UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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

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

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

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

Class		Outstanding as of September 30, 2006
Common stock, no par value		18,851,040

 

 

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at September 30, 2006, December 31, 2005, and September 24, 2005.			3-4
Consolidated Condensed Statements of Earnings for the Three and Nine Months Ended September 30, 2006 and September 24, 2005.			5
Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2006 and September 24, 2005.			6-7
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2006 and September 24, 2005.			8-9
Notes to Consolidated Condensed Financial Statements.			10-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			24-37
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			38
Item 4. Controls and Procedures.			39
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.			40
Item 3. Defaults Upon Senior Securities — NONE.
Item 4. Submission of Matters to a Vote of Security Holders — NONE.
Item 5. Other Information.			41
Item 6. Exhibits.			42
Certificate of the Chief Executive Officer to Section 302
Certificate of the Chief Financial Officer to Section 302
Certificate of the Chief Executive Officer to Section 906
Certificate of the Chief Financial Officer to Section 906

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

(in thousands, except share data)

		September 30,				December 31,				September 24,
		2006				2005				2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	46,184			$	46,215			$	30,767
Accounts receivable, net			227,428				185,080				230,762
Inventories:
Raw materials			121,324				144,361				121,502
Finished goods			111,560				109,408				105,235
			232,884				253,769				226,737
Other current assets			24,752				17,114				13,191
TOTAL CURRENT ASSETS			531,248				502,178				501,457
OTHER ASSETS			7,762				7,887				8,414
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS			146,602				131,556				129,719
OTHER INTANGIBLE ASSETS, net			11,947				10,966				7,629
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment			443,751				412,475				406,595
Accumulated depreciation and amortization			(211,323	)			(188,142	)			(183,488	)
PROPERTY, PLANT AND EQUIPMENT, NET			232,428				224,333				223,107
TOTAL ASSETS		$	929,987			$	876,920			$	870,326
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	109,581			$	106,716			$	131,621
Accrued liabilities:
Compensation and benefits			73,551				69,528				68,919
Other			32,809				27,449				27,752
Current portion of long-term debt and capital lease obligations			697				458				22,091
TOTAL CURRENT LIABILITIES			216,638				204,151				250,383
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion			171,009				209,039				168,602
DEFERRED INCOME TAXES			13,089				12,914				17,691
MINORITY INTEREST			11,922				8,577				7,826
OTHER LIABILITIES			10,926				10,387				9,910
TOTAL LIABILITIES			423,584				445,068				454,412

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS — CONTINUED

		September 30,				December 31,				September 24,
		2006				2005				2005
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,       18,851,040, 18,402,648 and 18,380,366		$	18,851			$	18,403			$	18,380
Additional paid-in capital			113,157				97,372				96,710
Deferred stock compensation							4,212				4,133
Deferred stock compensation in rabbi trust							(2,117	)			(2,087	)
Retained earnings			372,728				312,878				297,707
Accumulated other comprehensive earnings			2,920				2,408				2,414
			507,656				433,156				417,257
Employee stock notes receivable			(1,253	)			(1,304	)			(1,343	)
TOTAL SHAREHOLDERS’ EQUITY			506,403				431,852				415,914
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	929,987			$	876,920			$	870,326

See notes to consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)

(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2006				2005				2006				2005
NET SALES		$	672,873			$	721,497			$	2,165,329			$	2,038,209
COST OF GOODS SOLD			574,048				622,435				1,851,775				1,770,676
GROSS PROFIT			98,825				99,062				313,554				267,533
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			65,970				63,877				201,272				173,233
EARNINGS FROM OPERATIONS			32,855				35,185				112,282				94,300
OTHER EXPENSE (INCOME):
Interest expense			3,214				3,714				10,757				11,755
Interest income			(875	)			(227	)			(1,656	)			(646	)
Gain on sale of real estate											(63	)			(1,240	)
			2,339				3,487				9,038				9,869
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST			30,516				31,698				103,244				84,431
INCOME TAXES			11,322				12,009				38,963				32,005
EARNINGS BEFORE MINORITY INTEREST			19,194				19,689				64,281				52,426
MINORITY INTEREST			(1,489	)			(518	)			(3,396	)			(1,236	)
NET EARNINGS		$	17,705			$	19,171			$	60,885			$	51,190
EARNINGS PER SHARE — BASIC		$	0.94			$	1.04			$	3.24			$	2.79
EARNINGS PER SHARE — DILUTED		$	0.91			$	1.00			$	3.14			$	2.69
WEIGHTED AVERAGE SHARES OUTSTANDING			18,906				18,465				18,788				18,325
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS			19,394				19,193				19,368				19,050

See notes to consolidated condensed financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

(in thousands, except share and per share data)

														Deferred
										Deferred				Compen-								Accumulated
						Additional				Stock				sation								Other				Employees
		Common				Paid-In				Compen-				Rabbi				Retained				Comprehensive				Stock Notes
		Stock				Capital				sation				Trust				Earnings				Earnings				Receivable				Total
Balance at December 25, 2004		$	18,002			$	89,269			$	3,423				($1,331	)		$	247,427			$	1,525				($1,546	)		$	356,769
Comprehensive earnings:
Net earnings																			51,190
Foreign currency translation adjustment																							889
Total comprehensive earnings																															52,079
Cash dividends — $.050 per share																			(910	)											(910	)
Issuance of 389,207 shares under employee stock plans			389				4,388																								4,777
Issuance of 3,469 shares under stock grant programs			3				146																								149
Issuance of 33,074 shares under deferred compensation plans			33				939				(216	)			(756	)															0
Received 49,244 shares for the exercise of stock options			(49	)			(1,856	)																							(1,905	)
Tax benefits from non-qualified stock options exercised							3,764																								3,764
Accrued expense under deferred compensation plans											926																				926
Issuance of 1,605 shares in exchange for employee stock notes receivable			2				60																				(62	)			0
Payments received on employee stock notes receivable																											265				265
Balance at September 24, 2005		$	18,380			$	96,710			$	4,133				($2,087	)		$	297,707			$	2,414				($1,343	)		$	415,914

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY — CONTINUED

														Deferred
										Deferred				Compen-								Accumulated
						Additional				Stock				sation								Other				Employees
		Common				Paid-In				Compen-				Rabbi				Retained				Comprehensive				Stock Notes
		Stock				Capital				sation				Trust				Earnings				Earnings				Receivable				Total
Balance at December 31, 2005		$18,403				$ 97,372				$ 4,212				($2,117)				$312,878				$2,408				($1,304)				$431,852
Comprehensive earnings:
Net earnings																			60,885
Foreign currency translation adjustment																							512
Total comprehensive earnings																															61,397
Cash dividends — $.055 per share																			(1,035	)											(1,035	)
Reversal of deferred compensation upon adoption of SFAS 123(R)							2,095				(4,212	)			2,117																0
Issuance of 341,921 shares under employee stock plans			342				5,459																								5,801
Issuance of 3,338 shares under stock grant programs			3				188																								191
Issuance of 101,278 shares under deferred compensation plans			101				(101	)																							0
Received 1,367 shares for the exercise of stock options			(1	)			(89	)																							(90	)
Tax benefits from non-qualified stock options exercised							4,357																								4,357
Expense associated with share-based compensation arrangements							691																								691
Accrued expense under deferred compensation plans							2,984																								2,984
Issuance of 3,222 shares in exchange for employee stock notes receivable			3				201																				(204	)			0
Payments received on employee stock notes receivable																											255				255
Balance at September 30, 2006		$	18,851			$	113,157			$	0			$	0			$	372,728			$	2,920				($1,253	)		$	506,403

See notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

(in thousands)

		Nine Months Ended
		September 30,				September 24,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	60,885			$	51,190
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation			25,558				23,391
Amortization of intangibles			3,953				1,809
Expense associated with share-based compensation arrangements			691
Expense associated with stock grant plans			191				149
Deferred income taxes			(871	)			(886	)
Minority interest			3,396				1,236
Net loss (gain) on sale or impairment of property, plant, and equipment			206				(561	)
Changes in:
Accounts receivable			(37,947	)			(75,061	)
Inventories			23,693				(10,712	)
Accounts payable			771				43,103
Accrued liabilities and other			11,326				26,502
Excess tax benefits from share-based compensation arrangements			(3,959	)
NET CASH FROM OPERATING ACTIVITIES			87,893				60,160
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(27,600	)			(31,768	)
Acquisitions, net of cash received			(27,137	)			(13,883	)
Proceeds from sale of property, plant and equipment			506				2,373
Insurance proceeds			38				3,013
Collections of notes receivable			1,612				457
Advances on notes receivable			(2,473	)			(887	)
Other assets, net			6				752
NET CASH FROM INVESTING ACTIVITIES			(55,048	)			(39,943	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under revolving credit facilities			(38,725	)			(16,201	)
Repayment of long-term debt			(1,201	)			(1,674	)
Proceeds from issuance of common stock			5,711				4,074
Distributions to minority shareholder			(1,569	)			(749	)
Investment received from minority shareholder							500
Dividends paid to shareholders			(1,035	)			(910	)
Excess tax benefits from share-based compensation arrangements			3,959
Other			(16	)			236
NET CASH FROM FINANCING ACTIVITIES			(32,876	)			(14,724	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(31	)			5,493
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			46,215				25,274
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	46,184			$	30,767
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	9,309			$	9,028
Income taxes			44,448				29,761

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS — CONTINUED

		Nine Months Ended
		September 30,				September 24,
		2006				2005
NON-CASH OPERATING ACTIVITIES:
Accounts receivable exchanged for note receivable		$	431			$	765
Deferred purchase price of acquisition exchanged for current payable			53				994
Deferred purchase price of acquisition exchanged for long-term liability			721
NON-CASH INVESTING ACTIVITIES:
Property, plant & equipment exchanged for debt		$	1,379				63
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		$	2,225			$	972

See notes to consolidated condensed financial statements.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

A.		BASIS OF PRESENTATION
		The accompanying unaudited, interim, consolidated, condensed financial statements (the “Financial Statements”) include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany transactions and balances have been eliminated.
		In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 31, 2005.
		Certain reclassifications have been made to the Financial Statements for 2005 to conform to the classifications used in 2006.
B.		REVENUE RECOGNITION
		Earnings on construction contracts are reflected in operations using either percentage-of-completion accounting, which includes the cost to cost and units of delivery methods, or completed contract accounting, depending on the nature of the business at individual operations. Under percentage-of-completion using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under percentage-of-completion using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent. Under the completed contract method, revenues and related earnings are recorded when the contracted work is complete and losses are charged to operations in their entirety when such losses become apparent.

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

     The following table presents the balances of percentage-of-completion accounts:

		September 30,				September 24,
		2006				2005
Cost and Earnings in Excess of Billings		$	6,203			$	3,950
Billings in Excess of Cost and Earnings			5,733				3,592

C.		EARNINGS PER COMMON 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 09/30/06												Three Months Ended 09/24/05
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings		$	17,705											$	19,171
EPS — Basic
Income available to common stockholders			17,705				18,906			$	0.94				19,171				18,465			$	1.04
Effect of dilutive securities
Options							488												728
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	17,705				19,394			$	0.91			$	19,171				19,193			$	1.00

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

		Nine Months Ended 09/30/06												Nine Months Ended 09/24/05
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings		$	60,885											$	51,190
EPS — Basic
Income available to common stockholders			60,885				18,788			$	3.24				51,190				18,325			$	2.79
Effect of dilutive securities
Options							580												725
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	60,885				19,368			$	3.14			$	51,190				19,050			$	2.69

		No outstanding options were excluded from the computation of diluted EPS for the quarters and nine months ended September 30, 2006 or September 24, 2005.
D.	SALE OF ACCOUNTS RECEIVABLE
	On March 8, 2006 we entered into a new accounts receivable sale agreement with a bank. The terms of this new agreement are substantially the same as the agreement that was in place in the first six months of 2005 and subsequently cancelled on October 25, 2005. Under the terms of these agreements:
	Ÿ	We sell specific receivables to the bank at an agreed-upon price at terms ranging from one month to one year.
	Ÿ	We service the receivables sold and outstanding on behalf of the bank at a rate of 0.50% per annum.
	Ÿ	We receive an incentive servicing fee, which we account for as a retained interest in the receivables sold. Our retained interest is determined based on the fair market value of anticipated collections in excess of the Agreed Base Value of the receivables sold. Appropriate valuation allowances are recorded against the retained interest.
	Ÿ	The maximum amount of receivables, net of retained interest, which may be sold and outstanding at any point in time under this arrangement is $50 million.
	On September 30, 2006 no receivables were sold and outstanding. On September 24, 2005, $27.0 million of receivables were sold and outstanding, and we recorded $2.0 million of

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

retained interest in other current assets. A summary of the transactions we completed for the first nine months of 2006 and 2005 are presented below (in thousands).

		Nine Months Ended				Nine Months Ended
		September 30, 2006				September 24, 2005
Accounts receivable sold		$	342,898			$	346,844
Retained interest in receivables							(568	)
Expense from sale			(1,519	)			(1,214	)
Servicing fee received			124				137
Discounts and sales allowances			0				(3,298	)
Net cash received from sale		$	341,503			$	341,901

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

		September 30, 2006								September 24, 2005
						Accumulated								Accumulated
		Assets				Amortization				Assets				Amortization
Non-compete agreements		$	16,177			$	(8,640	)		$	10,512			$	(5,445	)
Licensing agreements			2,510				(2,295	)			3,684				(2,021	)
Customer relationships			5,988				(1,831	)			1,285				(386	)
Backlog			694				(656	)			190				(190	)
Total		$	25,369			$	(13,422	)		$	15,671			$	(8,042	)

Estimated amortization expense for intangible assets as of September 30, 2006 for each of the five succeeding fiscal years is as follows (in thousands):

2006 Remaining		$	1,306
2007			3,701
2008			3,227
2009			2,131
2010			1,158
Thereafter			424

The changes in the net carrying amount of goodwill and indefinite-lived intangible assets for the nine months ended September 30, 2006 and September 24, 2005 are as follows (in thousands):

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

						Indefinite-
						Lived
						Intangible
		Goodwill				Assets
Balance as of December 31, 2005		$	131,556			$	0
Acquisitions			18,863				2,340
Final purchase price allocation of DecKorators			(5,925	)
Other, net			(232	)
Balance as of September 30, 2006		$	144,262			$	2,340
Balance as of December 25, 2004		$	123,845
Acquisition			5,604
Other, net			270
Balance as of September 24, 2005		$	129,719

F. BUSINESS COMBINATIONS

On August 18, 2006, one of our subsidiaries acquired the assets and assumed certain liabilities of GeoMatrix, Inc. (“GeoMatrix”) located in Troy, MI, a leading developer and supplier of plastic lattice and other proprietary plastic products. The purchase price was approximately $11.3 million, allocating $2.4 million to tangible net assets and $8.9 million to goodwill. The purchase price allocation for this acquisition is preliminary and will be revised as final estimates of intangible asset values are made in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. GeoMatrix had net sales in fiscal 2005 totaling approximately $19 million.

On July 10, 2006, one of our subsidiaries acquired a 50% membership interest in United Lumber & Reman, LLC (“United”), an industrial wood manufacturing plant located in Muscle Shoals, AL. The purchase price was approximately $4.9 million, allocating $1.7 million to tangible net assets and $3.2 million to goodwill. The purchase price allocation for this acquisition is preliminary and will be revised as final estimates of intangible asset values are made in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. United had net sales totaling approximately $26 million in 2005. We have consolidated this entity, including a respective minority interest, because we exercise control.

On June 5, 2006, one of our subsidiaries acquired the assets of Dura-Bilt Mfg. Co. (“Dura-Bilt”) located in Riverbank, CA, a roof and floor truss manufacturer for the site-built construction market in Northern California. The purchase price was approximately $9.2 million, consisting of $8.4 million paid on the date we closed the transaction and $0.8 million to be paid in the future, allocating $2.6 million to tangible net assets and $6.6 million to goodwill. The purchase price allocation for this acquisition is preliminary and will be revised

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

as final estimates of intangible asset values are made in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. Dura-Bilt had net sales in fiscal 2005 totaling approximately $16 million.

On April 3, 2006, one of our subsidiaries, which at the time owned a 75% interest in Shawnlee Construction, LLC (“Shawnlee”), acquired an additional 5% interest for approximately $0.8 million, allocating $0.5 million to tangible assets, $0.1 million to customer relationship related intangibles, $0.1 million to a non-compete agreement and $0.1 million to goodwill. In addition, as previously agreed, we will purchase the remaining 20% in 5% increments over the next four years.

On January 9, 2006, one of our subsidiaries acquired the assets of Classic Truss Company, Inc. (“Classic”), a facility which supplies the site-built construction market in Fort Pierce, FL. The purchase price was approximately $2.1 million, allocating $1.7 million to tangible net assets and $0.4 million to a non-compete agreement. Classic had net sales in fiscal 2005 totaling approximately $6.0 million.

On November 14, 2005, one of our subsidiaries acquired the assets of DecKorators, Inc. (“DecKorators”) which designs, imports, markets and distributes decorative balusters and accessories for residential decks and porches, and is located in Crestwood and St. Louis, MO. The purchase price was approximately $7.7 million, consisting of $7.0 million paid on the date we closed the transaction and $0.7 million paid in January 2006, allocating $0.8 million to tangible net assets, $2.9 million to non-compete agreements, $0.9 million to customer relationship related intangibles, $2.3 million to trade name and related intangibles and $0.8 to goodwill. DecKorators had net sales in fiscal 2004 totaling approximately $9.1 million.

On June 27, 2005, one of our subsidiaries, which at the time owned a 50% interest in Shawnlee, acquired an additional 25% interest for approximately $3.5 million, allocating $1.2 million to tangible assets, $0.8 million to customer relationship related intangibles, $0.7 million to a non-compete agreement, $0.2 million to backlog and $0.6 million to goodwill. We agreed to purchase the remaining 25% in 5% increments over the next five years. In addition, Shawnlee acquired the assets of Shepardville Construction, Inc. (“Shepardville”) and AW Construction, LLC (“AW”), which install interior products for commercial and multi-family construction. The purchase price was approximately $2.0 million, allocating $0.9 million to tangible assets, $0.8 million to customer relationship related intangibles, and $0.3 million to backlog. Shepardville had net sales in fiscal 2004 totaling approximately $4.8 million. AW had net sales in 2004 totaling approximately $7.9 million.

On June 2, 2005, one of our subsidiaries acquired the assets of Maine Ornamental Woodworkers, Inc. (“Maine Ornamental”), which manufactures, imports and distributes decorative caps used on decking and fence posts, and is based in Winthrop, ME and Bainbridge Island, WA. The purchase price was approximately $8.4 million, consisting of $7.5 million paid on the date we closed the transaction and $0.9 million paid in August 2005, allocating

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

		$4.4 million to tangible net assets, $1.7 million to non-compete agreements, $2.1 million to customer relationship related intangibles and $0.2 million to goodwill. Maine Ornamental had net sales in fiscal 2004 totaling approximately $12.4 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.
G.		EMPLOYEE STOCK NOTES RECEIVABLE
		Employee stock notes receivable represents notes issued to us by certain employees and officers to finance the purchase of our common stock. Directors and executive officers do not, and are not allowed to, participate in this program.
H.		STOCK-BASED COMPENSATION
		Prior to January 1, 2006, we accounted for our stock option plans and our Employee Stock Purchase Plan using the intrinsic value method of accounting provided under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”) and related Interpretations, as permitted by Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”) under which no compensation expense was recognized for stock option grants and issuance of stock pursuant to the Employee Stock Purchase Plan. Accordingly, share-based compensation was included as a pro forma disclosure in the financial statement footnotes and continues to be provided for periods prior to fiscal 2006.
		Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, (“SFAS 123(R)”) using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the first nine months of 2006 includes: a) compensation cost for all share-based payments granted through December 31, 2005, but for which the requisite service period had not been completed as of December 31, 2005, based on the grant date fair market value estimated in accordance with the original provisions of SFAS 123, and b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
		As a result of adopting SFAS 123(R) on January 1, 2006, our earnings before income taxes and net earnings for the third quarter of 2006, are $169,000 and $115,000 lower, respectively, than if we had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the third quarter of 2006 are $0.01 and $0.01 lower, respectively, than if we had continued to account for share-based compensation under APB 25.

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

As a result of adopting SFAS 123(R) on January 1, 2006, our earnings before income taxes and net earnings for the first nine months of 2006, are $691,000 and $470,000 lower, respectively, than if we had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the first nine months of 2006 are $0.03 and $0.02 lower, respectively, than if we had continued to account for share-based compensation under APB 25.

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Condensed Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from the tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits from share-based compensation arrangements”) to be classified as financing cash flows. The $3,959,000 excess tax benefit from share-based compensation arrangements classified as a financing cash inflow for the first nine months of 2006 would have been classified as an operating cash inflow if we had not adopted SFAS 123(R).

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 Director Retainer Stock Plan, the Directors’ Stock Grant Plan, and the Conditional Share Grant Agreement.

Stock Option Plans

On April 28, 1999, our shareholders approved the Long Term Stock Incentive Plan (the “1999 Plan”) to succeed the 1997 Long Term Stock Incentive Plan (the “1997 Plan”). The 1999 Plan reserves a maximum of 1,000,000 shares, plus 406,029 shares remaining under the 1997 Plan, plus an annual increase of no more than 200,000 shares which may be added on the date of the annual meeting of shareholders each year. The term of the 1999 Plan is ten years. The 1999 Plan provides for the granting of stock options, reload options, stock appreciation rights, restricted stock, performance shares and other stock-based rewards. To date, we have only issued options under this plan. Vesting requirements for awards under this plan will vary by individual grant and are time-based vesting. The contractual life of all of the options granted under this plan will be no greater than 15 years.

The fair value of each option award is estimated as of the date of grant using the Black-Scholes option pricing model. Expected volatility assumptions used were based on historical volatility of our stock. We utilize historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for the expected term of the option award was based on the U.S. Treasury yield curve in effect at the time of the grant. No new option awards were granted in the first nine months of 2006 and therefore no specific valuation assumptions are presented.

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

The following summary presents information regarding outstanding options as of September 30, 2006 and changes during the nine months then ended with regard to options under all stock option plans:

										Weighted
						Weighted				Average
		Stock				Average				Remaining				Aggregate
		Under				Exercise Price				Contractual				Intrinsic
		Option				Per Share				Term				Value
Outstanding at January 1, 2006			1,384,879			$	19.08
Exercised			(328,845	)		$	15.60
Forfeited or expired			(14,195	)		$	21.07
Outstanding at September 30, 2006			1,041,839			$	20.15				4.99			$	30,132,159
Vested or expected to vest at September 30, 2006			808,511			$	20.13				5.21			$	23,414,985
Exercisable at September 30, 2006			232,313			$	16.96				4.06			$	7,455,566

The total intrinsic value of options exercised during the first nine months of 2006 was $16,754,000.

Employee Stock Purchase Plan

In April 1994, our shareholders approved the Employee Stock Purchase Plan (“Stock Purchase Plan”) and Director Retainer Stock Plan (“Stock Retainer Plan”). In April 2002, our shareholders approved the 2002 Employee Stock Purchase Plan (“2002 Stock Purchase Plan”) to succeed the Stock Purchase Plan. The plans allow eligible employees to purchase shares of our stock at a share price equal to 85% of fair market value on the purchase date.

For the nine months ending September 30, 2006, 13,076 shares were issued under this plan. The weighted average fair value of employee stock purchase rights pursuant to this plan was $8.62 per share. The fair value of the stock purchase rights was calculated as the difference between the stock price and the employee purchase price.

Director Retainer Stock Plan

The Stock Retainer Plan allows eligible members of the Board of Directors to defer their retainer fees and receive shares of our stock at the time of their retirement, disability or death. The number of shares to be received is equal to the amount of the retainer fee deferred multiplied by 110% divided by the fair market value of a share of our stock at the time of deferral, is increased for dividends declared and may only be distributed in kind. We recognized the fair market value of the shares issued under this plan, calculated using the number of shares issued and the stock price on the issuance date, as expense and recorded the related obligation in shareholders’ equity. We recognized approximately $186,000 in expense for shares issued under this program in the first nine months of 2006.

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

Directors’ Stock Grant Program

In January 1997, we instituted a Directors’ Stock Grant Program. In lieu of a cash increase in the amount of Director fees, each outside Director receives 100 shares of stock for each board meeting attended up to a maximum of 400 shares per year. In the first nine months of 2006, we recognized the fair market value of the shares issued under this plan, calculated using the number of shares issued and the stock price on the issuance date, as an expense totaling approximately $142,000.

Conditional Share Grant Agreement

On April 17, 2002, under the 1999 Plan, a Conditional Share Grant Agreement was executed which will grant our Chief Executive Officer 10,000 shares of common stock immediately upon the satisfaction of the terms and conditions set forth in the Agreement. We recognize the fair value of the award estimated as of the date of grant using the Black-Scholes option pricing model. We recognized approximately $106,000 in expense for shares issuable under this program in the first nine months of 2006.

All Share-Based Payment Arrangements

The total share-based compensation cost and the related total income tax benefit that has been recognized in results of operations was approximately $1.0 million and $346,000, respectively for the first nine months of 2006.

As of September 30, 2006, there was $1.6 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.38 years.

Cash received from option exercises and share issuances under the Stock Purchase Plan was $5,711,000 during the first nine months of fiscal 2006. The actual tax benefit realized for the tax deductions from option exercises totaled $4,357,000 during that period.

Pro Forma Net Earnings

The following table provides pro forma net earnings and earnings per share had we applied the fair value method of SFAS 123 for the third quarter and first nine months of 2005 (in thousands, except per share data):

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

		Three Months				Nine Months
		Ended				Ended
		September 24,				September 24,
		2005				2005
Net Earnings:
As reported		$	19,171			$	51,190
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(141	)			(542	)
Pro Forma		$	19,030			$	50,648
EPS — Basic:
As reported		$	1.04			$	2.79
Pro forma		$	1.03			$	2.76
EPS — Diluted:
As reported		$	1.00			$	2.69
Pro forma		$	0.99			$	2.67

I.		COMMITMENTS, CONTINGENCIES, AND GUARANTEES
		We are self-insured for environmental impairment liability through a wholly owned subsidiary, UFP Insurance Ltd., a licensed captive insurance company. We own and operate a number of facilities throughout the United States that chemically treat lumber products. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses. Insurance reserves, calculated with no discount rate, have been established to cover remediation activities at our Union City, GA; Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Schertz, TX; and Janesville, WI wood preservation facilities. In addition, a small reserve was established for our Thornton, CA property to remove asbestos and certain lead containing materials which existed on the property at the time of purchase.
		Including amounts from our wholly owned captive insurance company, we have reserved approximately $1.7 million on September 30, 2006 and $1.7 million on September 24, 2005, representing the estimated costs to complete future remediation efforts without reduction for 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 or borates. In March 2005, one

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

facility began using CCA to treat certain marine products and panel goods for which ACQ is not a suitable preservative.

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 EPA did refer a question on the use of sealants to a scientific advisory panel. The panel issued a report which provides guidance to the EPA on the use of various sealants but does not mandate their use. The results of the EPA study are consistent with a prior Consumer Products Safety Commission (CPSC) study which reached a similar conclusion. The EPA and CPSC studies with respect to sealants are ongoing, and additional reports are expected in the near future.

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

We have been requested by a customer to defend it from a purported class action lawsuit currently pending in Illinois State Court. The purported class action lawsuit seeks unspecified damages from this customer, based on generalized claims under a purported theory of violation of individual state Consumer Protection Act statutes. This case was previously dismissed without prejudice. The claim was restated and filed, and the circuit court denied class certification for this case in December 2005. The plaintiff has appealed. As previously stated, our vendors believe and scientific studies support the fact that CCA treated lumber poses no unreasonable risks, and we intend to vigorously defend this position. While our customer has charged us for certain costs incurred in the defense of these claims and we have expensed them accordingly, we have not formally accepted liability of these costs.

We believe that based on current facts, laws, and existing scientific evidence, as well as the favorable disposition of the above referenced lawsuits, that the likelihood of a material adverse financial impact from the remaining claims is remote. Therefore, we have not accrued for any potential loss related to the contingencies above. However, potential liabilities of this nature are not conducive to precise estimates and are subject to change. To the extent we are required to defend these actions, we intend to do so vigorously and will monitor these facts on an ongoing basis.

In addition, on September 30, 2006, 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 CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

On September 30, 2006, we had outstanding purchase commitments on capital projects of approximately $9.5 million.

We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material.

In certain cases we jointly bid on contracts with framing companies to supply building materials to site-built construction projects. In some of these instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims made against the bonds. Historically, we have not had any claims for indemnity from our sureties. As of September 30, 2006, we had approximately $23.8 million in outstanding payment and performance bonds, which expire during the next two years. In addition, approximately $14.6 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 $2.2 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 30, 2006, we had outstanding letters of credit totaling $39.2 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 $20.4 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.

We are required to provide irrevocable letters of credit in favor of the bond trustees for all of the industrial development revenue bonds that we have issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $18.5 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO 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.
		Our treating operations utilize “Subpart W” drip pads, defined as hazardous waste management units by the EPA. The rules regulating drip pads require that the pad be “closed” at the point that it is no longer used to manage hazardous waste. Closure involves identification and disposal of contamination which requires removal from the wood treating operations. The ultimate cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contamination, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed. Based on our knowledge of existing circumstances, it is considered probable that these costs will approximate $465,000. As a result, this amount is recorded in other long-term liabilities on September 30, 2006.
		We did not enter into any new guarantee arrangements during the third quarter of 2006 which would require us to recognize a liability on our balance sheet.
J.		SALE OF REAL ESTATE
		On January 3, 2005, we sold real estate located in Stockton, CA for $2.3 million and recorded a pre-tax gain totaling approximately $1.2 million.

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 2006 were highlighted by the following:

•		Our unit sales out of existing facilities decreased by 4% this quarter, while we experienced a 2% increase in sales growth as a result of acquisitions and new operations.
•		Lumber prices were approximately 21% lower compared to the same period of 2005. This primarily impacted our overall selling prices (see “Impact of the Lumber Market on Our Operating Results” below) and working capital requirements.
•		We faced adverse industry conditions in our D-I-Y/retail, site-built construction and manufactured housing markets, which impacted our unit sales. We were able to mitigate the impact of these adverse conditions by gaining share in each one of our markets.
•		Our operating profits decreased almost 7% compared to the same period of 2005 as a result of a 2% decline in unit sales combined with a 3% increase in selling, general, and administrative expenses.
•		We improved our cash flows from operating activities due to a combination of improvements in our cash cycle, a 23% increase in our year-to-date earnings and non-cash expenses, a lower Lumber Market which reduced working capital requirements this year, and very strong sales levels and, therefore, greater working capital requirements last year.
•		A reduction in interest-bearing debt to $171.7 million from $190.7 million due to strong operating cash flows.
•		Our purchase of a 50% membership interest in United Lumber & Reman, LLC in Muscle Shoals, AL in July 2006 and our purchase of the assets and assumption of certain liabilities of GeoMatrix, Inc. in Troy, MI in August 2006.

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

In summary, we remain optimistic about the future of our business, markets and strategies, and our employees remain focused on adding value for our customers, executing our strategies and meeting our goals. We have revised our annual net earnings and unit sales growth targets to a range of 1% to 5% each for 2006 based on the following recent developments:

	•		A continued significant decline in housing starts;
	•		A soft D-I-Y/retail market as a result of a decline in consumer spending;
	•		A weak manufactured housing and modular market; and
	•		The impact of FEMA orders in 2005 in the wake of hurricanes.

We continue to pursue acquisition opportunities and believe that acquisitions will, as they have in the past, play an important role in our long-term growth strategy.

HISTORICAL LUMBER PRICES

The following table presents the Random Lengths framing lumber composite price for the nine months ended September 30, 2006 and September 24, 2005:

		Random Lengths Composite
		Average $/MBF
		2006				2005
January		$	382			$	381
February			377				420
March			368				422
April			369				407
May			341				386
June			326				405
July			309				381
August			296				360
September			292				395
Third quarter average		$	299			$	379
Year-to-date average		$	340			$	395
Third quarter percentage change from 2005			(21.1	%)
Year-to-date percentage change from 2005			(13.9	%)

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

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
		2006				2005
January		$	496			$	446
February			503				489
March			514				501
April			510				511
May			488				500
June			444				538
July			409				536
August			394				503
September			387				501
Third quarter average		$	397			$	513
Year-to-date average		$	461			$	503
Third quarter percentage change from 2005			(22.6	%)
Year-to-date percentage change from 2005			(8.4	%)

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 generally comprise up to 80% 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.

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

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

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

Changes in the trend of lumber prices have their greatest impact on the following products:

•		Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises almost eighteen percent 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.

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

		Period 1				Period 2
Lumber cost		$	300			$	400
Conversion cost			50				50
= Product cost			350				450
Adder			50				50
= Sell price			400				500
Gross margin			12.5	%			10.0	%

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.

BUSINESS COMBINATIONS

We completed the following business combinations in fiscal 2006 and fiscal 2005, which were accounted for using the purchase method. (See Note F, “Business Combinations.”)

Company Name		Acquisition Date		Business Description
GeoMatrix, Inc. (“GeoMatrix”)		August 18, 2006		A developer and distributor of plastic lattice products and other proprietary plastic products located in Troy, MI.
United Lumber & Reman, LLC (“United”)		July 10, 2006		An industrial wood manufacturing plant located in Muscle Shoals, AL. Acquired a 50% membership interest.
Dura-Bilt Mfg Co. (“Dura-Bilt”)		June 5, 2006		Designs and manufactures roof and floor trusses for site-built construction. The company is located in Riverbank, CA.
Shawnlee Construction, LLC (“Shawnlee”)		April 3, 2006, June 27, 2005 and April 2, 2004		Provides framing services for multi-family construction in the northeast. Located in Plainville, MA. Purchased initial 50% membership interest on April 2, 2004, an additional 25% membership interest on June 27, 2005, and an additional 5% membership interest on April 3, 2006.

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

Classic Truss Company, Inc. (“Classic”)		January 9, 2006		Manufactures and distributes engineered wood components for site-built construction. The company is located in Fort Pierce, FL.
DecKorators, Inc. (“DecKorators”)		November 14, 2005		Provides decorative balusters and accessories for residential decks and porches to independent dealers and certain “big box” home improvement retailers. The company has locations in Crestwood and St. Louis, MO.
Shepardville Construction, Inc. and AW Construction, LLC (“Shepardville and AW”)		June 27, 2005		Installs interior products such as base boards, crown moldings, window sills and casings, doors, and cabinets for commercial and multi-family construction projects. Located in Warwick, RI and Wolcott, CT. These entities were merged on January 1, 2006.
Maine Ornamental Woodworkers, Inc. (“Maine Ornamental”)		June 2, 2005		Provides decorative post caps for fencing and decking applications to two-step distributors and certain “big box” home improvement retailers. The company has locations in Winthrop, ME and Bainbridge Island, WA.

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
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2006				2005				2006				2005
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			85.3				86.3				85.5				86.9
Gross profit			14.7				13.7				14.5				13.1
Selling, general, and administrative expenses			9.8				8.8				9.3				8.5

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

		For the Three Months Ended								For the Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2006				2005				2006				2005
Earnings from operations			4.9				4.9				5.2				4.6
Interest, net			0.4				0.5				0.4				0.6
Net gain on sale of real estate			0.0				0.0				0.0				(0.1	)
			0.4				0.5				0.4				0.5
Earnings before income taxes and minority interest			4.5				4.4				4.8				4.1
Income taxes			1.7				1.7				1.8				1.5
Earnings before minority interest			2.8				2.7				3.0				2.6
Minority interest			(0.2	)			(0.0	)			(0.2	)			(0.1	)
Net earnings			2.6	%			2.7	%			2.8.	%			2.5	%