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EX-31.(A) - EXHIBIT 31(A) - UNIVERSAL FOREST PRODUCTS INCex31_a.htm
EX-31.(B) - EXHIBIT 31(B) - UNIVERSAL FOREST PRODUCTS INCex31_b.htm
EX-32.(B) - EXHIBIT 32(B) - UNIVERSAL FOREST PRODUCTS INCex32_b.htm
EX-32.(A) - EXHIBIT 32(A) - UNIVERSAL FOREST PRODUCTS INCex32_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 March 29, 2014

OR

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

Commission File Number 0-22684

UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Michigan
 
38-1465835
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

2801 East Beltline NE, Grand Rapids, Michigan
 
49525
(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 March 29, 2014
Common stock, no par value
 
20,048,764
 


UNIVERSAL FOREST PRODUCTS, INC.

TABLE OF CONTENTS
 
 
 
Page No.
PART I.
FINANCIAL INFORMATION.
 
 
 
 
Item 1.
Financial Statements.
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
Item 2.
15
 
 
 
Item 3.
27
 
 
 
Item 4.
27
 
 
 
PART II.
OTHER INFORMATION.
 
 
 
 
Item 1.
Legal Proceedings – NONE.
 
 
 
 
Item 1A.
28
 
 
 
Item 2.
28
 
 
 
Item 3.
Defaults upon Senior Securities – NONE.
 
 
 
 
Item 4.
Mine Safety Disclosures – NONE.
 
 
 
 
Item 5.
28
 
 
 
Item 6.
29
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

(in thousands, except share data)

 
 
March 29,
   
December 28,
   
March 30,
 
 
 
2014
   
2013
   
2013
 
ASSETS
 
   
   
 
CURRENT ASSETS:
 
   
   
 
Cash and cash equivalents
 
$
-
   
$
-
   
$
-
 
Restricted cash
   
720
     
720
     
653
 
Accounts receivable, net
   
242,433
     
180,452
     
232,954
 
Inventories:
                       
Raw materials
   
168,310
     
161,226
     
158,742
 
Finished goods
   
143,700
     
126,079
     
132,010
 
Total inventories
   
312,010
     
287,305
     
290,752
 
Refundable income taxes
   
-
     
2,235
     
-
 
Deferred income taxes
   
6,850
     
6,866
     
9,222
 
Other current assets
   
20,339
     
18,820
     
16,494
 
TOTAL CURRENT ASSETS
   
582,352
     
496,398
     
550,075
 
 
                       
DEFERRED INCOME TAXES
   
1,307
     
1,365
     
1,721
 
OTHER ASSETS
   
11,757
     
12,087
     
15,868
 
GOODWILL
   
160,945
     
160,146
     
161,266
 
INDEFINITE-LIVED INTANGIBLE ASSETS
   
2,340
     
2,340
     
2,340
 
OTHER INTANGIBLE ASSETS, NET
   
6,664
     
7,241
     
7,597
 
PROPERTY, PLANT AND EQUIPMENT:
                       
Property, plant and equipment
   
587,159
     
578,702
     
556,559
 
Less accumulated depreciation and amortization
   
(345,740
)
   
(341,292
)
   
(328,476
)
PROPERTY, PLANT AND EQUIPMENT, NET
   
241,419
     
237,410
     
228,083
 
TOTAL ASSETS
 
$
1,006,784
   
$
916,987
   
$
966,950
 
 
                       
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
CURRENT LIABILITIES:
                       
Cash overdraft
 
$
12,151
   
$
1,079
   
$
7,665
 
Accounts payable
   
91,015
     
72,918
     
93,597
 
Accrued liabilities:
                       
Compensation and benefits
   
35,596
     
45,018
     
32,819
 
Income taxes
   
458
     
-
     
930
 
Other
   
21,000
     
20,084
     
18,817
 
TOTAL CURRENT LIABILITIES
   
160,220
     
139,099
     
153,828
 
 
                       
LONG-TERM DEBT, less current portion
   
143,471
     
84,700
     
155,181
 
DEFERRED INCOME TAXES
   
26,627
     
26,788
     
25,004
 
OTHER LIABILITIES
   
16,044
     
16,666
     
17,280
 
TOTAL LIABILITIES
   
346,362
     
267,253
     
351,293
 
 
                       
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, 20,048,764, 19,948,270, and 19,868,615.
 
$
20,049
   
$
19,948
   
$
19,869
 
Additional paid-in capital
   
159,278
     
156,129
     
151,889
 
Retained earnings
   
469,028
     
461,812
     
432,116
 
Accumulated other comprehensive income
   
2,864
     
3,466
     
4,377
 
Employee stock notes receivable
   
(540
)
   
(732
)
   
(849
)
Total controlling interest shareholders' equity
   
650,679
     
640,623
     
607,402
 
Noncontrolling interest
   
9,743
     
9,111
     
8,255
 
TOTAL SHAREHOLDERS' EQUITY
   
660,422
     
649,734
     
615,657
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,006,784
   
$
916,987
   
$
966,950
 

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
 
 
 
March 29,
   
March 30,
 
 
 
2014
   
2013
 
 
 
   
 
NET SALES
 
$
553,998
   
$
554,494
 
 
               
COST OF GOODS SOLD
   
487,986
     
496,676
 
 
               
GROSS PROFIT
   
66,012
     
57,818
 
 
               
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
53,908
     
48,228
 
ANTI-DUMPING DUTY ASSESSMENT
   
-
     
639
 
NET GAIN ON DISPOSITION OF ASSETS
   
(524
)
   
(106
)
 
               
EARNINGS FROM OPERATIONS
   
12,628
     
9,057
 
 
               
INTEREST EXPENSE
   
1,066
     
1,245
 
INTEREST INCOME
   
(290
)
   
(147
)
EQUITY IN EARNINGS (LOSS) OF INVESTEE
   
(51
)
   
(42
)
 
   
725
     
1,056
 
 
               
EARNINGS BEFORE INCOME TAXES
   
11,903
     
8,001
 
 
               
INCOME TAXES
   
4,235
     
2,245
 
 
               
NET EARNINGS
   
7,668
     
5,756
 
 
               
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(452
)
   
(532
)
 
               
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
 
$
7,216
   
$
5,224
 
 
               
EARNINGS PER SHARE - BASIC
 
$
0.36
   
$
0.26
 
 
               
EARNINGS PER SHARE - DILUTED
 
$
0.36
   
$
0.26
 
 
               
NET EARNINGS
   
7,668
     
5,756
 
 
               
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
   
(696
)
   
415
 
 
               
COMPREHENSIVE INCOME
   
6,972
     
6,171
 
 
               
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(358
)
   
(828
)
 
               
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTERST
 
$
6,614
   
$
5,343
 

See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED 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
   
Accumulat-
ed Other
Comprehen-
sive
Earnings
   
Employees
Stock
Notes
Receivable
   
Noncontrolling
Interest
   
Total
 
Balance at December 29, 2012
 
$
19,800
   
$
149,805
   
$
426,887
   
$
4,258
   
$
(982
)
 
$
7,757
   
$
607,525
 
Net earnings
                   
5,224
                     
532
     
5,756
 
Foreign currency translation adjustment
                           
119
             
296
     
415
 
Distributions to noncontrolling interest
(330
)
(330
)
Issuance of 3,409 shares under employee stock plans
3
     
77
                                     
80
Issuance of 32,810 shares under stock grant programs
   
33
     
(19
)
   
5
                             
19
 
Issuance of 33,005 shares under deferred compensation plans
   
33
     
(33
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
7
                                     
7
 
Expense associated with share-based compensation arrangements
           
642
                                     
642
 
Accrued expense under deferred compensation plans
           
1,410
                                     
1,410
 
Payments received on employee stock notes receivable
                                   
133
             
133
 
Balance at March 30, 2013
 
$
19,869
   
$
151,889
   
$
432,116
   
$
4,377
   
$
(849
)
 
$
8,255
   
$
615,657
 
 
                                                       
Balance at December 28, 2013
 
$
19,948
   
$
156,129
   
$
461,812
   
$
3,466
   
$
(732
)
 
$
9,111
   
$
649,734
 
Net earnings
                   
7,216
                     
452
     
7,668
 
Foreign currency translation adjustment
                           
(602
)
           
(94
)
   
(696
)
Noncontrolling interest associated with business acquisitions
                                           
975
     
975
 
Distributions to noncontrolling interest
                                        (701 )     (701 )
Issuance of 2,172 shares under employee stock plans
2
97
99
Issuance of 63,019 shares under stock grant programs
   
63
     
523
                                     
586
 
Issuance of 35,303 shares under deferred compensation plans
   
36
     
(35
)
                                   
1
 
Expense associated with share-based compensation arrangements
           
495
                                     
495
 
Accrued expense under deferred compensation plans
           
2,069
                                     
2,069
 
Payments received on employee stock notes receivable
                                   
192
             
192
 
Balance at March 29, 2014
 
$
20,049
   
$
159,278
   
$
469,028
   
$
2,864
   
$
(540
)
 
$
9,743
   
$
660,422
 

See notes to consolidated condensed financial statements
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

(in thousands)
 
 
 
Three Months Ended
 
 
 
March 29,
   
March 30,
 
 
 
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
 
Net earnings
 
$
7,668
   
$
5,756
 
Adjustments to reconcile net earnings attributable to controlling interest:
               
Depreciation
   
7,691
     
7,140
 
Amortization of intangibles
   
586
     
604
 
Expense associated with share-based compensation arrangements
   
495
     
642
 
Expense associated with stock grant plans
   
29
     
19
 
Deferred income taxes (credit)
   
(150
)
   
36
 
Equity in earnings of investee
   
(51
)
   
(42
)
Net gain on sale of property, plant and equipment
   
(602
)
   
(127
)
Changes in:
               
Accounts receivable
   
(61,825
)
   
(70,715
)
Inventories
   
(23,980
)
   
(47,305
)
Accounts payable
   
18,150
     
27,417
 
Accrued liabilities and other
   
(2,743
)
   
12,001
 
NET CASH FROM OPERATING ACTIVITIES
   
(54,732
)
   
(64,574
)
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
   
(8,994
)
   
(8,085
)
Proceeds from sale of property, plant and equipment
   
785
     
251
 
Acquisitions, net of cash received
   
(4,191
)
   
(8,600
)
Advances of notes receivable
   
(2,462
)
   
(383
)
Collections on notes receivable
   
473
     
543
 
Cash restricted as to use
   
-
     
6,178
 
Other, net
   
(36
)
   
6
 
NET CASH FROM INVESTING ACTIVITIES
   
(14,425
)
   
(10,090
)
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings under revolving credit facilities
   
106,318
     
110,177
 
Repayments under revolving credit facilities
   
(47,547
)
   
(50,786
)
Proceeds from issuance of common stock
   
99
     
80
 
Distributions to noncontrolling interest
   
(701
)
   
(330
)
Other, net
   
(8
)
   
(6
)
NET CASH FROM FINANCING ACTIVITIES
   
58,161
     
59,135
 
 
               
Effect of exchange rate changes on cash
   
(76
)
   
217
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
(11,072
)
   
(15,312
)
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
(1,079
)
   
7,647
 
 
               
CASH (CASH OVERDRAFT), END OF PERIOD
 
$
(12,151
)
 
$
(7,665
)
 
               
SUPPLEMENTAL INFORMATION:
               
Interest paid
 
$
281
   
$
417
 
Income taxes paid (refunded)
   
1,681
     
(6,199
)
 
               
NON-CASH INVESTING ACTIVITIES
               
Other receivables exchanged for notes receivable
   
2,768
     
-
 
 
               
NON-CASH FINANCING ACTIVITIES:
               
Common stock issued under deferred compensation plans
   
1,894
     
1,329
 
 
See notes to consolidated condensed financial statements
UNIVERSAL FOREST PRODUCTS, INC.

NOTES TO UNAUDITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
A.
BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements (the "Financial Statements") include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States.  All intercompany transactions and balances have been eliminated.

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 28, 2013.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.  For comparative purposes, we have included the March 30, 2013 balances in the accompanying unaudited consolidated condensed balance sheets.

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. ASU 2013-02 was effective for the Company during the interim and annual periods beginning after December 15, 2012. Our adoption of the provisions of ASU 2013-02 in 2013 did not affect our consolidated financial position, results of operations or cash flows.

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:
UNIVERSAL FOREST PRODUCTS, INC.

 
 
March 29, 2014
   
March 30, 2013
 
(in thousands)
 
Quoted Prices
in Active
Markets
(Level 1)
   
Quoted Prices
in Active
Markets
(Level 1)
 
Money market funds
 
$
162
   
$
62
 
Mutual funds:
               
Domestic stock funds
   
833
     
653
 
International stock funds
   
577
     
537
 
Target funds
   
198
     
151
 
Bond funds
   
152
     
140
 
Total mutual funds
   
1,760
     
1,481
 
 
               
 
 
$
1,922
   
$
1,543
 

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 March 29, 2014 or March 30, 2013.

C.
REVENUE RECOGNITION

Revenue is recognized at the time the product is shipped to the customer. Generally, title passes at the time of shipment.  In certain circumstances, the customer takes title when the shipment arrives at the destination.  However, our shipping process is typically completed the same day.

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.

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 year, we update our estimated costs to complete our projects using current labor and commodity costs and recognize losses to the extent that they exist.
UNIVERSAL FOREST PRODUCTS, INC.

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

 
 
March 29,
2014
   
December 28,
2013
   
March 30,
2013
 
 
 
   
   
 
Cost and Earnings in Excess of Billings
 
$
7,296
   
$
6,903
   
$
6,660
 
Billings in Excess of Cost and Earnings
   
1,307
     
2,858
     
4,189
 

D.
EARNINGS PER SHARE

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

 
 
Three Months Ended
 
 
 
March 29,
2014
   
March 30,
2013
 
Numerator:
 
   
 
Net earnings attributable to controlling interest
 
$
7,216
   
$
5,224
 
Adjustment for earnings allocated to non-vested restricted common stock
   
(63
)
   
(48
)
Net earnings for calculating EPS
 
$
7,153
   
$
5,176
 
Denominator:
               
Weighted average shares outstanding
   
20,058
     
19,886
 
Adjustment for non-vested restricted common stock
   
(176
)
   
(184
)
Shares for calculating basic EPS
   
19,882
     
19,702
 
Effect of dilutive stock options
   
23
     
34
 
Shares for calculating diluted EPS
   
19,905
     
19,736
 
Net earnings per share:
               
Basic
 
$
0.36
   
$
0.26
 
Diluted
 
$
0.36
   
$
0.26
 

No options were excluded from the computation of diluted EPS for the quarters ended March 29, 2014 or March 30, 2013.

E.
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.
UNIVERSAL FOREST PRODUCTS, INC.

We own and operate a number of facilities throughout the United States that chemically treat lumber products.  In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses.  Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; 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 March 29, 2014 and $3.5 million on March 30, 2013, representing the estimated costs to complete future remediation efforts. These amounts are included in Other Liabilities within the condensed balance sheet and have not been reduced by an insurance receivable.

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 and do not expect it to result in a material loss.

In addition, on March 29, 2014, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business.  In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On March 29, 2014, we had outstanding purchase commitments on capital projects of approximately $5.0 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 residential and multi-family 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 March 29, 2014 we had approximately $15.8 million in outstanding payment and performance bonds, which expire during the next two years.  In addition, approximately $19.8 million in payment and performance bonds are outstanding for completed projects which are still under warranty.
UNIVERSAL FOREST PRODUCTS, INC.

On March 29, 2014, 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.

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 $0.5 million.  As a result, this amount is recorded in other long-term liabilities on March 29, 2014.

We did not enter into any new guarantee arrangements during the first quarter of 2014 which would require us to recognize a liability on our balance sheet.
UNIVERSAL FOREST PRODUCTS, INC.

F.
BUSINESS COMBINATIONS

We completed the following acquisitions in fiscal 2014 and 2013 which were accounted for using the purchase method (in thousands):

Company
Name
Acquisition
Date
Purchase
Price
 
Intangible
Assets
   
Net
Tangible
Assets
 
Operating
Segment
Business Description
Upshur Forest Products, LLC (“Upshur”)
March 27, 2014
$1,774
(50% asset purchase; 51% voting majority)
 
$
799
   
$
975
 
Western Division
A business of remanufacturing, packaging, and selling lumber products from its facility located in Gilmer, TX.  Upshur had annual sales of $8.9 million.
Container Systems, Inc. (“CSI”)
March 14, 2014
$2,417 (asset purchase)
 
$
-
   
$
2,417
 
Eastern Division
A manufacturer of crates and containers for industrial applications and the moving-and-storage industry, located in Franklinton, NC.  CSI had annual sales of $3.0 million.
SE Panel and Lumber Supply, LLC (“SE Panel”)
November 8, 2013
$2,181 (asset purchase)
 
$
-
   
$
2,181
 
Eastern Division
A distributor of Olympic Panel overlay concrete forming panels and commodity lumber products to the concrete forming and construction industries.  Facility is located in South Daytona, FL.  SE Panel had annual sales of $5.4 million.
Premier Laminating Services, Inc.
(“Premier Laminating”)
May 31, 2013
$696 (asset purchase)
 
$
250
   
$
446
 
Western Division
A business specialized in environmentally sustainable laminated wooden products. Facility is located in Perris, CA. Premier Laminating had annual sales of $6.2 million.
Millry Mill Company, Inc. (“Millry”)
February 28, 2013
$2,323 (asset purchase)
 
$
50
   
$
2,273
 
Eastern Division
A highly specialized export mill that produces rough dimension boards and lumber.  Facility is located in Millry, AL.  Millry had annual sales of $4.7 million.
Custom Caseworks, Inc. (“Custom Caseworks”)
December 31, 2012
$6,278 (asset purchase)
 
$
2,000
   
$
4,278
 
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.

UNIVERSAL FOREST PRODUCTS, INC.

The purchase price allocation for Upshur is preliminary for the valuation of intangible assets and will be revised, as necessary, as final determinations of intangible fair value are completed.  The intangible assets for the other acquisitions were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2013.

G.
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, Pinelli Universal 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 and certain incentive compensation expense.

 
 
Three Months Ended March 29, 2014
 
 
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
456,396
   
$
52,121
   
$
45,481
   
$
-
   
$
553,998
 
Intersegment net sales
   
22,580
     
2,818
     
3,845
     
-
     
29,243
 
Segment earnings from operations
   
14,906
     
1,598
     
(1,253
)
   
(2,623
)
   
12,628
 

 
 
Three Months Ended March 30, 2013
 
 
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
445,524
   
$
58,150
   
$
50,820
   
$
-
   
$
554,494
 
Intersegment net sales
   
18,792
     
4,293
     
2,612
     
-
     
25,697
 
Segment earnings from operations
   
14,074
     
(4,055
)
   
(346
)
   
(616
)
   
9,057
 

UNIVERSAL FOREST PRODUCTS, INC.

H.
INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 35.6% in the first quarter of 2014 compared to 28.1% for same period of 2013.  The increase is primarily due to recognizing a tax benefit for research and development and certain other tax credits totaling approximately $700,000 in the first quarter of 2013 related to 2012. These tax credits were enacted in the first quarter of 2013, retroactive to the beginning of 2012. 
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 supply wood, wood composite and other products to three robust markets: retail, construction and industrial.  Founded in 1955, the Company is headquartered in Grand Rapids, Mich., with affiliates throughout North America. For more about Universal Forest Products, 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 2014.

OVERVIEW

Our results for the first quarter of 2014 were impacted by the following:

Our overall sales were flat compared to the first quarter of 2013 as a 3% increase in our unit sales was offset by a decline in selling prices due to the commodity lumber market (see Historical Lumber Prices).  Our 3% increase in unit sales was driven by sales growth to our industrial and commercial construction and concrete forming markets, offset by a decline in unit sales to our residential construction market.  Unit sales to our retail and manufactured housing markets were flat.  Our ability to grow sales to the retail and construction markets was  temporarily hampered by inclement weather in most of the United States in the first quarter of 2014.
UNIVERSAL FOREST PRODUCTS, INC.

· National housing starts increased approximately 1.6% in the period from December 2013 through February 2014 (our sales trail housing starts by about a month), compared to the same period of 2013.  Although national housing starts increased, our unit sales to the residential construction market decreased 6%, primarily due to being more selective in the business that we take, particularly in our framing operations within our Site-Built segment.

· Production of HUD code manufactured homes increased 3.8% in the first quarter of 2014, compared to the same period of 2013, which helped drive our 1% increase in unit sales to this market.  Our unit sales growth trails the market primarily due to a vertical integration strategy being employed by one of our customers.  We expect this trend to continue for the balance of the year.

· Our operating profit percentage increased to 2.3% from 1.6% comparing 2014 to 2013 primarily due to the improved profitability of our framing and other operations that primarily serve residential construction customers.

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
 
 
 
2014
   
2013
 
 
 
   
 
January
 
$
395
   
$
393
 
February
   
394
     
409
 
March
   
387
     
436
 
 
               
First quarter average
 
$
392
   
$
413
 
 
               
First quarter percentage change
   
(5.1
%)
       

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 approximately 50% of our sales volume.
UNIVERSAL FOREST PRODUCTS, INC.

 
 
Random Lengths SYP
Average $/MBF
 
 
 
2014
   
2013
 
 
 
   
 
January
 
$
375
   
$
397
 
February
   
398
     
426
 
March
   
406
     
445
 
 
               
First quarter average
 
$
393
   
$
423
 
 
               
First quarter percentage change
   
(7.1
%)
   

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.
UNIVERSAL FOREST PRODUCTS, INC.

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.

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 15% 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 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.
UNIVERSAL FOREST PRODUCTS, INC.

BUSINESS COMBINATIONS

We completed two business acquisitions through March 2014 and four during all of 2013.  Each of the acquisitions was accounted for using the purchase method.  The annual revenue of these acquisitions is approximately $35 million.  These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2014 and 2013 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note C, "Business Combinations" for additional information.

RESULTS OF OPERATIONS

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

 
 
Three Months Ended
 
 
 
March 29,
2014
   
March 30,
2013
 
 
 
   
 
Net sales
   
100.0
%
   
100.0
%
Cost of goods sold
   
88.1
     
89.6
 
Gross profit
   
11.9
     
10.4
 
Selling, general, and administrative expenses
   
9.7
     
8.7
 
Anti-dumping duty assessments
   
-
     
0.1
 
Net gain on disposition of assets
   
(0.1
)
   
(0.0
)
Earnings from operations
   
2.3
     
1.6
 
Other expense, net
   
0.1
     
0.2
 
Earnings before income taxes
   
2.2
     
1.4
 
Income taxes
   
0.8
     
0.4
 
Net earnings
   
1.4
     
1.0
 
Less net earnings attributable to noncontrolling interest
   
(0.1
)
   
(0.1
)
Net earnings attributable to controlling interest
   
1.3
%
   
0.9
%

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:
UNIVERSAL FOREST PRODUCTS, INC.

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.

Ÿ Developing new products and expanding our product offering for existing customers.  New product sales were $21.2 million in the first quarter of 2014 compared to $18.8 million  during the first quarter of 2013.

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

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
 
 
 
   
   
 
Market Classification
 
March 29, 2014
   
March 30, 2013
   
% Change
 
Retail Building Materials
 
$
202,259
   
$
206,062
     
(1.8
)
Industrial
   
170,402
     
159,676
     
6.7
 
Manufactured Housing
   
83,611
     
90,380
     
(7.5
)
Residential Construction
   
77,290
     
78,719
     
(1.8
)
Commercial Construction and Concrete Forming
   
28,635
     
25,865
     
10.7
 
Total Gross Sales
   
562,197
     
560,702
     
0.3
 
Sales Allowances
   
(8,199
)
   
(6,208
)
       
Total Net Sales
 
$
553,998
   
$
554,494
     
(0.1
)

During 2014, certain customers were reclassified to a different market.  Prior year information has been restated to reflect these changes.
UNIVERSAL FOREST PRODUCTS, INC.

Gross sales in the first quarter of 2014 increased 0.3% compared to the same period of 2013, due to a 3% increase in unit sales, offset by a 3% decline in selling prices due to the lower level of the Lumber Market.

Changes in our gross sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market decreased almost 2% in the first quarter of 2014 compared to the same period of 2013, due to a reduction in selling prices due to the Lumber Market.  Overall unit sales remained flat.  Within this market, sales to our big box customers increased 7% while our sales to other retailers decreased 11%.  The decline in sales to our independent retail customers was due to inclement weather in the first quarter of 2014 as these customers are more apt to order product on a just-in-time basis.

Industrial:

Gross sales to the industrial market increased nearly 7% in the first quarter of 2014 compared to the same period of 2013, resulting from a 10% increase in unit sales, offset by a 3% reduction in selling prices due to the Lumber Market.  Our growth was due to a combination of new customers and an increase in sales to existing customers.

Manufactured Housing:

Gross sales to the manufactured housing market decreased over 7% in the first quarter of 2014 compared to 2013.  The decrease was due to an 8% decrease in selling prices, offset by a 1% increase in unit sales.  By comparison, production of HUD-code homes in January and February 2014 were up 4% compared to 2013.  Our unit sales increase generally trailed industry production primarily due to a vertical integration strategy being employed by one of our customers.  We expect this trend to continue for the balance of the year.

Residential Construction:

Gross sales to the residential construction market decreased approximately 2% in the first quarter of 2014 compared to the same period of 2013, due to a 6% decrease in our unit sales, offset by a 4% increase in selling prices.   By comparison, national housing starts increased approximately 1.6% in the period from December 2013 through February 2014 (our sales trail housing starts by about a month), compared to the same period of 2013, and were impacted by inclement weather in the first quarter of 2014.  The decrease in our unit sales and increase in our selling prices reflects efforts to be more selective in the business that we take, particularly in our framing operations within our Site-Built segment.
UNIVERSAL FOREST PRODUCTS, INC.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased nearly 11% in the first quarter of 2014 compared to the same period of 2013.  A shift in sales mix towards higher margin products generated a 3% increase in selling prices, despite a decrease in lumber prices.  Additionally, unit sales increased 8%.

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
 
 
 
March 29,
2014
   
March 30,
2013
 
 
 
   
 
Value-Added
   
57.7
%
   
57.1
%
Commodity-Based
   
42.3
%
   
42.9
%

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 11.9% from 10.4% comparing the first quarter of 2014 to the same period of 2013.  Our gross profit dollars increased by 14.2%, which compares favorably with our 3% increase in unit sales.  The improvement in our profitability in 2014 reflects efforts to be more selective in the business that we take on sales to the residential construction market, particularly in our framing entities, as well as operational improvements we made to those entities.  Our growth in sales to the industrial market also contributed to our gross margin and gross profit increases.  These improvements were offset to some extent by adverse cost variances resulting from a decline in productivity due to inclement weather.  We experienced many lost production days at our plants  during the first quarter in 2014.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $5.7 million, or 11.8%, in the first quarter of 2014 compared to the same period of 2013, while we reported a 3% increase in unit sales.  The increase in SG&A was primarily due to increases in compensation and benefit costs tied to an increased headcount, incentive compensation resulting from an increase in our profitability, and an increase in bad debt expense.

INTEREST, NET

Net interest costs were lower in the first quarter of 2014 compared to the same period of 2013, due to lower interest expense resulting from lower debt levels in 2014, and an increase in interest income resulting from certain notes receivables.
UNIVERSAL FOREST PRODUCTS, INC.

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 35.6% in the first quarter of 2014 compared to 28.1% for the same period of 2013.  The increase is primarily due to recognizing a tax benefit for research and development and certain other tax credits totaling approximately $700,000 in the first quarter of 2013 related to 2012. These tax credits were enacted in the first quarter of 2013, retroactive to the beginning of 2012.

SEGMENT REPORTING

The following table presents, for the periods indicated, our net sales and earnings from operations by reportable segment.

 
 
Net Sales
   
Earnings from Operations
 
(in thousands)
 
Three Months Ended
   
Three Months Ended
 
 
 
March 29,
2014
   
March 30,
2013
   
% Change
   
March 29,
2014
   
March 30, 
2013
   
% Change
 
Eastern and Western
 
$
456,396
   
$
445,524
     
2.4
   
$
14,906
   
$
14,074
     
5.9
 
Site-Built
   
52,121
     
58,150
     
(10.4
)
   
1,598
     
(4,055
)
   
139.4
 
All Other
   
45,481
     
50,820
     
(10.5
)
   
(1,253
)
   
(346
)
   
(261.3
)
Corporate1
                           
(2,623
)
   
(616
)
   
(325.8
)
Total
 
$
553,998
   
$
554,494
     
(0.1
)
 
$
12,628
   
$
9,057
     
39.5
 

1 Corporate earnings from operations represents unallocated administrative costs and certain incentive compensation expense.

Eastern and Western

Net sales to the Eastern and Western reportable segment increased in the first quarter of 2014 compared to 2013 due to an increase in sales to industrial and concrete forming customers, offset by a decline in sales to retail and manufactured housing customers due to the Lumber Market.

Earnings from operations for the Eastern and Western reportable segment increased in the first quarter of 2014 compared to 2013, primarily due to an increase in overall unit sales and improvement in product mix, offset by unfavorable cost variances due to lost production days resulting from inclement weather.

Site-Built

Net sales to the Site-Built reportable segment decreased in the first quarter of 2014 compared to 2013 primarily due to a decrease in sales to the commercial construction market and due to a decline in sales of our framing operations as we were more selective in the business that we pursued.
UNIVERSAL FOREST PRODUCTS, INC.

Earnings from operations for the Site-Built reportable segment increased in the first quarter of 2014 compared to 2013 primarily due to improvements in our framing operations, as well as improved profitability of our component plants.  These results were offset somewhat by unfavorable cost variances resulting from lost production days due to inclement weather.

All Other

Net sales to all other segments decreased in the first quarter of 2014 compared to 2013, primarily due to a decline in commodity lumber sales executed by our centralized purchasing department.

Earnings from operations for all other segments decreased in the first quarter of 2014 compared to 2013, primarily due to our Universal Consumer Products operations.

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):

 
 
Three Months Ended
 
 
 
March 29, 2014
   
March 30, 2013
 
Cash from operating activities
 
(54,732
)
 
(64,574
)
Cash from investing activities
   
(14,425
)
   
(10,090
)
Cash from financing activities
   
58,161
     
59,135
 
Effect of exchange rate changes on cash
   
(76
)
   
217
 
Net change in cash and cash equivalents
   
(11,072
)
   
(15,312
)
Cash and cash equivalents, beginning of period
   
(1,079
)
   
7,647
 
Cash overdraft, end of period
 
(12,151
)
 
( 7,665
)

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

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.  For comparative purposes, we have included the March 30, 2013 balances in the accompanying unaudited consolidated condensed balance sheets.
UNIVERSAL FOREST PRODUCTS, INC.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management.  Our cash cycle increased to 62 days in the first three months of 2014 from 55 days in the first three months of 2013, due to a 5 day increase in our days supply of inventory, combined with a 2 day increase in our days sales outstanding. In 2014, inclement weather resulted in weaker than expected unit sales and lower inventory turnover.  In addition, we carried higher levels of safety stock inventory in 2014 due to industry transportation challenges.

Cash used in operating activities was $54.7 million in the first three months of 2014, which was comprised of net earnings of $7.7 million and $8.0 million of non-cash expenses, offset by a $70.4 million increase in working capital since the end of 2013 due to the seasonality of our business.

Capital expenditures were $9.0 million in the first three months of 2014.  We currently plan to spend up to $40 million in 2014.  Outstanding purchase commitments on existing capital projects totaled approximately $5.0 million on March 29, 2014.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.

Cash flows used in investing activities also included $4.2 million spent to acquire assets of Upshur Forest Products, LLC and Container Systems, Inc. See Notes to Unaudited Consolidated Condensed Financial Statements, Note F “Business Combinations”.

On March 29, 2014, we had $58.8 million outstanding on our $265 million revolving credit facility. The revolving credit facility also supports letters of credit totaling approximately $9.8 million on March 29, 2014.  Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold.  We were in compliance with all our covenant requirements on March 29, 2014.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, "Commitments, Contingencies, and Guarantees."
UNIVERSAL FOREST PRODUCTS, INC.

CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States.  These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures.  There have been no material changes in our policies or estimates since December 28, 2013.

UNIVERSAL FOREST PRODUCTS, INC.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

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

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

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

Item 4.  Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.  With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended March 29, 2014 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

(b) Changes in Internal Controls.  During the quarter ended March 29, 2014, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
UNIVERSAL FOREST PRODUCTS, INC.

PART II.  OTHER INFORMATION

Item 1A.  Risk Factors.

CCA Treated Lumber Products.  In connection with the chemical treatment of lumber products, certain of our affiliates market a modest amount of CCA (Chromated Copper Arsenate) treated products for permitted, non-residential applications.  From time to time, various special interests and environmental groups have petitioned certain states requesting restrictions on the use or disposal of CCA treated products.   The wood preservation industry trade groups have been and are working with individual states and the regulatory agencies to provide an accurate, factual background that demonstrates that the present method of uses and disposal is scientifically supported.  While the level of activity in this area has diminished over time, our inability to market CCA treated products could impact our operations adversely.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

(a)            None.

(b)            None.

(c)            Issuer purchases of equity securities.

Fiscal Month
(a)
(b)
(c)
(d)
 
 
 
 
 
December 29 – February 1, 2014(1)
 
 
 
2,988,229
February 2 – March 1, 2014
 
 
 
2,988,229
March 2 – 29, 2014
 
 
 
2,988,229
(a)        Total number of shares purchased.
 
 
 
 
(b)        Average price paid per share.
 
 
 
 
(c)        Total number of shares purchased as part of publicly announced plans or programs.
 
 
(d)        Maximum number of shares that may yet be purchased under the plans or programs.
 
 

 
(1)
On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock.  On October 14, 2011, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program.  The total number of shares that may be repurchased under the program is approximately 3 million shares.

Item 5.  Other Information.

None.
UNIVERSAL FOREST PRODUCTS, INC.

PART II.  OTHER INFORMATION

Item 6.  Exhibits.

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

31
Certifications.
 
 
 
 
(a)
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
 
(b)
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
32
Certifications.
 
 
 
 
(a)
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
 
(b)
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
101
Interactive Data File.
 
 
 
 
(INS) XBRL Instance Document.
 
 
 
 
(SCH) XBRL Schema Document.
 
 
 
 
(CAL) XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
(LAB) XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
(PRE) XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
(DEF) XBRL Taxonomy Extension Definition Linkbase Document.



*  Indicates a compensatory arrangement.
UNIVERSAL FOREST PRODUCTS, INC.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
UNIVERSAL FOREST PRODUCTS, INC.
 
Date: April 30, 2014
By:
/s/ Matthew J. Missad
 
Matthew J. Missad,
 
Chief Executive Officer and Principal Executive Officer
 
 
 
Date: April 30, 2014
By:
/s/ Michael R. Cole
 
Michael R. Cole,
 
Chief Financial Officer,
 
Principal Financial Officer and
 
Principal Accounting Officer

EXHIBIT INDEX

Exhibit No. Description

31
Certifications.
 
 
 
 
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
 
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
32
Certifications.
 
 
 
 
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
 
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 
101
Interactive Data File.
 
 
 
 
(INS)
XBRL Instance Document.
 
 
 
 
(SCH)
XBRL Schema Document.
 
 
 
 
(CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
(LAB)
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
(PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
(DEF)
XBRL Taxonomy Extension Definition Linkbase Document.
 

 
*  Indicates a compensatory arrangement.
 
 
31