UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

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

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Class		Outstanding as of September 27, 2008
Common stock, no par value		19,075,475

 

 

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at September 27, 2008 December 29, 2007, and September 29, 2007			3
Consolidated Condensed Statements of Earnings for the Three and Nine Months Ended September 27, 2008 and September 29, 2007			4
Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 27, 2008 and September 29, 2007			5
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 27, 2008 and September 29, 2007			6-7
Notes to Consolidated Condensed Financial Statements			8-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
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			32
Item 3. Defaults Upon Senior Securities — NONE
Item 4. Submission of Matters to a Vote of Security Holders — NONE
Item 5. Other Information			32
Item 6. Exhibits			33
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands, except share data)

		September 27,				December 29,				September 29,
		2008				2007				2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	31,459			$	43,605			$	46,747
Accounts receivable, net			230,106				142,562				191,023
Inventories:
Raw materials			112,150				120,805				122,431
Finished goods			85,693				115,063				106,368
			197,843				235,868				228,799
Assets held for sale			11,950				33,624				25,411
Other current assets			46,247				44,866				31,669
TOTAL CURRENT ASSETS			517,605				500,525				523,649
OTHER ASSETS			7,587				8,094				7,744
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS			158,287				150,272				152,041
OTHER INTANGIBLE ASSETS, net			25,225				23,849				28,133
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment			505,296				513,003				524,118
Accumulated depreciation and amortization			(255,218	)			(238,743	)			(240,939	)
PROPERTY, PLANT AND EQUIPMENT, NET			250,078				274,260				283,179
TOTAL ASSETS		$	958,782			$	957,000			$	994,746
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	101,430			$	83,505			$	105,938
Accrued liabilities:
Compensation and benefits			53,631				49,558				52,961
Other			38,827				28,717				33,036
Current portion of long-term debt and capital lease obligations			445				945				1,086
TOTAL CURRENT LIABILITIES			194,333				162,725				193,021
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion			166,713				205,126				197,435
DEFERRED INCOME TAXES			24,519				24,536				27,010
MINORITY INTEREST			9,875				10,376				10,343
OTHER LIABILITIES			17,952				17,569				15,815
TOTAL LIABILITIES			413,392				420,332				443,624
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, 19,075,475, 18,907,841 and 19,009,416		$	19,075			$	18,908			$	19,009
Additional paid-in capital			128,271				123,368				122,560
Retained earnings			395,250				391,253				406,761
Accumulated other comprehensive earnings			4,557				4,704				4,407
			547,153				538,233				552,737
Employee stock notes receivable			(1,763	)			(1,565	)			(1,615	)
TOTAL SHAREHOLDERS’ EQUITY			545,390				536,668				551,122
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	958,782			$	957,000			$	994,746

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
NET SALES		$	610,744			$	678,398			$	1,808,741			$	2,000,541
COST OF GOODS SOLD			545,222				596,233				1,603,521				1,743,151
GROSS PROFIT			65,522				82,165				205,220				257,390
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			58,046				58,792				178,302				192,299
NET LOSS ON DISPOSITION OF ASSETS AND OTHER IMPAIRMENT AND EXIT CHARGES			6,211				—				7,426				—
EARNINGS FROM OPERATIONS			1,265				23,373				19,492				65,091
INTEREST EXPENSE			2,705				4,367				9,589				13,457
INTEREST INCOME			(211	)			(494	)			(763	)			(1,634	)
			2,494				3,873				8,826				11,823
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST			(1,229	)			19,500				10,666				53,268
INCOME TAXES			535				7,383				4,655				19,633
EARNINGS (LOSS) BEFORE MINORITY INTEREST			(1,764	)			12,117				6,011				33,635
MINORITY INTEREST			(187	)			(778	)			(875	)			(1,610	)
NET EARNINGS (LOSS)		$	(1,951	)		$	11,339			$	5,136			$	32,025
EARNINGS (LOSS) PER SHARE — BASIC		$	(0.10	)		$	0.59			$	0.27			$	1.68
EARNINGS (LOSS) PER SHARE — DILUTED		$	(0.10	)		$	0.59			$	0.27			$	1.65
WEIGHTED AVERAGE SHARES OUTSTANDING FOR BASIC EARNINGS (LOSS)			19,092				19,097				19,045				19,070
WEIGHTED AVERAGE SHARES OUTSTANDING FOR DILUTED EARNINGS (LOSS)			19,092				19,361				19,233				19,419

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands, except share and per share data)

														Accumulated
														Other				Employees
						Additional Paid-				Retained				Comprehensive				Stock Notes
		Common Stock				In Capital				Earnings				Earnings				Receivable				Total
Balance at December 30, 2006		$	18,859			$	113,754			$	380,931			$	2,451			$	(1,253	)		$	514,742
Comprehensive earnings:
Net earnings											32,025
Foreign currency translation adjustment															1,956
Total comprehensive earnings																							33,981
Cash dividends — $.055 per share											(1,047	)											(1,047	)
Issuance of 210,495 shares under employee stock plans			211				3,475																3,686
Issuance of 3,130 shares under stock grant programs			3				157																160
Issuance of 67,373 shares under deferred compensation plans			67				(67	)															—
Repurchase of 125,100 shares			(125	)							(5,148	)											(5,273	)
Received 15,866 shares for the exercise of stock options			(16	)			(766	)															(782	)
Tax benefits from non-qualified stock options exercised							1,537																1,537
Expense associated with share-based compensation arrangements							391																391
Accrued expense under deferred compensation plans							3,587																3,587
Issuance of 10,132 shares in exchange for employee stock notes receivable			10				492												(502	)			—
Payments received on employee stock notes receivable																			140				140
Balance at September 29, 2007		$	19,009			$	122,560			$	406,761			$	4,407			$	(1,615	)		$	551,122
Balance at December 29, 2007		$	18,908			$	123,368			$	391,253			$	4,704			$	(1,565	)		$	536,668
Comprehensive earnings:
Net earnings											5,136
Foreign currency translation adjustment															(147	)
Total comprehensive earnings																							4,989
Cash dividends — $.060 per share											(1,139	)											(1,139	)
Issuance of 161,104 shares under employee stock plans			161				2,830																2,991
Issuance of 3,310 shares under stock grant programs			3				92																95
Issuance of 13,242 shares under deferred compensation plans			13				(13	)															—
Received 17,396 shares for the exercise of stock options			(17	)			(563	)															(580	)
Tax benefits from non-qualified stock options exercised							841																841
Expense associated with share-based compensation arrangements							875																875
Accrued expense under deferred compensation plans							611																611
Issuance of 7,374 shares in exchange for employee stock notes receivable			7				230												(237	)			—
Payments received on employee stock notes receivable																			39				39
Balance at September 27, 2008		$	19,075			$	128,271			$	395,250			$	4,557			$	(1,763	)		$	545,390

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands)

		Nine Months Ended
		September 27,				September 29,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	5,136			$	32,025
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation			28,929				29,105
Amortization of intangibles			7,322				6,402
Expense associated with share-based compensation arrangements			875				391
Expense associated with stock grant plans			95				160
Deferred income taxes			(137	)			(255	)
Minority interest			875				1,610
Gain on sale of interest in subsidiary							(140	)
Net loss on disposition of assets and other impairment and exit charges			6,165				32
Changes in:
Accounts receivable			(85,884	)			(30,298	)
Inventories			40,113				34,736
Accounts payable			16,395				12,874
Accrued liabilities and other			13,592				(5,483	)
Excess tax benefits from share-based compensation arrangements			(162	)			(745	)
NET CASH FROM OPERATING ACTIVITIES			33,314				80,414
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(13,959	)			(26,909	)
Acquisitions, net of cash received			(23,338	)			(57,087	)
Proceeds from sale of interest in subsidiary							400
Proceeds from sale of property, plant and equipment			30,152				3,551
Advances on notes receivable			(997	)			(122	)
Collections of notes receivable			500				151
Other, net			(52	)			(6	)
NET CASH FROM INVESTING ACTIVITIES			(7,694	)			(80,022	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facilities			(36,657	)			27,204
Repayment of long-term debt			(2,332	)			(28,200	)
Proceeds from issuance of common stock			2,762				3,321
Distributions to minority shareholder			(961	)			(1,225	)
Investment received from minority shareholder			419
Dividends paid to shareholders			(1,139	)			(1,047	)
Repurchase of common stock							(5,273	)
Excess tax benefits from share-based compensation arrangements			162				745
Other, net			(20	)			(278	)
NET CASH FROM FINANCING ACTIVITIES			(37,766	)			(4,753	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(12,146	)			(4,361	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			43,605				51,108
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	31,459			$	46,747
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	7,572			$	11,357
Income taxes			805				9,875

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS —
(CONTINUED)

		Nine Months Ended
		September 27,				September 29,
		2008				2007
NON-CASH INVESTING ACTIVITIES:
Stock acquired through employees’ stock notes receivable		$	237			$	502
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		$	262			$	3,588
Stock received for the exercise of stock options, net			352				418

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

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 29, 2007.

Effective at the beginning of the fiscal year ending December 27, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). This new standard establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings. The adoption has not had a material impact on our consolidated financial statements. SFAS No. 157 requires fair value measurements be classified and disclosed in one of three categories.

The following table summarizes the valuation of our financial instruments as of September 27, 2008. These instruments are classified as Level 1 which are financial instruments with unadjusted, quoted prices listed on active market exchanges.

						Quoted Prices in
						Active Markets
(in millions)		Total				(Level 1)
Assets:
Cash and cash equivalents		$	31.5			$	31.5
Trading marketable securities			4.5				4.5
		$	36.0			$	36.0
Liabilities:
Deferred compensation arrangements		$	4.5			$	4.5
		$	4.5			$	4.5

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

Effective at the beginning of the fiscal year ending December 27, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 allows companies to choose to measure certain financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses are reported in earnings for items measured using the fair value option and establishes presentation and disclosure requirements. We have elected not to apply the fair value option to any of our financial instruments except for those expressly required by U.S. GAAP.

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 becomes apparent.

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

		September 27,				September 29,
		2008				2007
Cost and Earnings in Excess of Billings		$	20,755			$	8,114
Billings in Excess of Cost and Earnings			13,752				6,910

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

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 09/27/08												Three Months Ended 09/29/07
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings		$	(1,951	)										$	11,339
EPS — Basic
Income available to common stockholders			(1,951	)			19,092			$	(0.10	)			11,339				19,097			$	0.59
Effect of dilutive securities
Options																			264
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	(1,951	)			19,092			$	(0.10	)		$	11,339				19,361			$	0.59

		Nine Months Ended 09/27/08												Nine Months Ended 09/29/07
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings		$	5,136											$	32,025
EPS — Basic
Income available to common stockholders			5,136				19,045			$	0.27				32,025				19,070			$	1.68
Effect of dilutive securities
Options							188												349
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	5,136				19,233			$	0.27			$	32,025				19,419			$	1.65

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

Options to purchase shares and certain other shares of common stock were not included in the computation of diluted EPS because they were antidilutive given the net loss for the quarter ended September 27, 2008. Options to purchase 30,000 shares of common stock at exercise prices ranging from $31.11 to $36.01 were outstanding as of September 27, 2008, but were not included in the computation of diluted EPS for the nine months ended September 27, 2008 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 outstanding options were excluded from the computation of diluted EPS for the quarter and nine months ended September 29, 2007.

D.

SALE OF ACCOUNTS RECEIVABLE

On March 8, 2006 we entered into an accounts receivable sale arrangement with a bank that was terminated on September 26, 2008. Under the terms of this arrangement:

•

We sold specific receivables to the bank at an agreed-upon price at terms ranging from one month to one year.

•

We serviced the receivables sold and outstanding on behalf of the bank at a rate of 0.50% per annum.

•

We received 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.

•

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.

No receivables were sold and outstanding as of September 27, 2008. On September 29, 2007, $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 nine months of 2008 and 2007 are presented below (in thousands).

		Nine Months Ended				Nine Months Ended
		September 27, 2008				September 29, 2007
Accounts receivable sold		$	369,242			$	495,247
Retained interest in receivables			(2,432	)			(1,982	)
Expense from sale			(882	)			(2,182	)
Servicing fee received			118				174
Net cash received from sale		$	366,046			$	491,257

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

E.

ASSETS HELD FOR SALE

Included in assets held for sale is certain property, plant and equipment totaling $11.9 million on September 27, 2008 and $25.4 million on September 29, 2007. These and other idle assets were evaluated based on the requirements of SFAS No. 144, which resulted in an impairment charge totaling approximately $6.2 million included in net loss on disposition of assets and other impairment and exit charges in our Eastern and Western operating segments for the nine months ended September 27, 2008. The assets held for sale consist of certain vacant land and several facilities we closed to better align manufacturing capacity with the current business environment. The fair values were determined based on appraisals or recent offers to acquire the assets and are included in our Eastern and Western operating segments. The changes in assets held for sale are as follows (in millions):

		Net Book						Net Sales
Description		Value				Date of Sale		Price
Assets held for sale as of December 29, 2007		$	33.6
Additions			8.0
Sale of vacant land acquired as part of acquisition of Aljoma			(24.5	)		Jan 24, 2008		$	24.2
Sale of certain real estate in Thorndale, Ontario			(2.7	)		Mar 18, 2008			2.6
Sale of certain real estate in Fishersville, Virginia			(1.5	)		Jul 23, 2008			1.9
Sale of certain real estate in Hohenwald, Tennessee			(1.0	)		Aug 11, 2008			1.0
Assets held for sale as of September 27, 2008		$	11.9

We incurred $1.2 million of severance expense associated with idled facilities for the nine months ended September 27, 2008.

F.

GOODWILL AND OTHER INTANGIBLE ASSETS

The following amounts were included in other intangible assets, net (in thousands):

		September 27, 2008								September 29, 2007
						Accumulated								Accumulated
		Assets				Amortization				Assets				Amortization
Non-compete agreements		$	26,899			$	(12,120	)		$	26,505			$	(10,718	)
Customer relationships			17,734				(9,319	)			14,883				(5,006	)
Patents			2,980				(949	)			2,980				(511	)
Total		$	47,613			$	(22,388	)		$	44,368			$	(16,235	)

The estimated amortization expense for intangible assets as of September 27, 2008 for each of the five succeeding fiscal years is as follows (in thousands):

2008		$	2,148
2009			8,265
2010			7,006
2011			4,753
2012			2,106
Thereafter			947

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

The changes in the net carrying amount of goodwill and indefinite-lived intangible assets for the nine months ended September 27, 2008 and September 29, 2007 are as follows (in thousands):

						Indefinite-
						Lived
						Intangible
		Goodwill				Assets
Balance as of December 29, 2007		$	147,932			$	2,340
Acquisitions			8,263
Other, net			(248	)
Balance as of September 27, 2008		$	155,947			$	2,340
Balance as of December 30, 2006		$	152,837			$	2,340
Acquisitions			1,408
Purchase price allocations			(5,422	)
Other, net			878
Balance as of September 29, 2007		$	149,701			$	2,340

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, including certain liabilities which are insured through a wholly owned subsidiary, UFP Insurance Ltd., a licensed captive insurance company. We own and operate a number of facilities throughout the United States that chemically treat lumber products. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses. Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Gordon, PA; Janesville, WI; Medley, FL; and Ponce, PR. In addition, a reserve was established for our affiliate’s facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.

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

On a consolidated basis, we have reserved approximately $4.4 million on September 27, 2008 and $4.0 million on September 29, 2007, 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 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. In its final report issued on April 30, 2008, the EPA does not require removal or replacement of CCA-treated structures, including decks and playground equipment, and is not recommending that surrounding soils be removed or replaced.

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

We 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 September 27, 2008, 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.

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

On September 27, 2008, we had outstanding purchase commitments on capital projects of approximately $2.0 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. As of September 27, 2008, we had approximately $39 million in outstanding payment and performance bonds, which expire during the next two years. In addition, approximately $8 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 $2.1 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.”)

On September 27, 2008, we had outstanding letters of credit totaling $32.2 million, primarily related to certain insurance contracts and industrial development revenue bonds as further described below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $17.4 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 $14.8 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.

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

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.

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 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 $0.4 million. As a result, this amount is recorded in other long-term liabilities on September 27, 2008.

We did not enter into any new guarantee arrangements during the third quarter of 2008 which would require us to recognize a liability on our balance sheet.

I.

BUSINESS COMBINATIONS

We completed the following business combinations in fiscal 2008 and fiscal 2007, which were accounted for using the purchase method.

										(in millions)
				(in millions)		(in millions)				Net
				Purchase		Intangible				Tangible
Company Name		Acquisition Date		Price		Assets				Assets				Business Description
D-Stake Mill and Manufacturing Country		June 9, 2008		$7.1 (asset purchase)		$	5.1			$	2.0			Manufactures kiln stickers, lath, stakes, decking, and pallets and pallet components for a variety of industries including manufacturing, retail and agriculture. Plants are located in McMinnville, OR and Independence, OR. Combined 2007 sales were $18.5 million.
Shawnlee Construction, LLC (“Shawnlee”)		April 1, 2008		$1.8 (asset purchase)		$	1.0			$	0.8			Provides framing services for multi-family construction in the northeast. Located in Plainville, MA. Purchased an additional 5% membership interest. We currently own a 90% membership interest.
		April 2, 2007		$1.4 (asset purchase)		$	0.9			$	0.5			Purchased an additional 5% membership interest.
International Wood Industries, Inc. (“IWI”)		February 4, 2008		$14.0 (stock purchase)		$	10.6			$	3.4			Manufactures and distributes industrial products, including specialty boxes, crates, pallets and skids. Headquartered in Turlock, CA with distribution sites in Hawaii and Alaska. 2007 sales were $40.0 million.
Deck Images		July 10, 2007		$0.9 (asset purchase)		$	0.6			$	0.3			Manufactures and distributes aluminum railing systems. Located in Hastings, MN. 2006 sales were $1.9 million.
Perfection Trusses, Inc. (“Perfection”)		March 5, 2007		$1.3 (asset purchase)		$	0.8			$	0.5			Manufactures and distributes roof and floor trusses to the Eastern Florida market. The company is located in Vero Beach, FL. 2006 sales were $3.9 million.
Aljoma Lumber Company (“Aljoma”)		February 12, 2007		$53.5 (stock purchase)		$	0.4			$	53.1			Manufactures, treats and distributes 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. 2006 sales were $225.0 million.

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

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

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.

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 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 nine months of 2008 and 2007 are presented below (in thousands).

		Nine Months Ended 09/27/08												Nine Months Ended 09/29/07
		Eastern												Eastern
		and												and
		Western												Western
		Divisions				All Other				Total				Divisions				All Other				Total
Net sales to outside customers		$	1,740,037			$	68,704			$	1,808,741			$	1,905,482			$	95,059			$	2,000,541
Intersegment net sales			0				24,510				24,510				0				21,308				21,308
Segment operating profit			17,980				1,512				19,492				57,016				8,075				65,091

K.

INCOME TAXES

Our effective tax rate is almost 44% for the year to date, which resulted in tax expense for the quarter despite reporting a book loss. This is primarily due to the impact of non-deductible permanent tax differences and the fact that the federal research and development tax credit was not granted legislative approval until October of 2008.

UNIVERSAL FOREST PRODUCTS, INC.

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 third quarter of 2008 were impacted by the following:

•

Our overall unit sales decreased 8%, as sales out of existing facilities and operations we closed decreased by 11% this quarter and we experienced a 3% increase in unit sales as a result of acquisitions.

•

We experienced sales decreases in our site-built, manufactured housing, and DIY/retail markets, while we continued to grow sales to the industrial market. We believe we have gained additional share in each of the markets we serve except manufactured housing. We have been able to maintain our significant market share of manufactured housing business.

•

Single-family housing starts decreased approximately 39% in the third quarter of 2008 compared to 2007 as a result of an excess supply of homes, tighter credit conditions, and an increase in foreclosures. In addition, tight credit conditions have recently resulted in a decline in multi-family and light commercial construction activity.

•

Consumer spending for large repair/remodel projects has decreased as many homeowners have lost equity in devalued homes and have less disposable income as a result of higher costs for necessities such as food, fuel and utilities. The Consumer Confidence Index has fallen from 87.3 at the beginning of the year to 38.0 at the end of October.

•

Shipments of HUD code manufactured homes were down 17% in July and August and industry sales of modular homes have also continued to decline due, in part, to an excess supply of site-built homes and tight credit conditions.

•

The industrial market is declining due to the general weakening of the U.S. economy. We gained additional share and increased sales to this market due, in part, to acquisitions and adding new concrete forming business.

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

•

Our gross profits decreased more than 20% compared to the same period of 2007 due to a combination of lower unit sales out of existing facilities and fixed manufacturing costs; intense pricing pressure, particularly in the site-built market; and higher transportation costs primarily due to an increase in diesel fuel prices and a decline in the number of available carriers.

•

We recorded a $6.2 million expense for asset impairments and other exit costs associated with facilities and equipment we made a decision to idle in the third quarter of 2008. The plants we closed had annual sales of approximately $45 million and annual incremental operating losses of over $6 million.

•

Since the beginning of this difficult economic cycle, we have focused on cash flow and working capital management. We are pleased to have reduced our debt by approximately $39 million and our sale of receivables program by almost $27 million for the first nine months of 2008.

Outlook

Due to unprecedented and prevailing uncertainties throughout the capital markets, which have a direct and material impact on the markets Universal serves, we do not believe our previous sales and net earnings targets for 2008, disclosed in our second quarter 10-Q, are achievable. In addition, we believe that current economic conditions limit our ability to provide meaningful guidance for the ranges of likely financial performance; therefore, we will not provide guidance for the foreseeable future.

Growth & Opportunity 2010 Goals

Since we announced our Growth & Opportunity 2010 Goals in our annual report on form 10-K for the period ended December 30, 2006, industry and general economic conditions have significantly deteriorated. We experience significant fluctuations in the cost of commodity lumber products from primary producers (“Lumber Market”). The Lumber Market has declined from an average of $388/mbf in 2005 to an average of $262/mbf in 2008; a 32% decline from when we first announced our goals, which has adversely impacted our sales. We are currently reviewing these long-term goals and expect to modify them when market conditions stabilize so new targets can be set using more current data and assumptions.

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

HISTORICAL LUMBER PRICES

The following table presents the Random Lengths framing lumber composite price for the nine months ended September 27, 2008 and September 29, 2007:

		Random Lengths Composite
		Average $/MBF
		2008				2007
January		$	249			$	292
February			244				289
March			240				280
April			255				286
May			281				288
June			268				306
July			267				299
August			282				290
September			272				276
Third quarter average		$	274			$	288
Year-to-date average		$	262			$	290
Third quarter percentage change from 2007			(4.9	%)
Year-to-date percentage change from 2007			(9.7	%)

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
		2008				2007
January		$	337			$	414
February			330				405
March			331				396
April			345				397
May			421				390
June			427				410
July			406				412
August			401				374
September			388				347
Third quarter average		$	398			$	378
Year-to-date average		$	376			$	394
Third quarter percentage change from 2007			5.3	%
Year-to-date percentage change from 2007			(4.6	%)

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

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.

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

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 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

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

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

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 Nine Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			89.3				87.9				88.7				87.1
Gross profit			10.7				12.1				11.3				12.9
Selling, general, and administrative expenses			9.5				8.7				9.9				9.6
Net loss on disposition of assets and other impairment and exit charges			1.0								0.4
Earnings from operations			0.2				3.4				1.0				3.3
Interest, net			0.4				0.5				0.4				0.6
Earnings (loss) before income taxes and minority interest			(0.2	)			2.9				0.6				2.7
Income taxes			0.1				1.1				0.3				1.0
Earnings before minority interest			(0.3	)			1.8				0.3				1.7
Minority interest			(0.0	)			(0.1	)			(0.0	)			(0.1	)
Net earnings (loss)			(0.3	)%			1.7	%			0.3	%			1.6	%

GROSS SALES

We engineer, manufacture, treat, distribute and install lumber, composite wood, plastic, and other building products for the DIY/retail, site-built construction, industrial, and manufactured housing markets. Our strategic long-term sales objectives include:

•		Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users, penetrating the concrete forms market, and increasing our sales of engineered wood components for custom homes, multi- family and light commercial construction.
•		Expanding geographically in our core businesses.
•		Increasing sales of “value-added” products and framing services. Value-added product sales primarily consist of fencing, decking, lattice, and other specialty products sold to the DIY/retail market, specialty wood packaging, engineered wood components, and “wood alternative” products. Engineered wood components include roof trusses, wall panels, and floor systems. Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals.
•		Maximizing unit sales growth while achieving return on investment goals.

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

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 Nine Months Ended
		Sept. 27,				%				Sept. 29,				Sept. 27,				%				Sept. 29,
Market Classification		2008				Change				2007				2008				Change				2007
DIY/Retail		$	251,559				(5.9	)		$	267,291			$	758,898				(7.8	)		$	823,173
Site-Built Construction			119,772				(24.2	)			158,035				361,430				(21.0	)			457,663
Industrial			166,327				5. 4				157,836				480,947				5.7				455,129
Manufactured Housing			85,215				(22.5	)			110,006				245,713				(19.3	)			304,426
Total Gross Sales			622,873				(10.1	)			693,168				1,846,988				(9.5	)			2,040,391
Sales Allowances			(12,129	)							(14,770	)			(38,247	)							(39,850	)
Total Net Sales		$	610,744				(10.0	)		$	678,398			$	1,808,741				(9.6	)		$	2,000,541