UNIVERSAL FOREST PRODUCTS, INC.

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

UNIVERSAL FOREST PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

Michigan		38-1465835
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan		49525
(Address of principal executive offices)		(Zip Code)

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

NONE

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

Indicate by 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 25, 2010
Common stock, no par value		19,291,486

 

 

UNIVERSAL FOREST PRODUCTS, INC.

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at September 25, 2010, December 26, 2009 and September 26, 2009			3
Consolidated Condensed Statements of Earnings for the Three and Nine Months Ended September 25, 2010 and September 26, 2009			4
Consolidated Condensed Statements of Equity for the Nine Months Ended September 25, 2010 and September 26, 2009			5
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 25, 2010 and September 26, 2009			6 - 7
Notes to Consolidated Condensed Financial Statements			8 - 16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17 - 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
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			31
Item 3. Defaults Upon Senior Securities — NONE
Item 4. (Removed and Reserved)
Item 5. Other Information			31
Item 6. Exhibits			32
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands, except share data)

		September 25,				December 26,				September 26,
		2010				2009				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	58,072			$	82,219			$	79,976
Accounts receivable, net			166,369				107,383				162,875
Inventories:
Raw materials			104,736				89,956				80,326
Finished goods			67,721				72,192				61,774
			172,457				162,148				142,100
Assets held for sale			—				—				3,057
Refundable income taxes			—				10,391				—
Other current assets			18,759				21,208				23,242
TOTAL CURRENT ASSETS			415,657				383,349				411,250
OTHER ASSETS			6,069				4,478				3,439
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS			159,332				157,058				156,936
OTHER INTANGIBLE ASSETS, net			15,719				16,693				18,873
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment			516,337				510,774				508,691
Accumulated depreciation and amortization			(294,498	)			(280,675	)			(278,134	)
PROPERTY, PLANT AND EQUIPMENT, NET			221,839				230,099				230,557
TOTAL ASSETS		$	818,616			$	791,677			$	821,055
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	78,683			$	64,473			$	70,817
Accrued liabilities:
Compensation and benefits			47,023				48,340				54,585
Income taxes			1,793				—				1,673
Other			21,485				21,698				30,375
Current portion of long-term debt and capital lease obligations			702				673				3,064
TOTAL CURRENT LIABILITIES			149,686				135,184				160,514
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion			52,465				53,181				53,168
DEFERRED INCOME TAXES			21,492				21,707				17,703
OTHER LIABILITIES			12,884				12,659				13,956
TOTAL LIABILITIES			236,527				222,731				245,341
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 19,291,486, 19,284,587 and 19,355,748		$	19,291			$	19,285			$	19,356
Additional paid-in capital			136,400				132,765				132,156
Retained earnings			417,842				409,278				416,853
Accumulated other comprehensive earnings			3,998				3,633				3,375
			577,531				564,961				571,740
Employee stock notes receivable			(1,721	)			(1,743	)			(1,780	)
			575,810				563,218				569,960
Noncontrolling interest			6,279				5,728				5,754
TOTAL EQUITY			582,089				568,946				575,714
TOTAL LIABILITIES AND EQUITY		$	818,616			$	791,677			$	821,055

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 25,				September 26,				September 25,				September 26,
		2010				2009				2010				2009
NET SALES		$	480,574			$	457,768			$	1,512,166			$	1,334,435
COST OF GOODS SOLD			426,159				388,505				1,328,232				1,135,866
GROSS PROFIT			54,415				69,263				183,934				198,569
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			47,286				51,198				149,815				156,310
NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND OTHER IMPAIRMENT AND EXIT CHARGES			1,137				606				1,521				(1,246	)
EARNINGS FROM OPERATIONS			5,992				17,459				32,598				43,505
INTEREST EXPENSE			888				900				2,677				3,403
INTEREST INCOME			(111	)			(79	)			(301	)			(258	)
			777				821				2,376				3,145
EARNINGS BEFORE INCOME TAXES			5,215				16,638				30,222				40,360
INCOME TAXES			2,017				6,378				10,836				14,808
NET EARNINGS			3,198				10,260				19,386				25,552
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST			(614	)			(206	)			(2,099	)			(617	)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST		$	2,584			$	10,054			$	17,287			$	24,935
EARNINGS PER SHARE — BASIC		$	0.13			$	0.52			$	0.90			$	1.30
EARNINGS PER SHARE — DILUTED		$	0.13			$	0.51			$	0.89			$	1.28
WEIGHTED AVERAGE SHARES OUTSTANDING			19,201				19,307				19,239				19,244
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS			19,416				19,585				19,488				19,442

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands, except share and per share data)

		Controlling Interest Shareholders’ Equity
														Accumulated
														Other				Employees
						Additional Paid-				Retained				Comprehensive				Stock Notes				Noncontrolling
		Common Stock				In Capital				Earnings				Earnings				Receivable				Interest				Total
Balance at December 27, 2008		$	19,089			$	128,830			$	393,312			$	2,353			$	(1,701	)		$	6,343			$	548,226
Comprehensive income:
Net earnings											24,935												617
Foreign currency translation adjustment															1,022								(33	)
Total comprehensive earnings																											26,541
Capital contribution from noncontrolling interest																							14				14
Purchase of additional noncontrolling interest							(853	)															(917	)			(1,770	)
Distributions to noncontrolling interest																							(270	)			(270	)
Cash dividends — $0.060 per share											(1,158	)															(1,158	)
Issuance of 118,267 shares under employee stock plans			118				1,991																				2,109
Issuance of 79,084 shares under stock grant programs			79				24																				103
Issuance of 73,611 shares under deferred compensation plans			74				(74	)																			—
Repurchase of 6,213 shares			(6	)							(236	)															(242	)
Received 1,602 shares for the exercise of stock options			(2	)			(33	)																			(35	)
Tax benefits from non-qualified stock options exercised							705																				705
Deferred income tax asset reversal for deferred compensation plans							(518	)																			(518	)
Expense associated with share-based compensation arrangements							1,417																				1,417
Accrued expense under deferred compensation plans							546																				546
Issuance of 3,721 shares in exchange for employee stock notes receivable			4				121												(125	)							—
Payments received on employee stock notes receivable																			46								46
Balance at September 26, 2009		$	19,356			$	132,156			$	416,853			$	3,375			$	(1,780	)		$	5,754			$	575,714
Balance at December 26, 2009		$	19,285			$	132,765			$	409,278			$	3,633			$	(1,743	)		$	5,728			$	568,946
Comprehensive income:
Net earnings											17,287												2,099
Foreign currency translation adjustment															365								78
Total comprehensive earnings																											19,829
Capital contribution from noncontrolling interest																							250				250
Purchase of additional noncontrolling interest							(295	)															(932	)			(1,227	)
Distributions to noncontrolling interest																							(944	)			(944	)
Cash dividends — $0.200 per share											(3,869	)															(3,869	)
Issuance of 66,384 shares under employee stock plans			66				1,373																				1,439
Issuance of 76,710 shares under stock grant programs			77				57																				134
Issuance of 7,911 shares under deferred compensation plans			8				(8	)																			—
Repurchase of 144,900 shares			(145	)							(4,854	)															(4,999	)
Tax benefits from non-qualified stock options exercised							379																				379
Expense associated with share-based compensation arrangements							1,495																				1,495
Accrued expense under deferred compensation plans							627																				627
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 September 25, 2010		$	19,291			$	136,400			$	417,842			$	3,998			$	(1,721	)		$	6,279			$	582,089

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

(Unaudited)

(in thousands)

		Nine Months Ended
		September 25,				September 26,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings attributable to controlling interest		$	17,287			$	24,935
Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
Depreciation			22,305				24,604
Amortization of intangibles			5,243				6,414
Expense associated with share-based compensation arrangements			1,495				1,417
Excess tax benefits from share-based compensation arrangements			(265	)			(302	)
Expense associated with stock grant plans			134				103
Deferred income taxes (credit)			(228	)			151
Net earnings attributable to noncontrolling interest			2,099				617
Net loss (gain) on sale or impairment of property, plant and equipment			1,053				(1,892	)
Changes in:
Accounts receivable			(58,151	)			(24,342	)
Inventories			(7,103	)			51,488
Accounts payable			14,127				7,578
Accrued liabilities and other			14,740				21,160
NET CASH FROM OPERATING ACTIVITIES			12,736				111,931
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(15,679	)			(9,497	)
Acquisitions, net of cash received			(6,529	)			—
Proceeds from sale of property, plant and equipment			540				10,408
Purchase of product technology and non-compete agreement			(4,589	)
Advances on notes receivable			(1,000	)			(14	)
Collections of notes receivable			143				134
Insurance proceeds			—				1,023
Other, net			17				16
NET CASH FROM INVESTING ACTIVITIES			(27,097	)			2,070
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facilities			—				(30,257	)
Repayment of long-term debt			(719	)			(16,830	)
Borrowings of long-term debt			—				800
Proceeds from issuance of common stock			1,439				2,109
Purchase of additional noncontrolling interest			(1,227	)			(1,770	)
Distributions to noncontrolling interest			(944	)			(270	)
Capital contribution from noncontrolling interest			250				14
Dividends paid to shareholders			(3,869	)			(1,158	)
Repurchase of common stock			(4,999	)			(242	)
Excess tax benefits from share-based compensation arrangements			265				302
Other, net			18				(60	)
NET CASH FROM FINANCING ACTIVITIES			(9,786	)			(47,362	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(24,147	)			66,639
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			82,219				13,337
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	58,072			$	79,976
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest		$	2,058			$	3,074
Income taxes			(1,488	)			5,964

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

		Nine Months Ended
		September 25,				September 26,
		2010				2009
NON-CASH INVESTING ACTIVITIES:
Stock acquired through employees’ stock notes receivable		$	50			$	125
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		$	337			$	2,461
Stock received for the exercise of stock options, net							35

See notes to unaudited consolidated condensed financial statements

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 26, 2009.

B.

FAIR VALUE

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

		September 25, 2010												September 26, 2009
		Quoted				Prices with								Quoted				Prices with
		Prices in				Other								Prices in				Other
		Active				Observable								Active				Observable
		Markets				Inputs								Markets				Inputs
(in thousands)		(Level 1)				(Level 2)				Total				(Level 1)				(Level 2)				Total
Recurring:
Money market funds		$	66							$	66
Mutual funds:														$	813							$	813
Domestic stock funds			397								397
International stock funds			353								353
Target funds			105								105
Bond funds			51								51
Total mutual funds			972								972				813								813
Non-Recurring:
Property, plant and equipment						$	165				165							$	1,350				1,350
		$	972			$	165			$	1,137			$	813			$	1,350			$	2,163

UNIVERSAL FOREST PRODUCTS, INC.

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

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

We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.

C.

REVENUE RECOGNITION

Earnings on construction contracts are reflected in operations using either percentage-of-completion accounting, which includes the cost to cost and units of delivery methods, or completed contract accounting, depending on the nature of the business at individual operations. Under percentage-of-completion using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under percentage-of-completion using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent. Under the completed contract method, revenues and related earnings are recorded when the contracted work is complete and losses are charged to operations in their entirety when such losses become apparent.

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

		September 25,				December 26,				September 26,
		2010				2009				2009
Cost and Earnings in Excess of Billings		$	4,602			$	9,998			$	11,117
Billings in Excess of Cost and Earnings			3,275				8,954				11,185

UNIVERSAL FOREST PRODUCTS, INC.

D.

EARNINGS PER SHARE

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

		Three Months Ended September 25, 2010												Three Months Ended September 26, 2009
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings Attributable to Controlling Interest		$	2,584											$	10,054
EPS — Basic
Income available to common stockholders			2,584				19,201			$	0.13				10,054				19,307			$	0.52
Effect of dilutive securities
Options							215												278
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	2,584				19,416			$	0.13			$	10,054				19,585			$	0.51

		Nine Months Ended September 25, 2010												Nine Months Ended September 26, 2009
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings Attributable to Controlling Interest		$	17,287											$	24,935
EPS — Basic
Income available to common stockholders			17,287				19,239			$	0.90				24,935				19,244			$	1.30
Effect of dilutive securities
Options							249												198
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	17,287				19,488			$	0.89			$	24,935				19,442			$	1.28

UNIVERSAL FOREST PRODUCTS, INC.

Options to purchase 130,000 and 10,000 shares of common stock were not included in the computation of diluted EPS for the quarter and nine months ended September 25, 2010, respectively, 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 ended September 26, 2009. Options to purchase 10,000 shares of common stock were not included in the computation of diluted EPS for the nine months ended September 26, 2009 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

E.

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

Included in “Assets held for sale” on our Consolidated Condensed Balance Sheets are certain property, plant and equipment totaling $3.1 million on September 26, 2009. The assets held for sale consist of certain vacant land and several facilities we closed to better align manufacturing capacity with the current business environment. The fair values were determined based on appraisals or recent offers to acquire the assets. These and other idle assets were evaluated based on the requirements of ASC 360, Property, Plant and Equipment, which resulted in certain impairment and other exit charges. “Net loss (gain) on disposition of assets and other impairment and exit charges” consists of the following amounts, separated by reporting segment, for the periods presented below (in millions):

Three Months Ended September 25,

Three Months Ended September 26,

2010

2009

Northern,

Northern,

Southern and

Southern and

Western

All

Western

All

Divisions

Other

Divisions

Other

Severances

$

0.2

Property, plant and equipment

0.2

$

0.6

Other intangibles

0.6

Lease termination

0.1

Nine Months Ended September 25,

Nine Months Ended September 26,

2010

2009

Northern,

Northern,

Southern and

Southern and

Western

All

Western

All

Divisions

Other

Divisions

Other

Severances

$

0.5

$

0.6

Property, plant and equipment

0.3

1.7

Other intangibles

0.6

Lease termination

0.1

Gain on sale of real estate

(3.5

)

UNIVERSAL FOREST PRODUCTS, INC.

F.

COMMITMENTS, CONTINGENCIES, AND GUARANTEES

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

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

On a consolidated basis, we have reserved approximately $4.2 million on September 25, 2010 and $4.4 million on September 26, 2009, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

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

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

In addition, on September 25, 2010, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On September 25, 2010, we had outstanding purchase commitments on capital projects of approximately $2.6 million.

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

UNIVERSAL FOREST PRODUCTS, INC.

In certain cases we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims made against the bonds. As of September 25, 2010, we had approximately $21.5 million in outstanding payment and performance bonds for projects in progress, which expire during the next two years. In addition, approximately $21.4 million in payment and performance bonds are outstanding for completed projects which are still under warranty.

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

On September 25, 2010, we had outstanding letters of credit totaling $31.9 million, primarily related to certain insurance contracts and industrial development revenue bonds as further described below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $19.0 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.

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 $0.3 million. As a result, this amount is recorded in other long-term liabilities on September 25, 2010.

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

G.

BUSINESS COMBINATIONS

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

Net

Company

Acquisition

Purchase

Intangible

Tangible

Operating

Name

Date

Price

Assets

Assets

Segment

Business Description

Shepherd Distribution Co.(“Shepherd”)

April 29, 2010

$5.9 (asset purchase)

$

2.6

$

3.3

Northern Division

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

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

March 8, 2010

$0.6 (asset purchase)

$

0.0

$

0.6

Southern Division

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

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

UNIVERSAL FOREST PRODUCTS, INC.

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

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

H.

SEGMENT REPORTING

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

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

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

		Nine Months Ended September 25, 2010												Nine Months Ended September 26, 2009
		Northern,												Northern,
		Southern and												Southern and
		Western				All								Western				All
		Divisions				Other				Total				Divisions				Other				Total
Net sales to outside customers		$	1,401,600			$	110,566			$	1,512,166			$	1,242,119			$	92,316			$	1,334,435
Intersegment net sales			0				41,716				41,716				0				29,239				29,239
Segment operating profit			31,284				1,314				32,598				36,845				6,660				43,505

UNIVERSAL FOREST PRODUCTS, INC.

I.

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

During the quarter, the Internal Revenue Service completed its examinations of our federal returns through 2008. As a result of the completed examinations, our gross unrecognized tax benefits decreased to $1.3 million at September 25, 2010 compared to $10.3 million at December 26, 2009. This decrease did not result in an adjustment to our income tax provision, therefore, our effective tax rate was not impacted by the examinations.

J.

SUBSEQUENT EVENTS

On October 14, 2010, our Board approved a semi-annual dividend of $0.20 per share, payable on December 15, 2010 to shareholders of record on December 1, 2010.

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.

UNIVERSAL FOREST PRODUCTS, INC.

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

This report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about the markets we serve, the economy, and the company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: Fluctuations in the price of lumber; adverse or unusual weather conditions; adverse conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. We also encourage you to read our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission. That report includes “Risk Factors” that you should consider in connection with any decision to buy or sell our securities. We are pleased to present this overview of 2010.

OVERVIEW

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

•

Our overall unit sales were flat compared to the third quarter of 2009 as increased unit sales to our industrial and manufactured housing customers was substantially offset by a decline in unit sales to our DIY/retail customers. We believe we have gained additional share of the industrial and manufactured housing markets we serve. Share gains in our industrial market have been achieved by adding many new customers while share gains in manufactured housing have been achieved by acquiring distribution operations. We believe we have maintained our share of the DIY/retail market. Finally, we recently closed several plants that supply the site-built housing market in order to achieve profitability and cash flow goals; consequently, we believe that these actions may temporarily cause us to lose some market share.

•

After unusual volatility in the second quarter, the Lumber Market stabilized and was approximately 5% higher, on average, in the third quarter of 2010 compared to the same period of 2009. Consequently, the Lumber Market had the effect of slightly increasing our overall selling prices for the quarter.

UNIVERSAL FOREST PRODUCTS, INC.

•

The Leading Indicator for Remodeling Activity, released by Harvard’s Joint Center for Housing Studies, estimated in its’ most recent report that spending in the third quarter of 2010 on homeowner remodeling improvements declined 4.1% for the period, which impacts our DIY/retail market. Consumer spending for large repair/remodel projects has decreased due to general economic conditions, among other factors, including weak home prices and high unemployment levels. Consequently, the same store sales of our “big box” home improvement retailers have declined. The Consumer Confidence Index recently decreased in September causing concern about the level of consumer spending in future months.

•

National housing starts decreased approximately 6% in the period from June through August of 2010 (our sales trail housing starts by about a month), compared to the same period of 2009, likely due to the expiration of certain government tax credits which shifted customer demand to earlier in the year.

•

Shipments of HUD code manufactured homes were up 3% in July and August of 2010, compared to the same period of 2009. Shipments of manufactured homes were also positively impacted by certain tax credits that have now expired.

•

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

•

Our gross margin decreased by 3.8% this quarter compared to the third quarter of 2009. While lumber prices stabilized during the third quarter of 2010, inventories were built earlier in the year—when lumber prices were up as much as 52% over the previous year—in preparation for a solid selling season, which didn’t materialize. At the end of June, our inventory consisted primarily of higher-cost lumber, which adversely affected profits in the third quarter. We have since sold through this higher cost product and, by the end of the third quarter, our inventories comprised lumber purchased at a much lower cost. At the end of September of 2010, our average cost of lumber inventory was approximately 7% higher than our average cost at the end of September of 2009, which approximates the year over year increase in the Lumber Market.

•

Our cash flow from operating activities was only $13 million, reflecting higher inventory levels due to softening demand. We anticipate strong cash flows for the balance of the year as we reduce inventories to a level needed to support current demand.

UNIVERSAL FOREST PRODUCTS, INC.

HISTORICAL LUMBER PRICES

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

		Random Lengths Composite
		Average $/MBF
		2010				2009
January		$	264			$	198
February			312				199
March			310				195
April			351				208
May			333				198
June			267				222
July			251				238
August			245				239
September			250				236
Third quarter average		$	249			$	238
Year-to-date average		$	287			$	215
Third quarter percentage change from 2009			4.6	%
Year-to-date percentage change from 2009			33.5	%

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

		Random Lengths SYP
		Average $/MBF
		2010				2009
January		$	269			$	241
February			331				233
March			337				232
April			382				241
May			374				231
June			293				236
July			264				253
August			249				241
September			252				244
Third quarter average		$	255			$	246
Year-to-date average		$	306			$	239
Third quarter percentage change from 2009			3.7	%
Year-to-date percentage change from 2009			28.0	%

UNIVERSAL FOREST PRODUCTS, INC.

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

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

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

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

•		Products with fixed selling prices. These products include value-added products such as decking and fencing sold to DIY/retail customers, as well as trusses, wall panels and other components sold to the site-built construction market, and most industrial packaging products. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity. In order to maintain margins and reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs for these sales commitments with our suppliers. Also, the time period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers.
•		Products with selling prices indexed to the reported Lumber Market with a fixed dollar “adder” to cover conversion costs and profits. These products primarily include treated lumber, remanufactured lumber, and trusses sold to the manufactured housing industry. For these products, we estimate the customers’ needs and carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins. For these products, our margins are exposed to changes in the trend of lumber prices.

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.

BUSINESS COMBINATIONS

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

UNIVERSAL FOREST PRODUCTS, INC.

RESULTS OF OPERATIONS

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

		For the Three Months Ended								For the Nine Months Ended
		September 25,				September 26,				September 25,				September 26,
		2010				2009				2010				2009
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			88.7				84.9				87.8				85.1
Gross profit			11.3				15.1				12.2				14.9
Selling, general, and administrative expenses			9.8				11.2				9.9				11.7
Net loss (gain) on disposition of assets and other impairment and exit charges			0.2				0.1				0.1				(0.1	)
Earnings from operations			1.2				3.8				2.2				3.3
Interest, net			0.2				0.2				0.2				0.2
Earnings before income taxes			1.1				3.6				2.0				3.0
Income taxes			0.4				1.4				0.7				1.1
Net earnings			0.7				2.2				1.3				1.9
Less net earnings attributable to non-controlling interest			(0.1	)			(0.0	)			(0.1	)			(0.0	)
Net earnings attributable to controlling interest			0.5	%			2.2	%			1.1	%			1.9	%