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EX-31.(A) - EXHIBIT 31(A) - UNIVERSAL FOREST PRODUCTS INCex31_a.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 28, 2013

OR

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

Commission File Number 0-22684
 
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Michigan
 
38-1465835
(State or other jurisdiction of
 
(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
 
 
(Former name or former address, if changed since last report.)
 
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  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 x
Accelerated Filer o
Non-Accelerated Filer o 
Smaller reporting company o
 
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes o   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding as of September 28, 2013
Common stock, no par value
 
19,900,066

UNIVERSAL FOREST PRODUCTS, INC.
 
TABLE OF CONTENTS
 
Page No.
 
PART I.
FINANCIAL INFORMATION.
 
 
 
 
Item 1.
Financial Statements.
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
Item 2.
16
 
 
 
Item 3.
30
 
 
 
Item 4.
31
 
 
 
PART II.
OTHER INFORMATION.
 
 
 
 
Item 1.
Legal Proceedings – NONE.
 
 
 
 
Item 1A.
32
 
 
 
Item 2.
32
 
 
 
Item 3.
Defaults upon Senior Securities – NONE.
 
 
 
 
Item 4.
Mine Safety Disclosures – NONE.
 
 
 
 
Item 5.
32
 
 
 
Item 6.
33

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
(in thousands, except share data)

 
 
September 28,
   
December 29,
   
September 29,
 
 
 
2013
   
2012
   
2012
 
ASSETS
 
   
   
 
CURRENT ASSETS:
 
   
   
 
Cash and cash equivalents
 
$
5,151
   
$
7,647
   
$
4,355
 
Restricted cash
   
720
     
6,831
     
553
 
Accounts receivable, net
   
241,990
     
163,225
     
191,178
 
Inventories:
                       
Raw materials
   
127,854
     
136,201
     
119,346
 
Finished goods
   
104,356
     
106,979
     
89,792
 
Total inventories
   
232,210
     
243,180
     
209,138
 
Refundable  income taxes
   
-
     
7,521
     
1,266
 
Deferred income taxes
   
9,203
     
9,212
     
9,694
 
Other current assets
   
20,280
     
15,557
     
16,204
 
TOTAL CURRENT ASSETS
   
509,554
     
453,173
     
432,388
 
 
                       
DEFERRED INCOME TAXES
   
1,696
     
1,759
     
-
 
OTHER ASSETS
   
12,615
     
14,583
     
14,918
 
GOODWILL
   
160,146
     
159,316
     
157,966
 
INDEFINITE-LIVED INTANGIBLE ASSETS
   
2,340
     
2,340
     
2,340
 
OTHER INTANGIBLE ASSETS, NET
   
7,815
     
8,101
     
8,802
 
PROPERTY, PLANT AND EQUIPMENT:
                       
Property, plant and equipment
   
578,429
     
543,595
     
541,473
 
Less accumulated depreciation and amortization
   
(339,082
)
   
(322,327
)
   
(324,542
)
PROPERTY, PLANT AND EQUIPMENT, NET
   
239,347
     
221,268
     
216,931
 
TOTAL ASSETS
 
$
933,513
   
$
860,540
   
$
833,345
 
 
                       
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
CURRENT LIABILITIES:
                       
Accounts payable
 
$
85,520
   
$
66,054
   
$
72,080
 
Accrued liabilities:
                       
Compensation and benefits
   
45,651
     
34,728
     
39,743
 
Income taxes
   
6,269
     
-
     
-
 
Other
   
26,900
     
14,002
     
17,656
 
Current portion of long-term debt
   
-
     
-
     
40,000
 
TOTAL CURRENT LIABILITIES
   
164,340
     
114,784
     
169,479
 
 
                       
LONG-TERM DEBT, less current portion
   
84,700
     
95,790
     
15,918
 
DEFERRED INCOME TAXES
   
24,861
     
24,930
     
19,889
 
OTHER LIABILITIES
   
16,211
     
17,511
     
16,342
 
TOTAL LIABILITIES
   
290,112
     
253,015
     
221,628
 
 
                       
SHAREHOLDERS' 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, 19,900,066, 19,799,606, and 19,790,414
 
$
19,900
   
$
19,800
   
$
19,790
 
Additional paid-in capital
   
153,932
     
149,805
     
148,581
 
Retained earnings
   
458,005
     
426,887
     
432,772
 
Accumulated other comprehensive income
   
3,901
     
4,258
     
4,554
 
Employee stock notes receivable
   
(732
)
   
(982
)
   
(1,013
)
Total controlling interest shareholders' equity
   
635,006
     
599,768
     
604,684
 
Noncontrolling interest
   
8,395
     
7,757
     
7,033
 
TOTAL SHAREHOLDERS' EQUITY
   
643,401
     
607,525
     
611,717
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
933,513
   
$
860,540
   
$
833,345
 
 
See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
 
(in thousands, except per share data)

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 28,
   
September 29,
   
September 28,
   
September 29,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
NET SALES
 
$
651,780
   
$
533,366
   
$
1,944,711
   
$
1,584,170
 
 
                               
COST OF GOODS SOLD
   
573,491
     
478,139
     
1,729,027
     
1,403,202
 
 
                               
GROSS PROFIT
   
78,289
     
55,227
     
215,684
     
180,968
 
 
                               
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
53,020
     
45,186
     
154,348
     
140,070
 
ANTI-DUMPING DUTY ASSESSMENT
   
887
     
2,000
     
887
     
2,328
 
NET GAIN ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES
   
(145
)
   
(269
)
   
(253
)
   
(7,052
)
 
                               
EARNINGS FROM OPERATIONS
   
24,527
     
8,310
     
60,702
     
45,622
 
 
                               
INTEREST EXPENSE
   
1,159
     
968
     
3,584
     
3,219
 
INTEREST INCOME
   
(159
)
   
(302
)
   
(463
)
   
(864
)
EQUITY IN EARNINGS OF INVESTEE
   
(18
)
   
(15
)
   
(152
)
   
(25
)
 
   
982
     
651
     
2,969
     
2,330
 
 
                               
EARNINGS BEFORE INCOME TAXES
   
23,545
     
7,659
     
57,733
     
43,292
 
 
                               
INCOME TAXES
   
8,530
     
2,903
     
20,589
     
16,140
 
 
                               
NET EARNINGS
   
15,015
     
4,756
     
37,144
     
27,152
 
 
                               
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(924
)
   
(558
)
   
(2,057
)
   
(1,290
)
 
                               
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
 
$
14,091
   
$
4,198
   
$
35,087
   
$
25,862
 
 
                               
EARNINGS PER SHARE - BASIC
 
$
0.71
   
$
0.21
   
$
1.76
   
$
1.31
 
 
                               
EARNINGS PER SHARE - DILUTED
 
$
0.71
   
$
0.21
   
$
1.76
   
$
1.31
 
 
                               
COMPREHENSIVE INCOME
   
15,767
     
6,269
     
36,828
     
28,490
 
 
                               
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(1,106
)
   
(956
)
   
(2,098
)
   
(1,674
)
 
                               
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTERST
 
$
14,661
   
$
5,313
   
$
34,730
   
$
26,816
 

See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
(in thousands, except share and per share data)

 
 
Controlling Interest Shareholders' Equity
   
   
 
 
 
Common
Stock
   
Additional
Paid-In
Capital
   
Retained Earnings
   
Accumulated Other Comprehensive
Income
   
Employees Stock
Notes Receivable
   
Noncontrolling Interest
   
Total
 
Balance at December 31, 2011
 
$
19,624
   
$
143,988
   
$
410,848
   
$
3,600
   
$
(1,255
)
 
$
5,794
   
$
582,599
 
Net earnings
                   
25,862
                     
1,290
     
27,152
 
Foreign currency translation adjustment
                           
954
             
384
     
1,338
 
Capital contribution from noncontrolling interest
                                           
436
     
436
 
Distributions to noncontrolling interest
                                           
(871
)
   
(871
)
Cash dividends - $0.200 per share
                   
(3,946
)
                           
(3,946
)
Issuance of 82,059 shares under employee stock plans
   
82
     
1,744
                                     
1,826
 
Issuance of 51,771 shares under stock grant programs
   
52
     
24
     
8
                             
84
 
Issuance of 33,525 shares under deferred compensation plans
   
33
     
(33
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
307
                                     
307
 
Expense associated with share-based compensation arrangements
           
993
                                     
993
 
Accrued expense under deferred compensation plans
           
1,582
                                     
1,582
 
Notes receivable written-off
   
(1
)
   
(24
)
                   
25
             
-
 
Payments received on employee stock notes receivable
                                   
217
             
217
 
Balance at September 29, 2012
 
$
19,790
   
$
148,581
   
$
432,772
   
$
4,554
   
$
(1,013
)
 
$
7,033
   
$
611,717
 
 
                                                       
Balance at December 29, 2012
 
$
19,800
   
$
149,805
   
$
426,887
   
$
4,258
   
$
(982
)
 
$
7,757
   
$
607,525
 
Net earnings
                   
35,087
                     
2,057
     
37,144
 
Foreign currency translation adjustment
                           
(357
)
           
41
     
(316
)
Distributions to noncontrolling interest
                                           
(1,460
)
   
(1,460
)
Cash dividends - $0.200 per share
                   
(3,977
)
                           
(3,977
)
Issuance of 31,341 shares under employee stock plans
   
31
     
808
                                     
839
 
Issuance of 30,650 shares under stock grant programs
   
31
     
10
     
8
                             
49
 
Issuance of 41,019 shares under deferred compensation plans
   
41
     
(41
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
109
                                     
109
 
Expense associated with share-based compensation arrangements
           
1,442
                                     
1,442
 
Accrued expense under deferred compensation plans
           
1,897
                                     
1,897
 
Notes receivable written off
   
(3
)
   
(98
)
                   
105
             
4
 
Payments received on employee stock notes receivable
                                   
145
             
145
 
Balance at September 28, 2013
 
$
19,900
   
$
153,932
   
$
458,005
   
$
3,901
   
$
(732
)
 
$
8,395
   
$
643,401
 
 
See notes to consolidated condensed financial statements
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
(in thousands)

 
 
Nine Months Ended
 
 
 
September 28,
   
September 29,
 
 
 
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
 
Net earnings
 
$
37,144
   
$
27,152
 
Adjustments to reconcile net earnings to net cash from operating activities:
               
Depreciation
   
22,333
     
22,154
 
Amortization of intangibles
   
1,880
     
2,218
 
Expense associated with share-based compensation arrangements
   
1,491
     
1,078
 
Excess tax benefits from share-based compensation arrangements
   
(8
)
   
(73
)
Loss reserve for notes receivable
   
-
     
767
 
Deferred income taxes
   
(83
)
   
(1,223
)
Equity in earnings of investee
   
(152
)
   
(25
)
Net gain on sale or impairment of property, plant and equipment
   
(195
)
   
(7,228
)
Changes in:
               
Accounts receivable
   
(79,849
)
   
(63,466
)
Inventories
   
11,261
     
(13,483
)
Accounts payable
   
19,336
     
22,285
 
Accrued liabilities and other
   
34,580
     
12,343
 
NET CASH FROM OPERATING ACTIVITIES
   
47,738
     
2,499
 
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
   
(32,108
)
   
(22,187
)
Proceeds from sale of property, plant and equipment
   
1,261
     
15,092
 
Acquisitions, net of cash received
   
(9,296
)
   
(2,149
)
Purchase of patents
   
-
     
(95
)
Advances on notes receivable
   
(1,990
)
   
(1,157
)
Collections on notes receivable
   
1,441
     
915
 
Cash restricted as to use
   
6,111
     
(553
)
Other, net
   
28
     
(387
)
NET CASH USED IN INVESTING ACTIVITIES
   
(34,553
)
   
(10,521
)
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net borrowings (repayments) under revolving credit facilities
   
(11,090
)
   
6,217
 
Repayment of long-term debt
   
-
     
(2,773
)
Debt issuance costs
   
(15
)
   
(86
)
Proceeds from issuance of common stock
   
839
     
1,826
 
Distributions to noncontrolling interest
   
(1,460
)
   
(871
)
Capital contribution from noncontrolling interest
   
-
     
281
 
Dividends paid to sharesholders
   
(3,977
)
   
(3,946
)
Excess tax benefits from share-based compensation arrangements
   
8
     
73
 
Other, net
   
-
     
4
 
NET CASH FROM (USED IN) FINANCING ACTIVITIES
   
(15,695
)
   
725
 
 
               
Effect of exchange rate changes on cash
   
14
     
347
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
(2,496
)
   
(6,950
)
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
7,647
     
11,305
 
 
               
CASH, END OF PERIOD
 
$
5,151
   
$
4,355
 
 
               
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
               
Interest paid
 
$
2,850
   
$
2,498
 
Income taxes paid
   
6,780
     
15,797
 
 
               
NON-CASH INVESTING ACTIVITIES
               
Accounts receivable exchanged for notes receivable
   
1,635
     
-
 
Notes receivable exchanged for property
   
3,900
     
-
 
 
               
NON-CASH FINANCING ACTIVITIES:
               
Common stock issued under deferred compensation plans
   
1,647
     
1,161
 
 
See notes to consolidated condensed financial statements
UNIVERSAL FOREST PRODUCTS, INC.

NOTES TO UNAUDITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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 29, 2012.

Certain prior year information has been reclassified to conform to the current year presentation.

In the second quarter of fiscal 2013, we changed our annual testing date for evaluating goodwill and indefinite-lived intangible asset impairment from the last day of the fiscal year to the first day of the Company’s fourth fiscal quarter for all reporting units and indefinite-lived intangible assets. This voluntary change in accounting method is preferable under the circumstances because it will allow us more time to complete the annual goodwill and indefinite-lived intangible asset impairment testing in advance of our year-end reporting.  This change does not delay, accelerate or avoid an impairment charge. The change is not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.  There have been no other material changes in our policies or estimates since December 29, 2012.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASC Topic 220) (“ASU 2013-02”).  ASU 2013-02 amends prior presentation of comprehensive income guidance. ASU 2013-02 requires that we report, in one place, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. Our adoption of the provisions of ASU 2013-02 in the first quarter of 2013 did not affect our consolidated financial position, results of operations or cash flows.
UNIVERSAL FOREST PRODUCTS, INC.

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 28, 2013
   
September 29, 2012
 
(in thousands)
 
Quoted Prices in Active Markets
(Level 1)
   
Quoted Prices in Active Markets
(Level 1)
 
Recurring:
 
   
 
Money market funds
 
$
62
   
$
84
 
Mutual funds:
               
Domestic stock funds
   
725
     
597
 
International stock funds
   
535
     
473
 
Target funds
   
159
     
141
 
Bond funds
   
135
     
116
 
Total mutual funds
   
1,554
     
1,327
 
 
 
$
1,616
   
$
1,411
 

We maintain money market and mutual funds in our non-qualified deferred compensation plan.  These funds are valued at prices quoted in an active exchange market and are included in “Other Assets”.  We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.

We did not maintain any Level 2 or 3 assets or liabilities at September 28, 2013 or September 29, 2012.  

C. REVENUE RECOGNITION

Earnings on construction contracts are reflected in operations using percentage-of-completion accounting, under either cost to cost or units of delivery methods, 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.
UNIVERSAL FOREST PRODUCTS, INC.

Our construction contracts are generally entered into with a fixed price and completion of the projects can range from 6 to 18 months in duration.  Therefore, our operating results are impacted by, among many other things, labor rates and commodity costs.  During the quarter, we updated our estimated costs to complete our projects using current labor and commodity costs and recognized losses to the extent that they exist.

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 28, 2013
   
December 29, 2012
   
September 29, 2012
 
 
 
   
   
 
Cost and Earnings in Excess of Billings
 
$
9,640
   
$
4,981
   
$
5,971
 
Billings in Excess of Cost and Earnings
   
2,655
     
2,020
     
3,232
 

D. EARNINGS PER SHARE

The computation of earnings per share (“EPS”) is as follows (in thousands):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 28, 2013
   
September 29, 2012
   
September 28, 2013
   
September 29, 2012
 
Numerator:
 
   
   
   
 
Net earnings attributable to controlling interest
 
$
14,091
   
$
4,198
   
$
35,087
   
$
25,862
 
Adjustment for earnings allocated to non-vested restricted common stock
   
(134
)
   
(38
)
   
(338
)
   
(225
)
Net earnings for calculating EPS
 
$
13,957
   
$
4,160
   
$
34,749
   
$
25,637
 
Denominator:
                               
Weighted average shares outstanding
   
19,965
     
19,827
     
19,916
     
19,783
 
Adjustment for non-vested restricted common stock
   
(190
)
   
(178
)
   
(192
)
   
(172
)
Shares for calculating basic EPS
   
19,775
     
19,649
     
19,724
     
19,611
 
Effect of dilutive stock options
   
25
     
25
     
39
     
19
 
Shares for calculating diluted EPS
   
19,800
     
19,674
     
19,763
     
19,630
 
Net earnings per share:
                               
Basic
 
$
0.71
   
$
0.21
   
$
1.76
   
$
1.31
 
Diluted
 
$
0.71
   
$
0.21
   
$
1.76
   
$
1.31
 

No options were excluded from the computation of diluted EPS for the quarter ended September 28, 2013 or September 29, 2012.
UNIVERSAL FOREST PRODUCTS, INC.

No options were excluded from the computation of diluted EPS for the nine months ended September 28, 2013.  Options to purchase 10,000 shares were not included in the computation of diluted EPS for the nine months ended September 29, 2012 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. NET (GAIN) LOSS ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES

We have long-lived assets that consist of certain vacant land and facilities we closed to better align manufacturing capacity with the current business environment.  The fair values were determined based on broker assessments of value, appraisals or recent offers to acquire assets.  These and other idle assets were evaluated based on the requirements of ASC 360, which resulted in impairment and other exit charges included in “Net loss (gain) on disposition of assets, early retirement and other impairment and exit charges” for the periods presented below. These amounts include the following, separated by reporting segment (in thousands):

 
 
Three Months Ended September 28, 2013
   
Three Months Ended September 29, 2012
 
 
 
Eastern and
Western
   
Site-Built
   
All
Other
   
Total
   
Eastern and
Western
   
Site-Built
   
All
Other
   
Total
 
Severances and early retirement
 
$
22
   
$
-
   
$
18
   
$
40
   
$
24
   
$
-
   
$
4
   
$
28
 
Plant and equipment
   
(43
)
   
-
     
(12
)
   
(55
)
   
(133
)
   
(53
)
   
(111
)
   
(297
)
Net gain on sale of real estate
   
-
     
(130
)
   
-
     
(130
)
   
-
     
-
     
-
     
-
 
Total
 
$
(21
)
 
$
(130
)
 
$
6
   
(145
)
 
(109
)
 
(53
)
 
(107
)
 
(269
)

 
 
 
Nine Months Ended September 28, 2013
   
Nine Months Ended September 29, 2012
 
 
 
Eastern and
Western
   
Site-Built
   
All
Other
   
Total
   
Eastern and
Western
   
Site-Built
   
All
Other
   
Total
 
Severances and early retirement
 
$
35
   
$
1
   
$
36
   
$
72
   
$
134
   
$
2
   
$
40
   
$
176
 
Plant and equipment
   
(199
)
   
29
     
(25
)
   
(195
)
   
(228
)
   
(150
)
   
60
     
(318
)
Net gain on sale of real estate
   
-
     
(130
)
   
-
     
(130
)
   
(6,910
)
   
-
     
-
     
(6,910
)
Total
 
(164
)
 
(100
)
 
$
11
   
(253
)
 
(7,004
)
 
(148
)
 
$
100
   
(7,052
)

In the second quarter of 2012, we sold certain real estate in Fontana, CA for approximately $12.5 million and recognized a pre-tax gain of a $7.2 million.
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, Ardellis 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, have been established to cover remediation activities at our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Janesville, WI; and Medley, FL. In addition, a reserve was established for our affiliate’s facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.  During 2009, a subsidiary entered into a consent order with the State of Florida to conduct additional testing at the Auburndale, FL facility. We admitted no liability and the costs are not expected to be material.

On a consolidated basis, we have reserved approximately $3.5 million on September 28, 2013 and $3.4 million on September 29, 2012, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

In the third quarter of 2013, we accrued $0.9 million related to anti-dumping duty assessments estimated on plywood and steel nails imported from China.  We continue to work with US Customs and Border Protection to mitigate potential charges.

In the third quarter of 2012, we recorded a $2 million loss contingency for a Canadian anti-dumping duty.  The Canadian government imposed retroactive assessments for antidumping and countervailing duties to certain extruded aluminum products imported from China.  We continue to work with the government to clarify the applicability of these rules to our products.  This duty is unrelated to the 2013 duty assessment disclosed above.

We are currently undergoing an unclaimed property audit with the state of Michigan covering the period July 1, 1994 to present.  We anticipate that the audit will be completed during 2014.

In addition, on September 28, 2013, 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.
UNIVERSAL FOREST PRODUCTS, INC.

On September 28, 2013, we had outstanding purchase commitments on capital projects of approximately $12.3 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.

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 28, 2013, we had approximately $32.2 million in outstanding payment and performance bonds, which expire during the next two years.  In addition, approximately $17.7 million in payment and performance bonds are outstanding for completed projects which are still under warranty.

On September 28, 2013, we had outstanding letters of credit totaling $26.5 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts.  We currently have irrevocable letters of credit outstanding totaling approximately $16.7 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 $9.8 million related to our outstanding industrial development revenue bonds.  These letters of credit have varying terms but may be renewed at the option of the issuing banks.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 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 $0.6 million.  As a result, this amount is recorded in other long-term liabilities on September 28, 2013.

We did not enter into any new guarantee arrangements during the third quarter of 2013 which would require us to recognize a liability on our balance sheet.

G. BUSINESS COMBINATIONS

We completed the following acquisitions in fiscal 2013 and 2012 which were accounted for using the purchase method (in millions):

Company Name
Acquisition Date
Purchase Price
 
Intangible Assets
   
Net Tangible Assets
 
Operating
Segment
Business Description
Premier Laminating Services, Inc.
(“Premier Laminating”)
May 31, 2013
$0.7 (asset purchase)
 
$
0.2
   
$
0.5
 
Western Division
A business specialized in environmentally sustainable laminated wooden products. Facility is located in Perris, CA.
Millry Mill Company, Inc. (“Millry”)
February 28, 2013
$2.3 (asset purchase)
 
$
0.1
   
$
2.2
 
Eastern Division
A highly specialized export mill that produces rough dimension boards and lumber.  Facility is located in Millry, AL.
Custom Caseworks, Inc. (“Custom Caseworks”)
December 31, 2012
$6.3 (asset purchase)
 
$
2.0
   
$
4.3
 
Western Division
A high-precision business-to-business manufacturer of engineered wood products in many commercial markets. Facility is located in Sauk Rapids, MN. Custom Caseworks had annual sales of $7 million.
Nepa Pallet and Container Co., Inc. (“Nepa”)
November 5, 2012
$16.2
(asset purchase)
 
$
1.4
   
$
14.8
 
Western Division
Manufactures pallets, containers and bins for agricultural and industrial customers.  Facilities are located in Snohomish, Yakima and Wenatchee, WA. NEPA had trailing twelve month sales of $25 million.
MSR Forest Products, LLC
(“MSR”)
May 16, 2012
$3.2 (asset purchase)
 
 
$
1.1
   
$
2.1
 
Distribution Division
Supplies roof trusses and cut-to-size lumber to manufactured housing customers.  Facilities are located in Haleyville, AL and Waycross, GA.  MSR had annual sales of $10 million.

UNIVERSAL FOREST PRODUCTS, INC.

The intangible assets for each of the acquisitions were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2013.  This resulted in a $1.4 million reclassification from goodwill to amortizable intangible asset accounts.

H. SEGMENT REPORTING

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

Our operating segments consist of the Eastern, Western, Site-Built, Consumer Products and Distribution divisions.  In accordance with ASC 280, due to the similar economic characteristics, nature of products, distribution methods, and customers, we have aggregated our Eastern and Western operating segments into one reportable segment.  The Site-Built division is considered a separate reportable segment.  Our other divisions do not collectively form a reportable segment because their respective operations are dissimilar and they do not meet the applicable quantitative requirements.  These operations have been included in the “All Other” column of the table below.  The “Corporate” column includes unallocated administrative costs.

 
 
Three Months Ended September 28, 2013
 
 
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
523,364
   
$
70,579
   
$
57,837
   
$
-
   
$
651,780
 
Intersegment net sales
   
21,246
     
4,406
     
2,968
     
-
     
28,620
 
Segment operating profit
   
18,628
     
3,993
     
630
     
1,276
     
24,527
 

UNIVERSAL FOREST PRODUCTS, INC.

 
 
Three Months Ended September 29, 2012
 
 
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
425,260
   
$
59,630
   
$
48,476
   
$
-
   
$
533,366
 
Intersegment net sales
   
13,455
     
5,040
     
3,009
     
-
     
21,504
 
Segment operating profit (loss)
   
6,149
     
394
     
(2,874
)
   
4,641
     
8,310
 

 
 
 
Nine Months Ended September 28, 2013
 
 
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
1,570,073
   
$
202,590
   
$
172,048
   
$
-
   
$
1,944,711
 
Intersegment net sales
   
69,179
     
13,168
     
9,913
     
-
     
92,260
 
Segment operating profit
   
54,412
     
2,163
     
1,543
     
2,584
     
60,702
 
 

 
 
 
Nine Months Ended September 29, 2012
 
 
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
1,268,162
   
$
160,561
   
$
155,447
   
$
-
   
$
1,584,170
 
Intersegment net sales
   
49,387
     
13,916
     
11,619
     
-
     
74,922
 
Segment operating profit (loss)
   
45,395
     
858
     
(4,150
)
   
3,519
     
45,622
 
 
I. INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 36.2% in the third quarter of 2013 compared to 37.9% for same period of 2012. Our effective tax rate was 35.7% in the first nine months of 2013 compared to 37.3% for the same period of 2012.  The decrease in our effective tax rate is primarily due to 2012 and 2013 research and development and certain other tax credits that were enacted in the first quarter of 2013, retroactive to the beginning of 2012.

J. SUBSEQUENT EVENTS

On October 16, 2013, our Board approved a semi-annual dividend of $0.21 per share, payable on December 15, 2013 to shareholders of record on December 1, 2013.

UNIVERSAL FOREST PRODUCTS, INC.

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

Universal Forest Products, Inc. is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products for building materials retailers and wholesalers, structural lumber and other products for the manufactured housing and residential construction markets, and specialty wood packaging and components and packing materials for various industries. It has subsidiaries that provide framing services for the residential construction market in some parts of the country; that manufacture and market products used for concrete construction; and that offer lawn and garden products, such as trellises and arches, to retailers nationwide. Its consumer products operations offer a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Founded in 1955, Universal Forest Products is headquartered in Grand Rapids, Mich. Its subsidiaries operate facilities throughout North America. For more about Universal, go to www.ufpi.com.

This report contains 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, events, or assumptions 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 economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of the first three quarters of 2013.
 
OVERVIEW

Our results for the third quarter of 2013 were impacted by the following:
 
Our sales increased 22% due to a 9% increase in prices due to the lumber market and a 13% increase in unit sales.  See “Historical Lumber Prices”.  Our unit sales increased in all five market classifications, with our strongest growth occurring in our construction and home building markets - commercial construction and concrete forming, residential construction, and manufactured housing. Our unit sales to the retail building materials market reported an increase of approximately 12% as we continue to gain market share with retail customers during 2013 and our industrial market increased by 12%, in part, due to recent acquisitions.
UNIVERSAL FOREST PRODUCTS, INC.
 
Ÿ National housing starts increased approximately 15% in the period of June 2013 through August  2013 (our sales trail housing starts by about a month), compared to the same period of 2012, while our unit sales increased 12% in the residential construction market.  Since the downturn in housing began, suppliers servicing this market have been challenged with significant excess capacity.  Consequently, pricing pressure has been intense resulting in several years of operating losses for many industry participants.  We have maintained our focus on profitability and cash flow by being selective in the business we take.  Consequently, our sales may trail the market from time to time.
 
Ÿ Production of HUD code manufactured homes was up 9% during the third quarter of 2013, compared to the same period of 2012, which helped drive our 9% increase in unit sales to this market. We also believe modular market activity has improved.  We believe we’ve maintained our share of the manufactured housing market in the core manufactured product lines we offer.
 
Ÿ
In the third quarter of 2013, we accrued $0.9 million related to anti-dumping duty assessments estimated on plywood and steel nails imported from China.  In the third quarter of 2012, we recorded a $2.0 million loss contingency for a Canadian anti-dumping duty. The Canadian government has imposed retroactive assessments for antidumping and countervailing duties tied to certain extruded aluminum products imported from China.  We continue to work with the applicable government agencies to clarify the applicability of these rules to our products.
 
Ÿ Our profitability has improved primarily due to a combination of higher unit sales and operating leverage we have in the cost structure of our business.
 
Ÿ Higher unit sales and lumber prices have resulted in a substantial year over year increase in our working capital and debt levels.
UNIVERSAL FOREST PRODUCTS, INC.
 
HISTORICAL LUMBER PRICES

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market"). The following table presents the Random Lengths framing lumber composite price:

 
 
Random Lengths Composite
 
 
 
Average $/MBF
 
 
 
2013
   
2012
 
 
 
   
 
January
 
$
393
   
$
281
 
February
   
409
     
286
 
March
   
436
     
300
 
April
   
429
     
308
 
May
   
367
     
342
 
June
   
329
     
330
 
July
   
343
     
323
 
August
   
353
     
340
 
September
   
368
     
332
 
 
               
Third quarter average
 
$
355
   
$
332
 
Year-to-date average
   
381
     
316
 
 
               
Third quarter percentage change
   
6.9
%
       
Year-to-date percentage change
   
20.6
%
       

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
 
 
 
2013
   
2012
 
 
 
   
 
January
 
$
397
   
$
269
 
February
   
426
     
278
 
March
   
445
     
300
 
April
   
436
     
314
 
May
   
383
     
341
 
June
   
355
     
314
 
July
   
366
     
300
 
August
   
364
     
315
 
September
   
360
     
319
 
 
               
Third quarter average
 
$
363
   
$
311
 
Year-to-date average
 
$
392
   
$
306
 
 
               
Third quarter percentage change
   
16.7
%
       
Year-to-date percentage change
   
28.1
%
       

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 (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.

Ÿ Products with fixed selling prices.  These products include value-added products such as decking and fencing sold to retail building materials customers, as well as trusses, wall panels and other components sold to the residential 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 with our suppliers for these sales commitments.  Also, the time period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers.

Ÿ 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 we carry anticipated levels of inventory.  Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins.  For these products, our margins are exposed to changes in the trend of lumber prices.  As a result of the decline in the housing market and our sales to residential and commercial builders, a greater percentage of our sales fall into this general pricing category.  Consequently, we believe our profitability may be impacted to a much greater extent to changes in the trend of lumber prices.

UNIVERSAL FOREST PRODUCTS, INC.
 
Changes in the trend of lumber prices have their greatest impact on the following products:
 
Ÿ 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 20% 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.)

Ÿ Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family and commercial 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.

 
 
Three Months Ended
   
Nine months Ended
 
 
 
September 28, 2013
   
September 29, 2012
   
September 28, 2013
   
September 29, 2012
 
 
 
   
   
   
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of goods sold
   
88.0
     
89.6
     
88.9
     
88.6
 
Gross profit
   
12.0
     
10.4
     
11.1
     
11.4
 
Selling, general, and administrative expenses
   
8.1
     
8.5
     
7.9
     
8.8
 
Anti-dumping duty assessment
   
0.1
     
0.4
     
0.1
     
0.2
 
Net gain on disposition of assets,early retirement, and other impairment and exit charges
   
-
     
-
     
-
     
(0.5
)
Earnings from operations
   
3.8
     
1.6
     
3.1
     
2.9
 
Other expense, net
   
0.1
     
0.1
     
0.1
     
0.2
 
Earnings before income taxes
   
3.6
     
1.4
     
3.0
     
2.7
 
Income taxes
   
1.3
     
0.5
     
1.1
     
1.0
 
Net earnings
   
2.3
     
0.9
     
1.9
     
1.7
 
Less net earnings attributable to noncontrolling interest
   
(0.1
)
   
(0.1
)
   
(0.1
)
   
(0.1
)
Net earnings attributable to controlling interest
   
2.2
%
   
0.8
%
   
1.8
%
   
1.6
%

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

GROSS SALES

We design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, and specialty wood packaging, components and packing materials for various industries.  Our strategic long-term sales objectives include:

Ÿ Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users, increasing our penetration of the concrete forming market, increasing our sales of engineered wood components for custom home, multi-family, military and light commercial construction, and increasing our market share with independent retailers.

Ÿ Expanding geographically in our core businesses, domestically and internationally.

Ÿ Increasing sales of “value-added” products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail building materials market, specialty wood packaging, engineered wood components, and “wood alternative” products. Engineered wood components include roof trusses, wall panels, and floor systems.  Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals.
UNIVERSAL FOREST PRODUCTS, INC.

Ÿ Developing new products and expanding our product offering for existing customers.

Ÿ Maximizing unit sales growth while achieving return on investment goals.

Value-Added and Commodity-Based Sales:

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

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 28, 2013
   
September 29, 2012
   
September 28, 2013
   
September 29, 2012
 
 
 
   
   
   
 
Value-Added
   
59.1
%
   
58.4
%
   
58.1
%
   
58.9
%
Commodity-Based
   
40.9
%
   
41.6
%
   
41.9
%
   
41.1
%

The processes used to produce preservative treated lumber and its applications in the marketplace would suggest that it is a “value-added” product, but we have classified this product category as “commodity-based” as a result of its lower margin.

The following table presents, for the periods indicated, our gross sales and percentage change in gross sales by market classification.

(in thousands)
 
Three Months Ended
   
Nine Months Ended
 
Market Classification
 
September 28, 2013
   
September 29, 2012
   
% Change
   
September 28, 2013
   
September 29, 2012
   
% Change
 
Retail Building Materials
 
$
247,002
   
$
203,126
     
21.6
   
$
767,810
   
$
678,408
     
13.2
 
Industrial
   
187,253
     
155,048
     
20.8
     
541,079
     
449,017
     
20.5
 
 
                                               
Residential Construction
   
89,692
     
69,378
     
29.3
     
258,328
     
181,148
     
42.6
 
Commercial Construction and Concrete Forming
   
36,737
     
24,217
     
51.7
     
104,627
     
67,954
     
54.0
 
Manufactured Housing
   
99,976
     
89,026
     
12.3
     
299,338
     
232,729
     
28.6
 
Housing and Construction
   
226,405
     
182,621
     
24.0
     
662,293
     
481,831
     
37.5
 
Total Gross Sales
   
660,660
     
540,795
     
22.2
     
1,971,182
     
1,609,256
     
22.5
 
Sales Allowances
   
(8,880
)
   
(7,429
)
           
(26,471
)
   
(25,086
)
       
Total Net Sales
 
$
651,780
   
$
533,366
     
22.2
   
$
1,944,711
   
$
1,584,170
     
22.8
 

Gross sales in the third quarter of 2013 increased 22% compared to the same period of 2012, due to a 9% increase in overall prices primarily resulting from the higher level of the Lumber Market, which impacts our selling prices to customers in each of our markets, and a 13% increase in overall unit sales.
UNIVERSAL FOREST PRODUCTS, INC.

Gross sales in the first nine months of 2013 increased 22% compared to the same period of 2012, due to higher lumber prices and an 8% increase in unit sales.

Changes in our gross sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market increased 22% in the third quarter of 2013 compared to the same period of 2012, due to a 10% increase in selling prices and a 12% increase in our overall unit sales.  Within this market, sales to our big box customers increased 28% while our sales to other retailers increased 15%.  Our increase in unit sales is due to a combination of an increase in market share and improved consumer spending as evidenced by higher same store sales growth reported by our big box customers.

Gross sales to the retail building materials market increased 13% in the first nine months of 2013 compared to the same period of 2012.  Within this market, sales to our big box customers increased 12% while our sales to other retailers increased 14%.  Our unit sales increased 1% for the first nine months of 2013.  Sequentially, our sales growth has improved since May of 2013 as weather in many regions of the country improved.

Industrial:

Gross sales to the industrial market increased 21% in the third quarter of 2013 compared to the same period of 2013, resulting from a 9% increase in selling prices and a 12% increase in unit sales.  We acquired two new operations which contributed to our growth in unit sales.

Gross sales to the industrial market increased 21% in the first nine months of 2013 compared to the same period of 2012, primarily due to the same factors discussed above.  Our unit sales increased 8% in the first nine months of 2013.

Residential Construction:

Gross sales to the residential construction market increased 29% in the third quarter of 2013 compared to the same period of 2012 due to an increase in lumber prices and a 12% increase in our unit sales.   By comparison, national housing starts increased approximately 15% in the period of June 2013 through August 2013 (our sales typically trail housing starts by about a month), compared to the same period of 2012.  Our sales growth may trail the market from time to time due to our focus on profitability and cash flow as this market is still challenged with excess capacity resulting in pricing pressure from customers.
UNIVERSAL FOREST PRODUCTS, INC.

Gross sales to the residential construction market increased 43% in the first nine months of 2013 compared to the same period of 2012, primarily due to the same factors discussed above.  Our unit sales increased 20% for the first nine months of 2013.  By comparison, national housing starts increased approximately 23% in the first nine months of 2013.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 52% in the third quarter of 2013 compared to the same period of 2012 due to a 42% increase in unit sales and a 10% increase in selling prices.  Within this market, sales to commercial builders increased 71%, primarily due to new product sales in our Gulf region, and sales of products used to make concrete forms increased 40%.

Gross sales to the commercial construction and concrete forming market increased 54% in the first nine months of 2013 compared to the same period of 2012 due to a 40% increase in unit sales and a 14% increase in selling prices.  Within this market, sales to commercial builders increased 90%, and sales of products used to make concrete forms increased 33% due to our continued focus on growing our share of this market.

Industrial:

Gross sales to the industrial market increased 21% in the third quarter of 2013 compared to the same period of 2013, resulting from a 9% increase in selling prices and a 12% increase in unit sales.  We acquired two new operations which contributed to our growth in unit sales.

Gross sales to the industrial market increased 21% in the first nine months of 2013 compared to the same period of 2012, primarily due to the same factors discussed above.  Our unit sales increased 8% in the first nine months of 2013.

Manufactured Housing:

Gross sales to the manufactured housing market increased 12% in the third quarter of 2013 compared to 2012, primarily due to an increase in unit sales and a slight increase in selling prices due to the lumber market.  Production of HUD-code homes in the third quarter of 2013 increased 9% compared to 2012, and we believe modular market activity also increased.

Gross sales to the manufactured housing market increased 29% in the first nine months of 2013 compared to 2012, primarily due to the same factors discussed above.  Our selling price increased 18% and our unit sales increased 11% for the first nine months of 2013.  By comparison, year to date production of HUD-code homes increased 6%.
UNIVERSAL FOREST PRODUCTS, INC.

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 12.0% from 10.4% comparing the third quarter of 2013 to the same period of 2012.  In addition, our gross profit dollars increased by 41.8%, exceeding our 13% increase in unit sales.

The improvement in our gross profit per unit and profitability this quarter resulted from our increase in unit sales combined with the operating leverage we have on our labor, overhead and outbound freight costs, as well as a decrease in our material costs as a percentage of sales to our residential construction and industrial customers as a result of the recent trend in lumber prices.  Products sold to these customers are generally sold on a fixed price held open for a specified period of time.

Our gross profit percentage decreased to 11.1% from 11.4% comparing the first nine months of 2013 to the same period of 2012 due to the higher level of lumber prices.  See Historical Lumber Prices.  Our gross profit dollars increased by 19.2%, which compares favorably to our 8% increase in unit sales. This improvement is primarily due to the combination of higher unit sales and operating leverage we have in the cost structure of our plants.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $7.8 million, or 17.3%, in the third quarter of 2013 compared to the same period of 2012, while we reported a 13% increase in unit sales.  The increase in SG&A was primarily due to increases in wages and certain incentive compensation tied to profitability and returns.

Selling, general and administrative ("SG&A") expenses increased by approximately $14.3 million, or 10.2%, in the first nine months of 2013 compared to the same period of 2012, while we reported an 8% increase in unit sales.  SG&A expenses were impacted in the first nine months of 2013 by the same factors discussed above.

ANTI-DUMPING DUTY ASSESSMENTS

In the third quarter of 2013, we recorded $0.9 million related to estimated anti-dumping duty charges from the U.S Customs and Border Protection on certain products we imported from China.  We continue to work with the government to mitigate potential charges.

In the third quarter of 2012, we recorded a $2.0 million loss contingency for a Canadian anti-dumping duty which represents the maximum amount of our exposure.  The Canadian government imposed retroactive assessments for antidumping and countervailing duties tied to certain extruded aluminum products imported from China. We continue to work with the government to clarify the applicability of these rules to our products.
UNIVERSAL FOREST PRODUCTS, INC.

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

In the first nine months of 2013, we had net gains on the sale of property, plant and equipment totaling approximately $0.3 million.

In the first nine months of 2012, we incurred approximately $0.2 million of severance costs which were offset by net gains on the sale or disposal of property, plant and equipment totaling approximately $7.2 million.

We regularly review the performance of each our operations and make decisions to permanently or temporarily close operations based on a variety of factors including:

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

INTEREST, NET
 
Net interest costs were higher in the third quarter and first nine months of 2013 compared to the same period of 2012, due to higher debt levels in 2013 resulting from the impact of higher lumber prices and greater sales volumes on working capital.

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 36.2% in the third quarter of 2013 compared to 37.9% for same period of 2012. Our effective tax rate was 35.7% in the first nine months of 2013 compared to 37.3% for the same period of 2012. The decrease in our year to date effective tax rate is primarily due to research and development and certain other tax credits related to 2012, which Congress approved in 2013, and a decrease in our state income tax rate as our pre-tax profits have improved.  

UNIVERSAL FOREST PRODUCTS, INC.
 
SEGMENT REPORTING

The following table presents, for the periods indicated, our net sales and operating profit by reportable segment.
 
 
 
   
Net Sales
   
   
Segment Operating Profit
 
(in thousands)
 
 
   
Three Months Ended
   
 
    
Three Months Ended
 
 
 
September 28, 2013
   
September 29, 2012
   
$ Change
   
% Change
   
September 28, 2013
   
September 29, 2012
   
$ Change
   
% Change
 
Eastern and Western
 
$
523,364
   
$
425,260
   
$
98,104
     
23.1
%
 
$
18,628
   
$
6,149
   
$
12,479
     
202.9
%
Site-Built
   
70,579
     
59,630
     
10,949
     
18.4
     
3,993
     
394
     
3,599
     
913.5
 
All Other
   
57,837
     
48,476
     
9,361
     
19.3
     
630
     
(2,874
)
   
3,504
     
121.9
 
Corporate1
   
-
     
-
     
-
     
-
     
1,276
     
4,641
     
(3,365
)
   
(72.5
)
Total
 
$
651,780
   
$
533,366
   
$
118,414
     
22.2
%
 
$
24,527
   
$
8,310
   
$
16,217
     
195.2
%

 
 
 
   
Net Sales
   
   
Segment Operating Profit
 
(in thousands)
 
   
Nine Months Ended
   
   
Nine Months Ended
 
 
 
September 28, 2013
   
September 29, 2012
   
$ Change
   
% Change
   
September 28, 2013
   
September 29, 2012
   
$ Change
   
% Change
 
Eastern and Western
 
$
1,570,073
   
$
1,268,162
   
$
301,911
     
23.8
%
 
$
54,412
   
$
45,395
   
$
9,017
     
19.9
%
Site-Built
   
202,590
     
160,561
     
42,029
     
26.2
     
2,163
     
858
     
1,305
     
152.1
 
All Other
   
172,048
     
155,447
     
16,601
     
10.7
     
1,543
     
(4,150
)
   
5,693
     
137.2
 
Corporate1
   
-
     
-
     
-
     
-
     
2,584
     
3,519
     
(935
)
   
(26.6
)
Total
 
$
1,944,711
   
$
1,584,170
   
$
360,541
     
22.8
%
 
$
60,702
   
$
45,622
   
$
15,080
     
33.1
%
 
1Corporate primarily represents over (under) allocated administrative costs.

Eastern and Western

Net sales to the Eastern and Western reportable segment increased in the third quarter of 2013 compared to 2012 and in the first nine months of 2013 compared to 2012, due to increased lumber prices and:
 
· An increase in commercial construction and concrete forming sales primarily due to new products introduced in our Gulf region and other market share gains.
· An increase in manufactured housing sales due to an increase in industry production of HUD code homes.
· Recently acquired businesses that serve the industrial market.
· An increase in sales to retail customers since May as weather and consumer spending improved and due to market share gains.
 
Operating profit for the Eastern and Western reportable segment increased in the third quarter and in the first nine months of 2013 primarily due to greater unit sales and operating leverage on labor and overhead costs.  In addition, operating profits were impacted in 2012 by a $6.9 million net gain on the sale of real estate.

Site-Built

Net sales to the Site-Built reportable segment increased in the third quarter and in the first nine months of 2013 compared to the same periods of 2012, primarily due to increased lumber prices and an increase in housing starts.
UNIVERSAL FOREST PRODUCTS, INC.

Operating profit for the Site-Built reportable segment increased in the third quarter of 2013 and first nine months of 2013, primarily due to an increase in unit sales and operating leverage on labor and overhead costs.  The year to date profits of our turn-key framing operations were adversely impacted by an unexpected rise in labor costs early in the year on certain projects, which offset some of the favorable impact of higher unit sales discussed above.

All Other

Net sales to all other segments increased in the third quarter and first nine months of 2013 compared to 2012 primarily due:

· An increase in sales to the manufactured housing market by our UFP Distribution operations, primarily due to an increase in industry production of HUD code homes and market share gains from adding new product lines.
· An increase in sales to the industrial market by our Pinelli Universal partnership, which manufactures moulding and millwork products out of its plant in Durango, Durango Mexico.
· An increase in sales by our Universal Consumer Products operations.
 
Operating profit for all other segments increased in the third quarter and first nine months of 2013 compared to 2012, primarily due to improved profitability of our Universal Consumer Products operations resulting from operational improvements and our Pinelli Universal partnership due to the higher level of lumber prices.  These factors were partially offset by additional development costs associated with our new Eovations product line.

OFF-BALANCE SHEET TRANSACTIONS

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

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
 
 
 
Nine Months Ended
 
 
 
September 28, 2013
   
September 29, 2012
 
Cash from operating activities
 
$
47,738
     
2,499
 
Cash used in investing activities
   
(34,553
)
   
(10,521
)
Cash from (used in) financing activities
   
(15,695
)
   
725
 
Effect of exchange rate changes on cash
   
14
     
347