EX-13 2 ex13.htm EXHIBIT 13

Exhibit 13

UNIVERSAL FOREST PRODUCTS, INC.
FINANCIAL INFORMATION

Table of Contents

Selected Financial Data
2
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
3-25
 
 
Management's Annual Report on Internal Control Over Financial Reporting
26
 
 
Report of Independent Registered Public Accounting Firm
27
 
 
Report of Independent Registered Public Accounting Firm
28
 
 
Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012
29-30
 
 
Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 28, 2013, December 29, 2012, and December 31, 2011
31
 
 
Consolidated Statements of Shareholders' Equity for the Years Ended December 28, 2013, December 29, 2012, and December 31, 2011
32-34
 
 
Consolidated Statements of Cash Flows for the Years Ended December 28, 2013, December 29, 2012, and December 31, 2011
35-36
 
 
Notes to Consolidated Financial Statements
37-60
 
 
Price Range of Common Stock and Dividends
61
 
 
Stock Performance Graph
62
 
 
Directors and Executive Officers
63
 
 
Shareholder Information
64-65


SELECTED FINANCIAL DATA
(In thousands, except per share and statistics data)
 
 
 
2013
   
2012
   
2011
   
2010
   
2009
 
Consolidated Statement of Earnings Data
 
   
   
   
   
 
Net sales
 
$
2,470,448
   
$
2,054,933
   
$
1,822,336
   
$
1,890,851
   
$
1,673,000
 
Gross profit
   
280,552
     
225,109
     
199,727
     
229,955
     
243,664
 
Earnings before income taxes
   
70,258
     
41,064
     
8,787
     
27,111
     
38,583
 
Net earnings attributable to controlling interest
   
43,082
     
23,934
     
4,549
     
17,411
     
24,272
 
Diluted earnings per share
 
$
2.15
   
$
1.21
   
$
0.23
   
$
0.89
   
$
1.25
 
Dividends per share
 
$
0.410
   
$
0.400
   
$
0.400
   
$
0.400
   
$
0.260
 
 
                                       
Consolidated Balance Sheet Data
                                       
Working capital(1)
 
$
357,299
   
$
338,389
   
$
225,399
   
$
263,578
   
$
248,165
 
Total assets
   
916,987
     
860,540
     
764,007
     
789,396
     
776,868
 
Total debt and capital lease obligations
   
84,700
     
95,790
     
52,470
     
55,291
     
53,854
 
Shareholders' equity
   
649,734
     
607,525
     
582,599
     
581,176
     
568,946
 
 
                                       
Statistics
                                       
Gross profit as a percentage of
                                       
net sales
   
11.4
%
   
11.0
%
   
11.0
%
   
12.2
%
   
14.6
%
Net earnings attributable to controlling interest as a percentage of net sales
   
1.7
%
   
1.2
%
   
0.2
%
   
0.9
%
   
1.5
%
Return on beginning equity(2)
   
7.1
%
   
4.1
%
   
0.8
%
   
3.1
%
   
4.4
%
Current ratio
   
3.59
     
3.95
     
2.70
     
3.21
     
3.06
 
Debt to equity ratio
   
0.13
     
0.16
     
0.09
     
0.10
     
0.09
 
Book value per common share(3)
 
$
32.57
   
$
30.68
   
$
29.69
   
$
30.06
   
$
29.50
 

(1) Current assets less current liabilities.
(2) Net earnings attributable to controlling interest divided by beginning shareholders’ equity.
(3) Shareholders’ equity divided by common stock outstanding.
2

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Universal Forest Products, Inc. (“the Company”) 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 material retailers and wholesalers, engineered wood components, structural lumber and other products for the manufactured housing industry and the residential construction market, and specialty wood packaging and components and packing materials for various industries. The Company’s subsidiaries also provide framing services for the residential construction market and a variety of products used for concrete construction. The Company's consumer products operations offer a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Its lawn and garden group offers an array of products, such as trellises and arches, to retailers nationwide. The Company is headquartered in Grand Rapids, Michigan, and its subsidiaries operate facilities throughout North America. For more about Universal Forest Products, Inc., 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 2013.

OVERVIEW

Our results for 2013 were impacted by the following:

·
 
Our sales increased 20% in 2013 due to a 12% increase in our selling prices due to the Lumber Market and an 8% increase in unit sales.  See “Historical Lumber Prices”.  Our unit sales increased in all five of our markets classifications, with our strongest growth occurring in our housing and construction 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 1% and our industrial market increased by 8%, in part, due to recent acquisitions.

3

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
· National housing starts increased approximately 21% in the period of December 2012 through November 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 were challenged with significant excess capacity.  We have maintained our focus on profitability and cash flow by being selective in the business that we take. Consequently, our revenue growth may trail market growth from time to time.

· Shipments of HUD code manufactured homes were up 9% in the period from January through November 2013, compared to the same period of 2012.  In addition, through the first nine months of 2013 (the last period reported), modular home starts increased by 5%.  These increases helped drive our 11% increase in unit sales to this market.

· Our gross profit dollars increased by 25% comparing 2013 to 2012, which compares to our 8% increase in unit sales.  Our profitability has improved primarily due to a combination of higher unit sales and improved operating leverage we have in the cost structure of our business and improvements in our sales mix whereby our sales of higher margin products have increased.  In addition, pricing pressure on sales to the residential construction market has eased. These factors were offset by the higher level of lumber prices in 2013 relative to 2012.

· We recorded loss contingencies of $1.6 million in 2013 and $2.3 million in 2012 related to anti-dumping duty assessments estimated on plywood and steel nails imported from China and Canadian anti-dumping duties.  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.

· Higher unit sales and lumber prices have resulted in a year over year increase in our working capital.

4

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

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

 
 
Random Lengths Composite
 
 
 
Average $/MBF
 
 
 
2013
   
2012
   
2011
 
January
 
$
393
   
$
281
   
$
301
 
February
   
409
     
286
     
296
 
March
   
436
     
300
     
294
 
April
   
429
     
308
     
275
 
May
   
367
     
342
     
259
 
June
   
329
     
330
     
262
 
July
   
343
     
323
     
269
 
August
   
353
     
340
     
265
 
September
   
368
     
332
     
262
 
October
   
384
     
324
     
261
 
November
   
398
     
354
     
257
 
December
   
385
     
370
     
267
 
Annual average
 
$
383
   
$
324
   
$
272
 
Annual percentage change
   
18.2
%
   
19.1
%
       

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

 
 
Random Lengths SYP
 
 
 
Average $/MBF
 
 
 
2013
   
2012
   
2011
 
January
 
$
397
   
$
269
   
$
282
 
February
   
426
     
278
     
289
 
March
   
445
     
300
     
290
 
April
   
436
     
314
     
266
 
May
   
383
     
341
     
254
 
June
   
355
     
314
     
246
 
July
   
366
     
300
     
253
 
August
   
364
     
315
     
263
 
September
   
360
     
319
     
239
 
October
   
356
     
313
     
244
 
November
   
362
     
350
     
248
 
December
   
360
     
362
     
256
 
Annual average
 
$
384
   
$
315
   
$
261
 
Annual percentage change
   
21.9
%
   
20.7
%
       

5

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

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

Our gross margins are impacted by (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.

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

6

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

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed four business acquisitions during 2013 and two during 2012 and each was accounted for using the purchase method.  The aggregate annual revenue of these acquisitions totaled $58 million.  These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2013 and 2012 are not presented.  No business combinations were completed in fiscal 2011.

See Notes to 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 Consolidated Statements of Earnings as a percentage of net sales.
7

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

 
 
Years Ended
 
 
 
December 28, 2013
   
December 29, 2012
   
December 31, 2011
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
Cost of goods sold
   
88.6
     
89.0
     
89.0
 
Gross profit
   
11.4
     
11.0
     
11.0
 
Selling, general, and administrative expenses
   
8.3
     
9.0
     
10.0
 
Loss contingency for anti-dumping duty assessments
   
0.1
     
0.1
     
-
 
Net loss (gain) on disposition of assets and other impairment and exit charges
   
-
     
(0.3
)
   
0.3
 
Earnings from operations
   
3.0
     
2.2
     
0.7
 
Other expense, net
   
0.2
     
0.2
     
0.2
 
Earnings before income taxes
   
2.8
     
2.0
     
0.5
 
Income taxes
   
1.0
     
0.7
     
0.2
 
Net earnings
   
1.9
     
1.3
     
0.3
 
Less net earnings attributable to noncontrolling interest
   
(0.1
)
   
(0.1
)
   
(0.1
)
Net earnings attributable to controlling interest
   
1.7
%
   
1.2
%
   
0.2
%

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.

Ÿ Developing new products and expanding our product offering for existing customers.  New product sales were $85 million in 2013 and $53 million in 2012.
8

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Ÿ Maximizing unit sales growth while achieving return on investment goals.

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

 
 
Years Ended
 
Market Classification
 
December 28,
2013
   
%
Change
   
December 29,
2012
   
%
Change
   
December 31,
2011
 
Retail Building Materials
 
$
936,590
     
11.9
   
$
836,670
     
(0.3
)  
$
838,903
 
Industrial
   
701,688
     
19.0
     
589,893
     
19.8
     
492,476
 
 
                                       
Manufactured Housing
   
388,697
     
23.8
     
314,095
     
28.4
     
244,663
 
Residential Construction
   
340,296
     
33.2
     
255,544
     
25.9
     
202,970
 
Commercial Construction and Concrete Forming
   
136,641
     
52.2
     
89,803
     
14.5
     
78,402
 
Housing and Construction
   
865,634
             
659,442
             
526,035
 
Total Gross Sales
   
2,503,912
     
20.0
     
2,086,005
     
12.3
     
1,857,414
 
Sales Allowances
   
(33,464
)
           
(31,072
)
           
(35,078
)
Total Net Sales
 
$
2,470,448
     
20.2
   
$
2,054,933
     
12.8
   
$
1,822,336
 

Note: During 2013, certain customers were reclassified to a different market.  Prior year information has been restated to reflect these changes.

The following table presents estimates, for the periods indicated, of our percentage change in gross sales which were attributable to changes in overall selling prices versus changes in units shipped.

 
% Change
 
 
in Sales
   
in Selling Prices
   
in Units
 
2013 versus 2012
   
20
%
   
12
%
   
8
%
2012 versus 2011
   
12
%
   
8
%
   
4
%
2011 versus 2010
   
-3
%
   
-5
%
   
2
%

Gross sales in 2013 increased 20% compared to 2012 due to a 12% estimated 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 an 8% increase in overall unit sales.  Unit sales increased due to improved demand in our housing and construction markets and share gains in our retail and industrial markets.

Gross sales in 2012 increased 12% compared to 2011 primarily due to an estimated 8% increase in overall selling prices combined with a unit sales increase of 4%.  Our overall selling prices increased as a result of the Lumber Market (see “Historical Lumber Prices”). Unit sales increased due to improved demand in all of our markets in the first nine months of the year.
9

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Changes in our sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market increased 12% in 2013 compared to 2012 due to an 11% increase in lumber prices and an estimated 1% increase in overall unit sales.  Within this market, sales to our big box customers increased 11% while our sales to other retailers increased 13%.  We believe that our increase in unit sales is due to a slight increase in market share.  Sales to this market for the first half of 2013 were adversely impacted by inclement weather, resulting in a shifting of some consumer demand to our third quarter.

Gross sales to the retail building materials market were flat in 2012 compared to 2011 primarily due to an estimated 6% decrease in overall unit sales offset by higher lumber prices.  Unit sales declined due to the loss of sales to a major retail customer.  This loss of market share was offset somewhat by increased sales to several other retail customers.

Industrial:

Gross sales to the industrial market increased 19% in 2013 compared to 2012, resulting from an 11% increase in selling prices and an 8% increase in unit sales.  We acquired two new operations (Nepa Pallet and Container Co, Inc. and Custom Caseworks, Inc., which contributed to our growth in unit sales.  Our sales also increased as a result of adding 218 new customers during the year.  Demand from our existing customers was soft for much of the year.

Gross sales to the industrial market increased 20% in 2012 compared to 2011, due to an estimated 11% increase in unit sales combined with an estimated 9% increase in selling prices.  We increased our capacity in several areas of the country and added many new customers in 2012, resulting in continued gains in market share. Our sales to existing customers also increased as we gained share with our top customers and demand improved.

Manufactured Housing:

Gross sales to the manufactured housing market increased 24% in 2013 compared to 2012, due to an 11% increase in unit sales and a 13% increase in selling prices due to the lumber market.  Production of HUD-code homes increased 9% compared to 2012 and modular home starts increased 5% for the first nine months of 2013 (the last period reported).

Gross sales to the manufactured housing market increased 28% in 2012 compared to 2011 due to the Lumber Market and an estimated 13% increase in unit sales. Unit sales to this market increased due to a rise in industry production of HUD-code homes related to orders from FEMA and strong demand for temporary housing in some areas of the country related to shale oil and gas development. In addition, we continued to add product lines and expand share in our distribution business. Shipments of HUD code manufactured homes were up 8% in January through November of 2012 compared to the same period of 2011.
10

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

Gross sales to the residential construction market increased 33% in 2013 compared to 2012 due to a 21% increase in lumber prices and a 12% increase in our unit sales.   By comparison, national housing starts increased approximately 21% in the period of December 2012 through November 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 as we are selective in the business that we take due to our focus on profitability and cash flow.

Gross sales to the residential construction market increased 26% in 2012 compared to 2011 due to an estimated 18% increase in unit sales and an 8% increase in selling prices.  By comparison, national housing starts increased approximately 27% in the period from December 2011 through November of 2012 (our sales trail housing starts by about a month), compared to the same period of 2011.  We were selective in the business that we pursued in order to improve profitability.  As a result, we lost some share of this market.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 52% in 2013 compared to 2012 due to a 39% increase in unit sales and a 13% increase in selling prices.  Within this market, sales to commercial builders increased 84%, and sales of products used to make concrete forms increased 34% due to our continued focus on growing our share of this market.  Our sales to commercial builders increased primarily due to a new product offering of installed cabinets to customers in our Gulf Region.

Gross sales to the commercial construction and concrete forming market increased 15% in 2012 compared to 2011.  Within this market, sales to commercial builders increased 5% as a result of our ability to supply “turnkey” (components and framing) services to our customers, and sales of products used to make concrete forms increased 24% due to the sales and capital resources we have dedicated to growing our share of this market.

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.

 
Value-Added
   
Commodity-Based
 
2013
   
58.1
%
   
41.9
%
2012
   
58.7
%
   
41.3
%
2011
   
58.8
%
   
41.2
%

11

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased from 11.0% in 2012 to 11.4% in 2013.  This improvement in profitability resulted from unit sales growth combined with operating leverage in our cost structure, as well as an improvement in our sales mix, whereby our sales of higher margin products has increased.  In addition, the pricing pressure we experienced on sales to our residential construction customers has eased as market activity has improved and we have been selective in the business that we take.  These factors were offset by the higher level of lumber prices in 2013 relative to 2012.  As explained above, based upon the manner in which the sale price of certain of our products is established, higher relative lumber prices tend to reduce our gross profits as a percentage of sales.  (See "Impact of Lumber Market on Our Operating Results".)  We also measure our relative profitability by comparing our gross profit dollars to changes in unit sales.  For 2013, our gross profit dollars increased by 24.6%, exceeding our 8% increase in unit sales.

Our gross profits increased by 13% comparing 2012 to 2011 while our unit sales increased by 4%.  Our improved profitability was primarily impacted by the following factors:

Ÿ During the first half of 2012 we benefited from selling into a rising lumber market for much of the period.  Conversely, during the first half of 2011 we were adversely impacted by selling into a falling market for most of that period.
Ÿ In the first quarter of 2012 we experienced more favorable weather than we did in the first quarter of 2011, which was impacted by inclement weather in many areas of the country resulting in many lost production days.
Ÿ We lost some market share with a major retail customer in 2012, primarily in product lines with lower gross margins.
Ÿ The favorable factors above were offset to some extent by pricing pressure in each of our markets.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $19.5 million, or 10.5%, in 2013 compared to 2012, while we reported an 8% increase in unit sales.  The increase in SG&A was primarily due to an increase in base wages as a result of raises and hiring additional sales and engineering personnel to support sales growth, and certain incentive compensation expense tied to profitability and return on investment which represented over half of the overall increase.

Selling, general and administrative ("SG&A") expenses increased by approximately $3.6 million, or 2.0%, in 2012 compared to 2011, while we reported a 4% increase in unit sales.  The increase in SG&A was primarily due to increases in accrued bonus and other incentive compensation, which is based on profitability and the efficient use of capital.  Also, we recorded $3.2 million in loss reserves for certain notes receivable, which included $1.7 million to SG&A expenses and $1.5 million to interest income.  These increases were offset by decreases in compensation and related expenses and as well as certain other expenses attributable to our continuing efforts to reduce our cost structure.
12

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
ANTI-DUMPING DUTY ASSESSMENTS

In 2012, we recorded a $2.3 million loss contingency for a Canadian anti-dumping duty. The Canadian government imposed retroactive assessments for antidumping and countervailing duties tied to certain extruded aluminum products imported from China.  An additional $0.6 million was recorded during 2013.

During 2013, we accrued $0.9 million related to anti-dumping duty assessments imposed by the US government estimated on plywood and steel nails imported from China.  We continue to work with US Customs and Border Protection to mitigate potential charges.  This duty is unrelated to the Canadian duty assessment disclosed above.

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

We incurred $0.4 million, $1.3 million and $6.4 million of charges in 2013, 2012 and 2011, respectively, relating to asset impairments and other costs associated with idled facilities and down-sizing efforts.  In 2012, these costs were offset by gains on the sale of certain equipment and real estate totaling $8.0 million.  See Notes to Consolidated Financial Statements, Note D “Assets Held for Sale and Net Loss (Gain) on Disposition of Assets, Early Retirement and Other Impairment and Exit Charges.”

On June 20, 2011 our chief executive officer resigned and we entered into a consulting and non-competition agreement with him.  We accrued for the present value of the future payments under the agreement totaling $2.6 million in June 2011, which is included in the amount discussed in the preceding paragraph.  The present value of these payments totaled approximately $1.2 million and $1.8 million at December 28, 2013 and December 29, 2012, respectively, and is accrued in other liabilities.

We regularly review the performance of each of 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

13

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

Net interest costs were higher in 2013 compared to 2012, due to higher debt levels in 2013 resulting from the impact of higher lumber prices and greater sales volumes on working capital and the issuance of long-term debt at the end of 2012 which carried a higher interest rate than our revolving credit facility.

Net interest costs were comparable in 2012 and 2011.  Our debt levels in 2012 were slightly lower; however, our borrowing rates were slightly higher compared to 2011.

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 decreased to 34.8% in 2013 compared to 36.6% in 2012.  The decrease is due to a decline in the state income tax rate resulting from franchise taxes which remain relatively unchanged even when income increases, along with research and development and certain other tax credits related to 2012, which Congress approved in 2013.  See Notes to Consolidated Financial Statements, Note K, “Income Taxes”.

Our effective tax rate increased to 36.6% in 2012 compared to 32.5% in 2011.  This increase is due in part to the expiration of the research and development tax credit offset by the impact of permanent tax differences on higher income.

SEGMENT REPORTING

The following table presents, for the periods indicated, our net sales and earnings from operations by reportable segment.
 
(in thousands)
 
Net Sales
 
 
 
December 28,
2013
   
December 29,
 2012
   
December 31,
2011
   
2013 vs
2012
   
2012 vs
2011
 
Eastern and Western
 
$
1,987,751
   
$
1,635,178
   
$
1,486,058
     
21.6
%
   
10.0
%
Site-Built
   
272,114
     
222,824
     
183,120
     
22.1
     
21.7
 
All Other
   
210,583
     
196,931
     
153,158
     
6.9
     
28.6
 
Corporate
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
2,470,448
   
$
2,054,933
   
$
1,822,336
     
20.2
%
   
12.8
%
 
 
(in thousands)
 
Earnings from Operations
 
 
 
December 28,
 2013
   
December 29,
 2012
   
December 31,
2011
   
2013 vs
2012
   
2012 vs
 2011
 
Eastern and Western
 
$
79,419
   
$
60,573
   
$
28,198
     
31.1
%
   
114.8
%
Site-Built
   
7,947
     
1,299
     
(6,349
)
   
511.8
     
120.5
 
All Other
   
(2,366
)
   
(11,316
)
   
(8,731
)
   
79.1
     
(29.6
)
Corporate1
   
(10,732
)
   
(6,028
)
   
(1,107
)
   
(78.0
)
   
(444.5
)
Total
 
$
74,268
   
$
44,528
   
$
12,011
     
66.8
%
   
270.7
%

14

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
1Corporate primarily represents over (under) allocated administrative costs and certain incentive compensation expense.
 
Eastern and Western

Net sales of the Eastern and Western reportable segment increased 21.6% in 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.
· A slight increase in sales to retail customers due to market share gains.
Net sales of the Eastern and Western reportable segment increased 10.0% in 2012 compared to 2011, primarily due to:
· A 19% increase in Industrial sales resulting from higher lumber prices and greater unit sales due to market share gains.
· A 28% increase in Manufactured Housing sales due to higher lumber prices and an increase in industry production of HUD code homes.
· A 15% increase in Commercial Construction and Concrete Forming sales primarily due to a significant increase in the sale of products used to make concrete forms.
Earnings from operations for the Eastern and Western reportable segment increased in 2013 primarily due to greater unit sales and operating leverage on labor and overhead costs as well as improvements in our sales mix whereby our sales of higher margin products has increased.

Earnings from operations for the Eastern and Western reportable segment increased in 2012 compared to 2011 primarily due to the following factors:
· Selling into a rising lumber market for much of the first half of 2012. Conversely, during the first half of 2011 we were adversely impacted by selling into a falling market for most of that period.
· In the first quarter of 2012 we experienced more favorable weather than we did in the first quarter of 2011. Adverse weather conditions in many areas of the country resulted in lost production days during early 2011.
· Earnings from operations were impacted in 2012 by a $6.9 million net gain on the sale of real estate.
Site-Built

Net sales of the Site-Built reportable segment increased 22.1% in 2013 compared to 2012, primarily due to increased lumber prices, an easing of pricing pressure, and an increase in housing starts.
15

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Net sales of the Site-Built reportable segment increased 21.7% in 2012 compared to 2011. This increase was primarily due to a 27% increase in national housing starts as well as growth in commercial construction.

Earnings from operations for the Site-Built reportable segment increased in 2013 compared to 2012, primarily due to an increase in unit sales and operating leverage on labor and overhead costs and an easing of pricing pressure on sales.  In addition, the 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 and pricing improvements.

Earnings from operations for the Site-Built reportable segment increased in 2012 compared to 2011 primarily due to the increase in unit sales mentioned above and operating leverage we have in the business.

All Other

Net sales of all other segments increased 6.9% in 2013 compared to 2012 primarily due to:

· 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 due to market share gains.
 
Net sales of all other segments increased 28.6% in 2012 compared to 2011. This increase was primarily due to:
 
· 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.
· An increase in sales to the Retail Building Materials market by our Universal Consumer Products operations, due to market share gains in composite decking and vinyl fencing products.
· An increase in sales to the Industrial market by our Universal Pinelli subsidiary, which manufactures molding and millwork products out of its plant in Durango, Mexico.
 
Earnings from operations for all other segments improved in 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 $7.5 million of additional development costs associated with our new Eovations product line.
16

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS

We have no significant off-balance sheet commitments other than operating leases.  The following table summarizes our contractual obligations as of December 28, 2013 (in thousands).

 
 
Payments Due by Period
 
Contractual Obligation
 
Less than
1 Year
   
1 – 3
Years
   
3 – 5
Years
   
After
5 Years
   
Total
 
Long-term debt and capital lease obligations
 
$
-
   
$
-
   
$
-
   
$
84,700
   
$
84,700
 
Estimated interest on long-term debt
   
2,979
     
5,957
     
5,957
     
15,126
     
30,019
 
Operating leases
   
4,235
     
4,475
     
1,448
     
-
     
10,158
 
Capital project purchase obligations
   
4,152
     
-
     
-
     
-
     
4,152
 
Total
 
$
11,366
   
$
10,432
   
$
7,405
   
$
99,826
   
$
129,029
 

As of December 28, 2013, we also had $26.5 million in outstanding letters of credit issued during the normal course of business, as required by some vendor contracts.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):

 
 
December 28,
2013
   
December 29,
2012
   
December 31,
2011
 
Cash from operating activities
 
$
53,380
   
$
(5,721
)
 
$
11,515
 
Cash from investing activities
   
(43,625
)
   
(34,223
)
   
(32,990
)
Cash from financing activities
   
(18,419
)
   
36,695
     
(10,314
)
Effect of exchange rate changes on cash
   
(62
)
   
244
     
(259
)
Net change in cash and cash equivalents
   
(8,726
)
   
(3,005
)
   
(32,048
)
Cash and cash equivalents, beginning of year
   
7,647
     
10,652
     
42,700
 
Cash and cash equivalents (overdraft), end of year
 
$
(1,079
)
 
$
7,647
   
$
10,652
 

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 issuances 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 resulted 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.  In 2013, higher lumber prices and unit sales caused our investment in accounts receivable and inventory to increase.
17

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days 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 49 days in 2013 from 48 days in 2012 due to a 1 day increase in our days supply of inventory.  In 2012, consumer demand and weather were unexpectedly good resulting in strong sales increases and higher inventory turnover.  Conversely, adverse weather in the first half of 2013 shifted some consumer demand to the third quarter and inventory turnover declined.

Cash generated from operating activities was approximately $53.4 million in 2013, which was comprised of net earnings of $45.8 million and $40.0 million of non-cash expenses, partially offset by a $32.4 million change in working capital since the end of 2012.  Working capital at the end of 2013 is higher than the end of 2012, primarily due to the impact of higher year over year lumber prices and unit sales increases.  As reflected in the table under the caption “Historical Lumber Prices”, lumber prices were up 11% in the fourth quarter of 2013.

Capital expenditures were $40.0 million in 2013 and we have outstanding purchase commitments on existing capital projects totaling approximately $4.2 million at December 28, 2013.  Included within capital expenditures was $11.2 million for expansion to support new product offerings and sales growth into new geographic markets and growing our manufacturing capabilities to serve our industrial customers.  We intend to fund capital expenditures and purchase commitments through our operating cash flows and amounts available under our revolving credit facility.

Cash flows used in investing activities also included $11.5 million spent to acquire the net assets of SE Panel and Lumber Supply, LLC, Premier Laminating Services, Inc., Millry Mill Company, Inc. and Custom Caseworks, Inc.  See Notes to Consolidated Financial Statements, Note C “Business Combinations”.

In 2013, cash flows used in financing activities included $8.2 million of dividends paid to shareholders.  Our Board of Directors approved two semi-annual dividends of $0.20 per share and $0.21 per share, which were paid in June and December of 2013, respectively.  During 2013, we also paid down the $11.1 million balance on our revolving credit facility.

On December 17, 2012, we entered into a Note Purchase Agreement under which we issued senior notes in two tranches totaling $75 million.  See Notes to Unaudited Consolidated Condensed Financial Statements, Note F “Debt”.  A portion of these proceeds were used to retire $40 million senior notes due in December 2012 while the balance of the proceeds were used to repay amounts owed under our revolving credit facility.

On December 28, 2013, we had no amounts outstanding on our $265 million revolving credit facility.  On December 29, 2012, we had $11.1 million outstanding.  The revolving credit facility is scheduled to mature in November of 2016.  The revolving credit facility supports letters of credit totaling approximately $9.8 million on December 28, 2013 and $28.7 million on December 29, 2012.  Financial covenants on the unsecured revolving credit facility and unsecured senior notes include minimum interest coverage 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 within all of our lending requirements on December 28, 2013 and December 29, 2012.
18

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

See Notes to Consolidated Financial Statements, Note M, “Commitments, Contingencies, and Guarantees”.

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.  Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

ACCOUNTS RECEIVABLE ALLOWANCES

We record provisions against gross revenues for estimated returns and cash discounts in the period when the related revenue is recorded.  These estimates are based on factors that include, but are not limited to, historical discounts taken, analysis of credit memorandum activity, and customer demand.  We also evaluate the allowance for uncollectible accounts receivable and discounts based on historical collection experience and specific identification of other potential problems, including the economic climate.  Actual collections can differ, requiring adjustments to the allowances.

LONG-LIVED ASSETS AND GOODWILL

We evaluate long-lived assets for indicators of impairment when events or circumstances indicate that this risk may be present.  Our judgments regarding the existence of impairment are based on market conditions, operational performance and estimated future cash flows.  If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its fair value.  Changes in forecasted operations and changes in discount rates can materially affect these estimates.  In addition, we test goodwill annually for impairment or more frequently if changes in circumstances or the occurrence of other events suggest impairments exist.  The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples.  Changes in these estimates may result in the recognition of an impairment loss.
19

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

INSURANCE RESERVES

We are primarily self-insured for certain employee health benefits, and have self-funded retentions for general liability, automobile liability, property and workers' compensation.  We are fully self-insured for environmental liabilities.  The general liability, automobile liability, property, workers' compensation, and certain environmental liabilities are managed through a wholly-owned insurance captive; the related assets and liabilities of which are included in the consolidated financial statements as of December 28, 2013.  Our accounting policies with respect to the reserves are as follows:

Ÿ General liability, automobile, and workers' compensation reserves are accrued based on third party actuarial valuations of the expected future liabilities.

Ÿ Health benefits are self-insured by us up to our pre-determined stop loss limits.  These reserves, including incurred but not reported claims, are based on internal computations.  These computations consider our historical claims experience, independent statistics, and trends.

Ÿ The environmental reserve is based on known remediation activities at certain wood preservation facilities and the potential for undetected environmental matters at other sites. The reserve for known activities is based on expected future costs and is computed by in-house experts responsible for managing our monitoring and remediation activities.

In addition to providing coverage for the Company, our wholly-owned insurance captive provides Excess Loss Insurance (primarily medical and prescription drug) to certain third parties.  As of December 28, 2013, there were nine such contracts in place.  The contracts have specific and/or aggregate coverage loss limits based on the election of the third parties.  Reserves associated with these contracts were $0.9 million at December 28, 2013 and $0.2 million at December 29, 2012, and are accrued based on third party actuarial valuations of the expected future liabilities.
.
INCOME TAXES

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future.  Such deferred income tax asset and liability computations are based on enacted tax laws and rates.  Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities.
20

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Tax laws are complex and subject to different interpretations by taxpayers and respective government taxing authorities, which results in judgment in determining our tax expense and in evaluating our tax positions.  Our tax positions are reviewed quarterly and adjusted as new information becomes available.

REVENUE RECOGNITION

Revenue for product sales 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.

Performance on construction contracts is reflected in operations using percentage-of-completion accounting, under either the 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 per the contract.  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.

FORWARD OUTLOOK

LONG-TERM GOALS

The pace of the economic recovery and in particular, the recovery of the housing market, has been much slower than we or industry analysts anticipated, but improvements are currently being seen.  With the assumption that housing starts will increase to 1.5 million starts by calendar 2015 and lead to a broader economic recovery that favorably impacts all of our markets, we are targeting goals of achieving $3 billion in sales and returning to operating margins at normal historical levels by 2017.
21

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our general long-term objectives continue to be to:

· Achieve sales growth primarily through new product introduction, international business expansion, and gaining additional share, particularly of our industrial and concrete forming markets;

· Increase our profitability through cost reductions, productivity improvements as volume improves, and a more favorable mix of higher margin value-added products; and

· Earn a return on invested capital in excess of our weighted average cost of capital.

RETAIL BUILDING MATERIALS MARKET

Harvard’s Joint Center for Housing Studies projects that spending by homeowners on improvement projects will continue to increase at a double-digit pace in early 2014 while a slowdown can be expected by the middle of 2014.  However, even with the projected mid-year tapering, remodeling activity is expected to remain at healthy levels.  The Home Improvement Research Institute (“HIRI”) also anticipates growth in home improvement spending and has forecasted a 6.8% growth rate in 2014.  HIRI’s long-term forecast is for spending to grow up to 4.3% by 2018.

We continue to compete for market share for certain retail customers and face intense pricing pressure from other suppliers to this market.

Our long-term goal is to achieve sales growth by:

· Increasing our market share of value-added and preservative-treated products, particularly with independent retail customers.

· Developing new value-added products, such as our Eovations product line, and services for this market.

· Adding new products or new markets through strategic business acquisitions or alliances.

· Increasing our emphasis on product innovation and product differentiation in order to counter commoditization trends and influences.

INDUSTRIAL MARKET

Our goal is to increase our sales of wood and alternative packaging products to a wide variety of industrial and OEM users.  We believe the vast amount of hardwood and softwood lumber consumed for industrial applications, combined with the highly fragmented nature of this market provides us with growth opportunities as a result of our competitive advantages in manufacturing, purchasing, and material utilization.  We plan to continue to obtain market share by expanding our manufacturing capabilities and increasing the size of our dedicated industrial sales force.  We also plan to evaluate strategic acquisition opportunities.
22

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

The National Association of Home Builders forecasts a 14% increase in manufactured home shipments in 2014.  Over the long-term, we believe the HUD code market will regain a greater share of the overall housing market as credit conditions normalize and as consumers seek more affordable housing alternatives.

We anticipate modular housing will gain additional share of the housing market as developers try to control the building environment and costs.  We will strive to maintain our market share of trusses produced for the modular market as a result of our strong relationships with modular builders, design services and proprietary products.

We plan to continue to expand our product offering to distribute additional products to our manufactured housing customers.  We may continue to rely upon strategic business acquisitions to help us achieve this goal.

RESIDENTIAL CONSTRUCTION MARKET

The Mortgage Bankers Association of America forecasts a 13% increase in national housing starts to an estimated 1.0 million starts in 2014.  The National Association of Home Builders forecasts starts of 1.1 million, a 24% increase from 2013.  We believe we are well-positioned to capture our share of any increase that may occur in housing starts in the regions we operate.  However, due to our continued focus on profitability and cash flow, our growth may continue to trail the market in 2014.

On a long-term basis, we anticipate growth in our sales to the residential construction market as market conditions improve and as a result of market share gains as weaker competitors exit the market.

COMMERCIAL CONSTRUCTION AND CONCRETE FORMING MARKET

It continues to be our long term objective to gain additional share of the concrete forming market through our ability to provide value added products and services to the customers in this market.

GROSS PROFIT

We believe the following factors may impact our gross profits and margins in 2014:

· End market demand.

· Our ability to maintain market share and gross margins on products sold to our largest customers.  We believe our level of service, geographic diversity, and quality of products provides an added value to our customers.  However, if our customers are unwilling to pay for these advantages, our sales and gross margins may be reduced.  Excess capacity exists for suppliers in each of our five markets.  As a result, we may experience pricing pressure in the future.

23

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

· Fluctuations in the relative level of the Lumber Market and the trend in the market place of lumber.  (See "Impact of the Lumber Market on our Operating Results.")

· Fuel and transportation costs.

· Our ability to continue to achieve productivity improvements as our unit sales increase and planned cost reductions through our continuous improvement and other initiatives.

· Operational improvements in our turn-key framing business.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Throughout the downturn in housing and the general economy we have continuously taken actions to close plants to better align our manufacturing capacity with the current business environment and reduce our headcount and certain overhead costs to better align our cost structure with current demand and sales.  We will continue to manage our cost structure conservatively based on market conditions, and will strive to continue to minimize increases in these costs in the future as market conditions improve and we achieve our growth objectives.  In addition, bonus expense for all salaried employees is based on earnings from operations and return on investment and will continue to fluctuate based on our operating results.

On a long-term basis, we expect that our SG&A expenses will primarily be impacted by:

· Our growth in sales to the industrial market and, as industry conditions continue to improve, the residential construction market.  Our sales to these markets require a higher ratio of SG&A costs due, in part, to product design requirements.

· Sales of new products which may require higher development, marketing, and advertising costs.

· Our incentive compensation program which is tied to pre-bonus earnings from operations and return on investment.

· Our growth and success in achieving continuous improvement objectives and leveraging our fixed costs.

24

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

Our cash cycle will continue to be impacted in the future by our mix of sales by market.  Sales to the residential construction and industrial markets require a greater investment in working capital (inventory and accounts receivable) than our sales to the retail building materials and manufactured housing markets.  Our investment in trade receivables and inventory will continue to be impacted by the level of lumber prices.

Management expects to spend $35 to $40 million on capital expenditures in 2014 and incur depreciation of approximately $32 million and amortization and other non-cash expenses of approximately $3 million.  On December 28, 2013, we had outstanding purchase commitments on capital projects of approximately $4.2 million.  We intend to fund capital expenditures and purchase commitments through our operating cash flows and availability under our revolving credit facility which is considered sufficient to meet these commitments and working capital needs.

We have no present plan to change our dividend policy, which is currently $0.21 per share paid semi-annually.

Our Board of Directors has approved a share repurchase program, and as of December 28, 2013, we have authorization to buy back approximately 3 million shares. In the past, we have repurchased shares in order to offset the effect of issuances resulting from our employee benefit plans and at opportune times when our stock price falls to predetermined levels.
25

Management’s Annual Report on Internal Control Over Financial Reporting

The management of Universal Forest Products, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.  Our internal control system was designed to provide reasonable assurance to us and the Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 

We assessed the effectiveness of our internal control over financial reporting as of December 28, 2013, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (“COSO”).  Based on that evaluation, management has concluded that as of December 28, 2013, our internal control over financial reporting was effective.

The effectiveness of the Company’s internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which follows our report.
 
Universal Forest Products, Inc.
 
February 26, 2014

26

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Universal Forest Products, Inc.
 
We have audited Universal Forest Products, Inc. and subsidiaries internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Universal Forest Products, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Universal Forest Products, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 28, 2013, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Universal Forest Products, Inc. and subsidiaries as of December 28, 2013 and December 29, 2012 and the related consolidated statements of earnings and comprehensive income, shareholder’s equity, and cash flows for each of the three fiscal years in the period ended December 28, 2013, and our report dated February 26, 2014 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
Grand Rapids, Michigan
February 26, 2014

27

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Universal Forest Products, Inc.

We have audited the accompanying consolidated balance sheets of Universal Forest Products, Inc. and subsidiaries as of December 28, 2013 and December 29, 2012, and the related consolidated statements of earnings and comprehensive income, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2013. These financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Forest Products, Inc. and subsidiaries at December 28, 2013 and December 29, 2012, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal Forest Products, Inc. and subsidiaries’ internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework), and our report dated February 26, 2014, expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
Grand Rapids, Michigan
February 26, 2014

28

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share data)

 
 
December 28,
   
December 29,
 
 
 
2013
   
2012
 
ASSETS
 
   
 
CURRENT ASSETS:
 
   
 
Cash and cash equivalents
 
$
-
   
$
7,647
 
Restricted cash
   
720
     
6,831
 
Accounts receivable, net
   
180,452
     
163,225
 
Inventories:
               
Raw materials
   
161,226
     
136,201
 
Finished goods
   
126,079
     
106,979
 
Total inventories
   
287,305
     
243,180
 
Refundable  income taxes
   
2,235
     
7,521
 
Deferred income taxes
   
6,866
     
9,212
 
Other current assets
   
18,820
     
15,557
 
TOTAL CURRENT ASSETS
   
496,398
     
453,173
 
 
               
DEFERRED INCOME TAXES
   
1,365
     
1,759
 
OTHER ASSETS
   
12,087
     
14,583
 
GOODWILL
   
160,146
     
159,316
 
INDEFINITE-LIVED INTANGIBLE ASSETS
   
2,340
     
2,340
 
OTHER INTANGIBLE ASSETS, NET
   
7,241
     
8,101
 
PROPERTY, PLANT AND EQUIPMENT:
               
Land and improvements
   
115,155
     
108,545
 
Building and improvements
   
173,641
     
165,307
 
Machinery and equipment
   
260,807
     
239,175
 
Furniture and fixtures
   
23,233
     
23,750
 
Construction in progress
   
5,866
     
6,818
 
PROPERTY, PLANT AND EQUIPMENT, GROSS
   
578,702
     
543,595
 
Less accumulated depreciation and amortization
   
(341,292
)
   
(322,327
)
PROPERTY, PLANT AND EQUIPMENT, NET
   
237,410
     
221,268
 
TOTAL ASSETS
 
$
916,987
   
$
860,540
 
 
29

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share data)
 
 
December 28,
December 29,
 
2013
2012
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Cash overdraft
  $
1,079
    $
-
 
Accounts payable
   
72,918
     
66,054
 
Accrued liabilities:
               
Compensation and benefits
   
45,018
     
34,728
 
Other
   
20,084
     
14,002
 
TOTAL CURRENT LIABILITIES
   
139,099
     
114,784
 
 
               
LONG-TERM DEBT
   
84,700
     
95,790
 
DEFERRED INCOME TAXES
   
26,788
     
24,930
 
OTHER LIABILITIES
   
16,666
     
17,511
 
TOTAL LIABILITIES
   
267,253
     
253,015
 
 
               
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, 19,948,270 and 19,799,606
 
 
19,948
   
 
19,800
 
Additional paid-in capital
   
156,129
     
149,805
 
Retained earnings
   
461,812
     
426,887
 
Accumulated other comprehensive earnings
   
3,466
     
4,258
 
Employee stock notes receivable
   
(732
)
   
(982
)
Total controlling interest shareholders' equity
   
640,623
     
599,768
 
Noncontrolling interest
   
9,111
     
7,757
 
TOTAL SHAREHOLDERS' EQUITY
   
649,734
     
607,525
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
916,987
   
$
860,540
 

See notes to consolidated financial statements.
30

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
 
(In thousands, except per share data)

 
 
Year Ended
 
 
 
December 28,
   
December 29,
   
December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
   
   
 
NET SALES
 
$
2,470,448
   
$
2,054,933
   
$
1,822,336
 
 
                       
COST OF GOODS SOLD
   
2,189,896
     
1,829,824
     
1,622,609
 
 
                       
GROSS PROFIT
   
280,552
     
225,109
     
199,727
 
 
                       
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
204,390
     
184,919
     
181,363
 
ANTI-DUMPING DUTY ASSESSMENTS
   
1,526
     
2,328
     
-
 
NET LOSS (GAIN) ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES
   
368
     
(6,666
)
   
6,353
 
 
                       
EARNINGS FROM OPERATIONS
   
74,268
     
44,528
     
12,011
 
 
                       
INTEREST EXPENSE
   
4,851
     
4,053
     
3,732
 
INTEREST INCOME
   
(640
)
   
(510
)
   
(566
)
EQUITY IN EARNINGS OF INVESTEE
   
(201
)
   
(79
)
   
58
 
 
   
4,010
     
3,464
     
3,224
 
 
                       
EARNINGS BEFORE INCOME TAXES
   
70,258
     
41,064
     
8,787
 
 
                       
INCOME TAXES
   
24,454
     
15,054
     
2,874
 
 
                       
NET EARNINGS
   
45,804
     
26,010
     
5,913
 
 
                       
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(2,722
)
   
(2,076
)
   
(1,364
)
 
                       
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
 
$
43,082
   
$
23,934
   
$
4,549
 
 
                       
EARNINGS PER SHARE - BASIC
 
$
2.16
   
$
1.21
   
$
0.23
 
 
                       
EARNINGS PER SHARE - DILUTED
 
$
2.15
   
$
1.21
   
$
0.23
 
 
                       
OTHER COMPRESHENSIVE INCOME:
                       
 
                       
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
   
(784
)
   
980
     
(1,067
)
 
                       
COMPREHENSIVE INCOME
   
45,020
     
26,990
     
4,846
 
 
                       
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(2,730
)
   
(2,398
)
   
(862
)
 
                       
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTERST
 
$
42,290
   
$
24,592
   
$
3,984
 
 
See notes to consolidated financial statements.
31

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
(In thousands, except share and per share data)

 
 
Controlling Interest Shareholders' Equity
   
   
 
 
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Earnings
   
Employees Stock Notes Receivable
   
Noncontrolling Interest
   
Total
 
Balance at December 25, 2010
 
$
19,333
   
$
138,573
   
$
414,108
   
$
4,165
   
$
(1,670
)
 
$
6,667
   
$
581,176
 
Net earnings
                   
4,549
                     
1,364
     
5,913
 
Foreign currency translation adjustment
                           
(565
)
           
(502
)
   
(1,067
)
Capital contribution from noncontrolling interest
                                           
80
     
80
 
Purchase of additional
                                                       
Current portion of long-term debt
                                     
(402
)
   
(402
)
Distributions to noncontrolling interest
                                     
(1,413
)
   
(1,413
)
Cash dividends - $0.400 per share
                   
(7,818
)
                           
(7,818
)
Issuance of 137,029 shares under employee stock plans
   
137
     
2,834
                                     
2,971
 
Issuance of 150,376 shares under stock grant programs
   
150
     
8
     
9
                             
167
 
Issuance of 7,995 shares under deferred compensation plans
   
8
     
(8
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
684
                                     
684
 
Expense associated with share-based compensation arrangements
           
1,361
                                     
1,361
 
Accrued expense under deferred compensation plans
           
744
                                     
744
 
Note receivable adjustment
   
(4
)
   
(208
)
                   
209
             
(3
)
Payments received on employee stock notes receivable
                                   
206
             
206
 
Balance at December 31, 2011
 
$
19,624
   
$
143,988
   
$
410,848
   
$
3,600
   
$
(1,255
)
 
$
5,794
   
$
582,599
 
 
32

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
(In thousands, except share and per share data)
 
 
Controlling Interest Shareholders' Equity
   
Common Stock
    
Additional Paid-In Capital
    
Retained Earnings
     
Accumulated Other Comprehensive Earnings
    
Employees Stock Notes Receivable
     
Noncontrolling Interest
   
Total
Net earnings
                   
23,934
                     
2,076
     
26,010
 
Foreign currency translation adjustment
                           
658
             
322
     
980
 
Capital contribution from noncontrolling interest
                                           
436
     
436
 
Distributions to noncontrolling interest
(871
)
(871
)
Cash dividends - $0.400 per share
                   
(7,905
)
                           
(7,905
)
Issuance of 89,574 shares under employee stock plans
   
90
     
1,971
                                     
2,061
 
Issuance of 49,536 shares under stock grant programs
   
50
     
37
     
10
                             
97
 
Issuance of 37,437 shares under deferred compensation plans
   
37
     
(37
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
765
                                     
765
 
Expense associated with share-based compensation arrangements
           
1,270
                                     
1,270
 
Accrued expense under deferred compensation plans
           
1,836
                                     
1,836
 
Note receivable adjustment
   
(1
)
   
(25
)
                   
27
             
1
 
Payments received on employee stock notes receivable
                                   
246
             
246
 
Balance at December 29, 2012
 
$
19,800
   
$
149,805
   
$
426,887
   
$
4,258
   
$
(982
)
 
$
7,757
   
$
607,525
 
 
33

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
(In thousands, except share and per share data)
 
 
Controlling Interest Shareholders' Equity
    
Common Stock
    
Additional Paid-In Capital
     
Retained Earnings
    
Accumulated Other Comprehensive Earnings
    
Employees Stock Notes Receivable
    
Noncontrolling Interest
    
Total
Net earnings
                   
43,082
                     
2,722
     
45,804
 
Foreign currency translation adjustment
                           
(792
)
           
8
     
(784
)
Capital contribution from noncontrolling interest
                                           
84
     
84
 
Distributions to noncontrolling interest
(1,460
)
(1,460
)
Cash dividends - $0.410 per share
                   
(8,166
)
                           
(8,166
)
Issuance of 76,492 shares under employee stock plans
   
76
     
2,068
                                     
2,144
 
Issuance of 30,808 shares under stock grant programs
   
31
     
20
     
9
                             
60
 
Issuance of 43,914 shares under deferred compensation plans
   
44
     
(44
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
290
                                     
290
 
Expense associated with share-based compensation arrangements
           
1,874
                                     
1,874
 
Accrued expense under deferred compensation plans
           
2,219
                                     
2,219
 
Note receivable adjustment
   
(3
)
   
(103
)
                   
106
             
-
 
Payments received on employee stock notes receivable
                                   
144
             
144
 
Balance at December 28, 2013
 
$
19,948
   
$
156,129
   
$
461,812
   
$
3,466
   
$
(732
)
 
$
9,111
   
$
649,734
 
 
See notes to consolidated financial statements
34

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)

 
 
Year Ended
 
 
 
December 28,
   
December 29,
   
December 31,
 
 
 
2013
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
   
 
Net earnings
 
$
45,804
   
$
26,010
   
$
5,913
 
Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
                       
Depreciation
   
31,091
     
30,461
     
30,804
 
Amortization of intangibles
   
2,473
     
2,918
     
5,183
 
Expense associated with share-based compensation arrangements
   
1,874
     
1,270
     
1,361
 
Excess tax benefits from share-based compensation arrangements
   
(112
)
   
(75
)
   
(36
)
Expense associated with stock grant plans
   
58
     
97
     
167
 
Loss reserve on notes receivable
   
15
     
2,131
     
-
 
Deferred income taxes
   
4,453
     
2,526
     
(1,939
)
Equity in earnings of investee
   
(201
)
   
(79
)
   
58
 
Net (gain) loss on sale or impairment of property, plant and equipment
   
297
     
(6,890
)
   
2,490
 
Changes in:
   
-
                 
Accounts receivable
   
(17,886
)
   
(32,274
)
   
(6,784
)
Inventories
   
(42,287
)
   
(45,529
)
   
(4,496
)
Accounts payable
   
6,756
     
16,281
     
(9,964
)
Accrued liabilities and other
   
21,026
     
(2,568
)
   
(11,242
)
NET CASH FROM OPERATING ACTIVITIES
   
53,361
     
(5,721
)
   
11,515
 
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Purchases of property, plant and equipment
   
(40,023
)
   
(30,344
)
   
(32,932
)
Proceeds from sale of property, plant and equipment
   
1,778
     
18,240
     
1,814
 
Acquisitions, net of cash received
   
(11,478
)
   
(16,974
)
   
-
 
Purchase of patents & product technology
   
(143
)
   
(95
)
   
(175
)
Advances on notes receivable
   
(2,673
)
   
(1,183
)
   
(2,468
)
Collections on notes receivable
   
2,814
     
2,839
     
472
 
Cash restricted as to use
   
6,111
     
(6,178
)
   
10
 
Other, net
   
11
     
(528
)
   
289
 
NET CASH FROM INVESTING ACTIVITIES
   
(43,603
)
   
(34,223
)
   
(32,990
)
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net borrowings (repayments) under revolving credit facilities
   
(11,090
)
   
11,090
     
(2,109
)
Repayment of long-term debt
   
-
     
(42,774
)
   
(745
)
Borrowings of long-term debt
   
-
     
75,000
     
-
 
Debt issuance costs
   
(46
)
   
(266
)
   
(946
)
Proceeds from issuance of common stock
   
2,144
     
2,061
     
2,971
 
Purchase of additional noncontrolling interest
   
-
     
-
     
(402
)
Distributions to noncontrolling interest
   
(1,460
)
   
(871
)
   
(1,413
)
Capital contribution from noncontrolling interest
   
84
     
281
     
80
 
Dividends paid to shareholders
   
(8,166
)
   
(7,905
)
   
(7,818
)
Excess tax benefits from share-based compensation arrangements
   
112
     
75
     
36
 
Other, net
   
-
     
4
     
32
 
NET CASH FROM FINANCING ACTIVITIES
   
(18,422
)
   
36,695
     
(10,314
)
 
                       
Effect of exchange rate changes on cash
   
(62
)
   
244
     
(259
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
(8,726
)
   
(3,005
)
   
(32,048
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
7,647
     
10,652
     
42,700
 
 
                       
CASH AND CASH EQUIVALENTS (OVERDRAFT), END OF PERIOD
 
$
(1,079
)
 
$
7,647
   
$
10,652
 

35

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

 
 
Year Ended
 
 
 
December 28,
   
December 29,
   
December 31,
 
 
 
2013
   
2012
   
2011
 
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
 
   
   
 
Interest paid
 
$
4,883
   
$
3,982
   
$
3,654
 
Income taxes paid
   
14,427
     
16,751
     
6,163
 
 
                       
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
 
$
1,800
     
1,310
     
246
 

See notes to consolidated financial statements
36

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

We design, manufacture and market wood and wood-alternative products for retail building materials home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for the residential construction market, and specialty wood packaging and components and packing materials for various industries. We also provide framing services for the residential market and forming products for concrete construction. Our consumer products operations offer a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Its lawn and garden group offers an array of products, such as trellises and arches, to retailers nationwide.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships.  In addition, we consolidate 50% owned entities over which we exercise control.  Intercompany transactions and balances have been eliminated.

NONCONTROLLING INTEREST IN SUBSIDIARIES

Noncontrolling interest in results of operations of consolidated subsidiaries represents the noncontrolling shareholders' share of the income or loss of various consolidated subsidiaries.  The noncontrolling interest reflects the original investment by these noncontrolling shareholders combined with their proportional share of the earnings or losses of these subsidiaries, net of distributions paid.

FISCAL YEAR

Our fiscal year is a 52 or 53 week period, ending on the last Saturday of December.  Unless otherwise stated, references to 2013, 2012, and 2011 relate to the fiscal years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.  Fiscal years 2013 and 2012 were comprised of 52 weeks.  Fiscal year 2011 was comprised of 53 weeks.  This extra week added an additional $16 million in sales to 2011.  An additional week of cost of goods sold and expenses in 2011 also impacted our results for 2012 compared to 2011.

FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
37

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

We follow ASC Topic 820, Fair Value Measurements and Disclosures, which provides a consistent definition of fair value, focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-tier hierarchy for fair value measurements. This topic requires fair value measurements to be classified and disclosed in one of the following three categories:
 
Ÿ Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Ÿ Level 2 — Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. Financial instrument values are determined using prices for recently traded financial instruments with similar underlying terms and direct or indirect observational inputs, such as interest rates and yield curves at commonly quoted intervals.
Ÿ Level 3 — Financial instruments not actively traded on a market exchange and there is little, if any, market activity. Values are determined using significant unobservable inputs or valuation techniques.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly-liquid investments purchased with an original maturity of three months or less.  There were no cash equivalents as of December 28, 2013 or December 29, 2012.
 
RESTRICTED CASH
 
Restricted cash consists of amounts required to be held for loss funding totaling $0.7 million and $0.5 million as of December 28, 2013 and December 29, 2012, respectively.  In addition, as of December 29, 2012, restricted cash included amounts held in escrow for the purchase of the operating assets of Custom Caseworks, Inc. totaling $6.3 million.

ACCOUNTS RECEIVABLE AND ALLOWANCES

We perform periodic credit evaluations of our customers and generally do not require collateral.  Accounts receivable are due under a range of terms we offer to our customers.  Discounts are offered, in most instances, as an incentive for early payment.

We base our allowances related to receivables on historical credit and collections experience, and the specific identification of other potential problems, including the general economic climate.  Actual collections can differ, requiring adjustments to the allowances.  Individual accounts receivable balances are evaluated on a monthly basis, and those balances considered uncollectible are charged to the allowance.
38

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The following table presents the activity in our accounts receivable allowances (in thousands):

 
 
Additions
 
 
 
 
 
Charged to
 
 
 
 
Beginning
 
Costs and
 
 
Ending
 
 
Balance
 
Expenses
 
Deductions*
 
Balance
 
Year Ended December 28, 2013:
 
 
 
 
Allowance for possible losses on accounts receivable
 
$
2,550
   
$
17,114
   
$
(17,604
)
 
$
2,060
 
 
Year Ended December 29, 2012:
                               
Allowance for possible losses on accounts receivable
 
$
2,053
   
$
16,687
   
$
(16,190
)
 
$
2,550
 
 
                               
Year Ended December 31, 2011:
                               
Allowance for possible losses on accounts receivable
 
$
2,611
   
$
18,144
   
$
(18,702
)
 
$
2,053
 

* Includes accounts charged off, discounts given to customers and actual customer returns and allowances.

We record estimated sales returns, discounts, and other applicable adjustments as a reduction of net sales in the same period revenue is recognized.

Accounts receivable retainage amounts related to long term construction contracts totaled $8.3 million and $6.9 million as of December 28, 2013 and December 29, 2012, respectively.  All amounts are expected to be collected within one year.

NOTES RECEIVABLE AND ALLOWANCES

We have written agreements to receive repayment of funds borrowed from us, consisting of principal as well as any accrued interest, at a specified future date. We record a valuation allowance relating to these agreements for the portion that is expected to be uncollectible. The current portion of notes receivable, net of allowance, totaled $0.8 million and $0.2 million at December 28, 2013 and December 29, 2012, respectively and are included in “Other Current Assets”. The long-term portion of notes receivable, net of allowance, totaled $5.1 million and $7.7 million at December 28, 2013 and December 29, 2012, respectively and are included in “Other Assets”.  No allowance for possible losses on notes receivable existed at December 31, 2011.

The following table presents the activity in our notes receivable allowances (in thousands):

 
 
Beginning Balance
   
Additions
   
Deductions
   
Ending Balance
 
Year Ended December 28, 2013: Allowance for possible losses on Notes receivable
 
$
3,226
   
$
887
   
$
(3,088
)
 
$
1,025
 
Year Ended December 29, 2012: Allowance for possible losses on Notes receivable
 
$
-
   
$
3,226
   
$
-
   
$
3,226
 

39

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
INVENTORIES
 
Inventories are stated at the lower of cost or market.  The cost of inventories includes raw materials, direct labor, and manufacturing overhead.  Cost is determined on a weighted average basis.  Raw materials consist primarily of unfinished wood products expected to be manufactured or treated prior to sale, while finished goods represent various manufactured and treated wood products ready for sale.  We have inventory on consignment at customer locations valued at $11.4 million as of December 28, 2013 and $10.9 million as of December 29, 2012.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost.  Expenditures for renewals and betterments are capitalized, and maintenance and repairs are expensed as incurred.  Amortization of assets held under capital leases is included in depreciation and amortized over the shorter of the estimated useful life of the asset or the lease term.  Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets as follows:

Land improvements
 5 to 15 years
Buildings and improvements
15 to 31.5 years
Machinery, equipment and office furniture
 3 to 10 years

LONG-LIVED ASSETS

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), when an indicator of potential impairment exists, we evaluate the recoverability of our long-lived assets by determining whether unamortized balances could be recovered through undiscounted future operating cash flows over the remaining lives of the assets.  If the sum of the expected future cash flows was less than the carrying value of the assets, an impairment loss would be recognized for the excess of the carrying value over the fair value.

GOODWILL

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.
40

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
FOREIGN CURRENCY

Our foreign operations use the local currency as their functional currency.  Accordingly, assets and liabilities are translated at exchange rates as of the balance sheet date and revenues and expenses are translated using weighted average rates, with translation adjustments included as a separate component of shareholders' equity. Gains and losses arising from re-measuring foreign currency transactions are included in earnings.

INSURANCE RESERVES

Our wholly-owned insurance captive, Ardellis Insurance Ltd.(“Ardellis”), was incorporated on April 21, 2001 under the laws of Bermuda and is licensed as a Class 2 insurer under the Insurance Act 1978 of Bermuda.

We are primarily self-insured for certain employee health benefits, and have self-funded retentions for general liability, automobile liability, property and workers' compensation.  We are fully self-insured for environmental liabilities.  The general liability, automobile liability, property, workers' compensation, and certain environmental liabilities are managed through Ardellis; the related assets and liabilities of which are included in the consolidated financial statements as of December 28, 2013 and December 29, 2012.  Our policy is to accrue amounts equal to actuarially determined or internally computed liabilities.  The actuarial and internal valuations are based on historical information along with certain assumptions about future events.  Changes in assumptions for such matters as legal actions, medical cost trends, and changes in claims experience could cause these estimates to change in the future.

In addition to providing coverage for the Company, Ardellis provides Excess Loss Insurance (primarily medical and prescription drug) to certain third parties.  As of December 28, 2013, Ardellis had nine such contracts in place.  The contracts have specific and/or aggregate coverage loss limits based on the election of the third parties.  Reserves associated with these contracts were $0.9 million at December 28, 2013 and $0.2 million at December 29, 2012, and are accrued based on third party actuarial valuations of the expected future liabilities.

INCOME TAXES

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future.  Such deferred income tax asset and liability computations are based on enacted tax laws and rates.  Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities.
41

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
REVENUE RECOGNITION
 
Revenue for product sales 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.

Performance on construction contracts is reflected in operations using percentage-of-completion accounting, under either the 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.

The following table presents the balances of percentage-of-completion accounts on December 28, 2013 and December 29, 2012 which are included in other current assets and other accrued liabilities, respectively (in thousands):

 
 
2013
   
2012
 
Cost and Earnings in Excess of Billings
 
$
6,903
   
$
4,981
 
Billings in Excess of Cost and Earnings
   
2,858
     
2,020
 

SHIPPING AND HANDLING OF PRODUCT

Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenue.  Costs incurred related to the shipment and handling of products are classified in cost of goods sold.

EARNINGS PER SHARE

The computation of earnings per share (“EPS”) is as follows (in thousands):
42

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
December 28, 2013
   
December 29, 2012
   
December 31, 2011
 
Numerator:
 
   
   
 
Net earnings attributable to controlling interest
 
$
43,082
   
$
23,934
   
$
4,549