XNAS:UFPI Universal Forest Products Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNIVERSAL FOREST PRODUCTS, INC.

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

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

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

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

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

2801 East Beltline NE, Grand Rapids, Michigan
 
49525
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code (616) 364-6161
 
NONE
(Former name or former address, if changed since last report.)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer ¨   Accelerated Filer x Non-Accelerated Filer ¨ Smaller reporting company ¨
 
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes ¨   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
 
Class
 
Outstanding as of June 30, 2012
 
 
Common stock, no par value
 
19,735,289
 
 


 
 

 
 
UNIVERSAL FOREST PRODUCTS, INC.

 
   
Page No.
     
PART I.
FINANCIAL INFORMATION.
 
     
Item 1.
Financial Statements.
 
     
  3
     
  4
     
  5
     
  6
     
  7
     
Item 2.
16
     
Item 3.
29
     
Item 4.
29
     
PART II.
OTHER INFORMATION.
 
     
Item 1.
Legal Proceedings – NONE.
 
     
Item 1A.
Risk Factors – NONE.
 
     
Item 2.
30
     
Item 3.
Defaults upon Senior Securities – NONE.
 
     
Item 4.
Mine Safety Disclosures – NONE.
 
     
Item 5.
30
     
Item 6.
31
 
 
UNIVERSAL FOREST PRODUCTS, INC.
(Unaudited)

(in thousands, except share data)
                 
                   
                   
   
June 30,
   
December 31,
   
June 25,
 
   
2012
   
2011
   
2011
 
ASSETS
                 
CURRENT ASSETS:
                 
Cash and cash equivalents
  $ 5,317     $ 11,305     $ -  
Accounts receivable, net
    212,038       127,316       200,181  
Inventories:
                       
Raw materials
    116,895       111,526       126,196  
Finished goods
    90,661       83,171       78,394  
      207,556       194,697       204,590  
Assets held for sale
    -       -       5,082  
Refundable income taxes
    -       3,482       3,587  
Other current assets
    24,105       21,394       22,258  
TOTAL CURRENT ASSETS
    449,016       358,194       435,698  
                         
OTHER ASSETS
    16,176       15,380       11,453  
GOODWILL
    157,836       154,702       154,702  
INDEFINITE-LIVED INTANGIBLE ASSETS
    2,340       2,340       2,340  
OTHER INTANGIBLE ASSETS, net
    9,491       10,924       13,136  
PROPERTY, PLANT AND EQUIPMENT:
                       
Property, plant and equipment
    537,273       537,208       525,197  
Accumulated depreciation and amortization
    (319,495 )     (314,741 )     (308,200 )
PROPERTY, PLANT AND EQUIPMENT, NET
    217,778       222,467       216,997  
TOTAL ASSETS
  $ 852,637     $ 764,007     $ 834,326  
                         
LIABILITIES AND EQUITY
                       
CURRENT LIABILITIES:
                       
Cash overdraft
  $ -     $ -     $ 8,671  
Accounts payable
    81,117       49,433       76,521  
Accrued liabilities:
                       
Compensation and benefits
    35,592       30,920       39,741  
Income taxes
    5,401                  
Other
    16,911       12,172       15,573  
Current portion of long-term debt and capital lease obligations
    40,000       40,270       23,772  
TOTAL CURRENT LIABILITIES
    179,021       132,795       164,278  
                         
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion
    32,854       12,200       52,200  
DEFERRED INCOME TAXES
    20,034       19,049       20,478  
OTHER LIABILITIES
    16,654       17,364       16,513  
TOTAL LIABILITIES
    248,563       181,408       253,469  
                         
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 19,735,289, 19,623,803 and 19,525,590
  $ 19,735     $ 19,624     $ 19,526  
Additional paid-in capital
    147,260       143,988       140,636  
Retained earnings
    428,573       410,848       410,814  
Accumulated other comprehensive earnings
    3,439       3,600       4,839  
Employee stock notes receivable
    (1,016 )     (1,255 )     (1,493 )
      597,991       576,805       574,322  
Noncontrolling interest
    6,083       5,794       6,535  
TOTAL EQUITY
    604,074       582,599       580,857  
TOTAL LIABILITIES AND EQUITY
  $ 852,637     $ 764,007     $ 834,326  
 
See notes to unaudited consolidated condensed financial statements.
 
UNIVERSAL FOREST PRODUCTS, INC.
COMPREHENSIVE INCOME
(Unaudited)

(in thousands, except per share data)
                       
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 25,
   
June 30,
   
June 25,
 
   
2012
   
2011
   
2012
   
2011
 
                         
NET SALES
  $ 593,693     $ 544,139     $ 1,050,804     $ 931,372  
                                 
COST OF GOODS SOLD
    521,946       487,552       925,391       833,371  
                                 
GROSS PROFIT
    71,747       56,587       125,413       98,001  
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    49,106       45,328       94,884       91,816  
NET (GAIN) LOSS ON DISPOSITION OF ASSETS, EARLY RETIREMENT, AND OTHER IMPAIRMENT AND EXIT CHARGES
    (6,878 )     3,482       (6,783 )     3,489  
                                 
EARNINGS FROM OPERATIONS
    29,519       7,777       37,312       2,696  
                                 
INTEREST EXPENSE
    1,240       929       2,251       1,812  
INTEREST INCOME
    (321 )     (132 )     (562 )     (380 )
EQUITY IN LOSS (EARNINGS) OF INVESTEE
    52       (18 )     (10 )     (35 )
      971       779       1,679       1,397  
                                 
EARNINGS BEFORE INCOME TAXES
    28,548       6,998       35,633       1,299  
                                 
INCOME TAXES
    10,538       2,502       13,237       215  
                                 
NET EARNINGS
    18,010       4,496       22,396       1,084  
 
                               
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    (501 )     (219 )     (732 )     (477 )
                                 
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
  $ 17,509     $ 4,277     $ 21,664     $ 607  
                                 
EARNINGS PER SHARE - BASIC
  $ 0.88     $ 0.22     $ 1.10     $ 0.03  
                                 
EARNINGS PER SHARE - DILUTED
  $ 0.88     $ 0.22     $ 1.10     $ 0.03  
                                 
COMPREHENSIVE INCOME
  $ 16,777     $ 4,706     $ 22,221     $ 2,004  
 
                               
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
    (63 )     (294 )     (718 )     (723 )
 
                               
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
  $ 16,714     $ 4,412     $ 21,503     $ 1,281  

See notes to unaudited consolidated condensed financial statements.
 
UNIVERSAL FOREST PRODUCTS, INC.
(Unaudited)

(in thousands, except share and per share data)
                               
   
Controlling Interest Shareholders' Equity
             
   
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
                    607                       477       1,084  
Foreign currency translation adjustment
                            674               246       920  
                                                         
Purchase of additional noncontrolling interest
                                            (100 )     (100 )
Capital contribution from noncontrolling interest
                                            80       80  
Distributions to noncontrolling interest
                                            (835 )     (835 )
Cash dividends - $0.200 per share
                    (3,905 )                             (3,905 )
Issuance of 30,108 shares under employee stock plans
    30       545                                       575  
Issuance of 158,436 shares under stock grant programs
    159       (13 )     4                               150  
Issuance of 4,245 shares under deferred compensation plans
    4       (4 )                                     -  
Tax benefits from non-qualified stock options exercised
            154                                       154  
Expense associated with share-based compensation arrangements
            1,013                                       1,013  
Accrued expense under deferred compensation plans
            380                                       380  
Notes receivable adjustment
            (12 )                     12               -  
Payments received on employee stock notes receivable
                                    165               165  
Balance at June 25, 2011
  $ 19,526     $ 140,636     $ 410,814     $ 4,839     $ (1,493 )   $ 6,535     $ 580,857  
                                                         
Balance at December 31, 2011
  $ 19,624     $ 143,988     $ 410,848     $ 3,600     $ (1,255 )   $ 5,794     $ 582,599  
Net earnings
                    21,664                       732       22,396  
Foreign currency translation adjustment
                            (161 )             (14 )     (175 )
                                                         
Distributions to noncontrolling interest
                                            (429 )     (429 )
Cash dividends - $0.200 per share
                    (3,946 )                             (3,946 )
Issuance of 49,811 shares under employee stock plans
    50       1,184                                       1,234  
Issuance of 33,063 shares under stock grant programs
    33       35       7                               75  
Issuance of 29,356 shares under deferred compensation plans
    29       (29 )                                     -  
Tax benefits from non-qualified stock options exercised
            129                                       129  
Expense associated with share-based compensation arrangements
            666                                       666  
Accrued expense under deferred compensation plans
            1,311                                       1,311  
Notes receivable written-off
    (1 )     (24 )                     25               -  
Payments received on employee stock notes receivable
                                    214               214  
Balance at June 30, 2012
  $ 19,735     $ 147,260     $ 428,573     $ 3,439     $ (1,016 )   $ 6,083     $ 604,074  
 
See notes to unaudited consolidated condensed financial statements.
 

UNIVERSAL FOREST PRODUCTS, INC.
(Unaudited)

(in thousands)
           
   
Six Months Ended
 
   
June 30,
   
June 25,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings attributable to controlling interest
  $ 21,664     $ 607  
Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
               
Depreciation
    14,430       14,452  
Amortization of intangibles
    1,506       2,873  
Expense associated with share-based compensation arrangements
    741       1,163  
Excess tax benefits from share-based compensation arrangements
    (26 )     (120 )
Deferred income tax credit
    (1,133 )     (87 )
Net earnings attributable to noncontrolling interest
    732       477  
Equity in earnings of investee
    (10 )     (35 )
Net  (gain) loss on sale or impairment of property, plant and equipment
    (6,932 )     21  
Changes in:
               
Accounts receivable
    (84,649 )     (77,166 )
Inventories
    (12,166 )     (13,865 )
Accounts payable
    31,447       16,927  
Accrued liabilities and other
    14,684       (3,158 )
NET CASH FROM OPERATING ACTIVITIES
    (19,712 )     (57,911 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
    (15,760 )     (12,159 )
Proceeds from sale of property, plant and equipment
    14,635       1,197  
Acquisitions, net of cash received
    (2,149 )     -  
Purchase of patents
    (48 )     (77 )
Collections of notes receivable
    755       294  
Advances of notes receivable
    (706 )     -  
Other, net
    (187 )     19  
NET CASH FROM INVESTING ACTIVITIES
    (3,460 )     (10,726 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net borrowings under revolving credit facilities
    23,154       20,931  
Repayment of long-term debt
    (2,774 )     (272 )
Debt issuance costs
    (85 )     -  
Proceeds from issuance of common stock
    1,234       575  
Purchase of additional noncontrolling interest
    -       (100 )
Distributions to noncontrolling interest
    (429 )     (835 )
Capital contribution from noncontrolling interest
    -       80  
Dividends paid to shareholders
    (3,946 )     (3,905 )
Excess tax benefits from share-based compensation arrangements
    26       120  
Other, net
    4       9  
NET CASH FROM FINANCING ACTIVITIES
    17,184       16,603  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (5,988 )     (52,034 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    11,305       43,363  
                 
CASH AND CASH EQUIVALENTS (OVERDRAFT), END OF PERIOD
  $ 5,317     $ (8,671 )
                 
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
               
Interest paid
  $ 2,079     $ 1,820  
Income taxes paid
    6,289       2,964  
                 
NON-CASH FINANCING ACTIVITIES:
               
Common stock issued under deferred compensation plans
  $ 1,008     $ 142  

See notes to unaudited consolidated condensed financial statements
 
 
UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
A.
BASIS OF PRESENTATION

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

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 31, 2011.

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

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”).  ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a continuous statement of comprehensive income or in two separate consecutive statements.  We have adopted the provisions of ASU 2011-05 by presenting comprehensive income in a continuous statement of earnings and comprehensive income.

B.
FAIR VALUE

We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value.  Assets measured at fair value are as follows:
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
   
June 30, 2012
   
June 25, 2011
 
(in thousands)
 
Quoted
Prices in
Active
Markets
(Level 1)
     
Quoted
Prices in
Active
Markets
(Level 2)
 
Total
   
Quoted
Prices in
Active
Markets
(Level 1)
 
Recurring:
                       
Money market funds
  $ 99           $   99     $ 84  
Mutual funds:
                               
Domestic stock funds
    568               568       570  
International stock funds
    442               442       539  
Target funds
    132               132       153  
Bond funds
    113               113       105  
Total mutual funds
    1,255               1,255       1,367  
Non-Recurring
                               
Property, plant and equipment
         
600
      600          
    $ 1,354    
$600
  $   1,954     $ 1,451  
 
Mutual funds are valued at prices quoted in an active exchange market and are included in “Other Assets”.  Property, plant and equipment are valued based on active market prices and other relevant information for sales of similar assets.  We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.

We do not maintain any Level 3 assets or liabilities that would be based on significant observable or unobservable inputs.

C.
REVENUE RECOGNITION

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

The following table presents the balances of percentage-of-completion accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
   
June 30,
2012
   
December 31,
2011
   
June 25,
2011
 
                   
Cost and Earnings in Excess of Billings
  $ 4,799     $ 3,670     $ 5,716  
Billings in Excess of Cost and Earnings
    3,227       2,668       1,751  

D.
EARNINGS PER SHARE

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2012
   
June 25,
2011
   
June 30,
2012
   
June 25,
2011
 
Numerator:
                       
Net earnings attributable to controlling interest
  $ 17,509     $ 4,277     $ 21,664     $ 607  
Adjustment for earnings allocated to non-vested restricted common stock
    (148 )     (45 )     (184 )     (7 )
Net earnings for calculating EPS
  $ 17,361     $ 4,232     $ 21,480     $ 600  
Denominator:
                               
Weighted average shares outstanding
    19,787       19,576       19,761       19,527  
Adjustment for non-vested restricted common stock
    (173 )     (163 )     (169 )     (167 )
Shares for calculating basic EPS
    19,614       19,413       19,592       19,360  
Effect of dilutive stock options
    29       56       24       77  
Shares for calculating diluted EPS
    19,643       19,469       19,616       19,437  
Net earnings per share:
                               
Basic
  $ 0.88     $ 0.22     $ 1.10     $ 0.03  
Diluted
  $ 0.88     $ 0.22     $ 1.10     $ 0.03  
 
No options were excluded from the computation of diluted EPS for the quarter ended June 30, 2012.

Options to purchase 10,000 shares were not included in the computation of diluted EPS for the six months ended June 30, 2012 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

Options to purchase 30,000 shares were not included in the computation of diluted EPS for the quarter ended June 25, 2011 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

Options to purchase 10,000 shares were not included in the computation of diluted EPS for the six months ended June 25, 2011 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

E.
ASSETS HELD FOR SALE AND NET (GAIN) LOSS ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENTS AND EXIT CHARGES

 
Included in “Assets held for sale” on our Consolidated Condensed Balance Sheets are certain property, plant and equipment totaling $5.1 million on June 25, 2011. The assets held for sale consist of certain vacant land and facilities we previously closed to better align manufacturing capacity with the current business environment.  The fair values were determined based on appraisals or recent offers to acquire assets.  These and other idle assets were evaluated based on the requirements of ASC 360, which resulted in impairment and other exit charges included in “Net (gain) loss on disposition of assets, early retirement and other impairment and exit charges” for the periods presented below. These amounts include the following, separated by reporting segment (in thousands):
 
   
Three Months Ended June 30, 2012
   
Three Months Ended June 25, 2011
 
   
Eastern
and
Western
   
Site-
Built
   
All
Other
   
Total
   
Eastern
and
Western
   
Site-
Built
   
All
Other
   
Total
 
Severances and early retirement
  $ 26     $ -     $ 2     $ 28     $ 10     $ -     $ 3,309     $ 3,319  
Property, plant and equipment
    (59 )     (68 )     129       2       (78 )     (18 )     190       94  
(Gain) loss on impairment or sale of real estate
    (6,908 )                     (6,908 )     69                       69  
Total
  $ (6,941 )   $ (68 )   $ 131     $ (6,878 )   $ 1     $ (18 )   $ 3,499     $ 3,482  
 
   
Six Months Ended June 30, 2012
   
Six Months Ended June 25, 2011
 
   
Eastern
and
Western
   
Site-
Built
   
All
Other
   
Total
   
Eastern
and
Western
   
Site-
Built
   
All
Other
   
Total
 
Severances and early retirement
  $ 111     $ 1     $ 36     $ 148     $ 125     $ 9     $ 3,334     $ 3,468  
Property, plant and equipment
    (95 )     (96 )     170       (21 )     (185 )     (23 )     160       (48 )
(Gain) loss on impairment or sale of real estate
    (6,910 )                     (6,910 )     69                       69  
Total
  $ (6,894 )   $ (95 )   $ 206     $ (6,783 )   $ 9     $ (14 )   $ 3,494     $ 3,489  
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
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.

 
The changes in assets held for sale are as follows (in thousands):

Description
 
Net Book Value
 
Date of Sale
Net Sales Price
Assets held for sale as of December 25, 2010
  $ 2,446      
Additions
    5,082      
Transfers to held for use
    (1,619 )    
Sale of certain real estate in Indianapolis, Indiana
    (827 )
May 17, 2011
$0.7 million
Assets held for sale as of June 25, 2011
  $ 5,082      

F.
COMMITMENTS, CONTINGENCIES, AND GUARANTEES

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

We own and operate a number of facilities throughout the United States that chemically treat lumber products.  In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses.  Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Janesville, WI; and Medley, FL. In addition, a reserve was established for our affiliate’s facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.  During 2009, a subsidiary entered into a consent order with the State of Florida to conduct additional testing at the Auburndale, FL facility. We admitted no liability and the costs are not expected to be material.
 
On a consolidated basis, we have reserved approximately $3.4 million on June 30, 2012 and $3.3 million June 25, 2011, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

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

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

In addition, on June 30, 2012, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business.  In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On June 30, 2012, we had outstanding purchase commitments on capital projects of approximately $9.6 million.

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

In certain cases we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations.  We have agreed to indemnify the surety for claims made against the bonds.  As of June 30, 2012, we had approximately $24.9 million in outstanding payment and performance bonds, which expire during the next two years.  In addition, approximately $22.6 million in payment and performance bonds are outstanding for completed projects which are still under warranty.

On June 30, 2012, we had outstanding letters of credit totaling $28.7 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts.  We currently have irrevocable letters of credit outstanding totaling approximately $18.9 million for these types of insurance arrangements.  We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.

We are required to provide irrevocable letters of credit in favor of the bond trustees for all of the industrial development revenue bonds that we have issued.  These letters of credit guarantee principal and interest payments to the bondholders.  We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our outstanding industrial development revenue bonds.  These letters of credit have varying terms but may be renewed at the option of the issuing banks.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2002-A Senior Notes and our revolving credit facility.  The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.

Many of our wood treating operations utilize "Subpart W" drip pads, defined as hazardous waste management units by the EPA.  The rules regulating drip pads require that the pad be “closed” at the point that it is no longer intended to be used for wood treating operations or to manage hazardous waste.  Closure involves identification and disposal of contaminants which are required to be removed from the facility.  The cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contaminants, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed.  Based on our present knowledge of existing circumstances, it is considered probable that these costs will approximate $0.7 million.  As a result, this amount is recorded in other long-term liabilities on June 30, 2012.

We did not enter into any new guarantee arrangements during the second quarter of 2012 which would require us to recognize a liability on our balance sheet.

G.
BUSINESS COMBINATIONS

We completed the following acquisition in fiscal 2012 which were accounted for using the purchase method (in millions):
 
Company
Name
Acquisition
Date
Purchase
Price
 
Intangible
Assets
   
Net
Tangible
Assets
 
Operating
Segment
Business Description
MSR Forest Products, LLC
(“MSR”)
May 16, 2012
$3.2 (asset purchase)
  $ 1.1     $ 2.1  
Distribution Division
Supplies roof trusses and cut-to-size lumber to manufactured housing customers.  Facilities are located in Haleyville, AL and Waycross, GA. In 2011, MSR had annual sales of $10 million.

The acquisition mentioned above was not significant to our operating results individually or in aggregate, and thus pro forma results are not presented.  No acquisitions were completed in fiscal 2011.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

The purchase price allocation for MSR is preliminary and will be revised as final estimates of intangible values are made.

H.
SEGMENT REPORTING

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

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

   
Three Months Ended June 30, 2012
 
   
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
 
 
Total
 
Net sales to outside customers
  $ 476,065     $ 53,388     $ 64,240     $ -     $ 593,693  
Intersegment net sales
    17,792       5,053       4,256       -       27,101  
Segment operating profit (loss)
    26,733       1,057       199       1,530       29,519  

   
Three Months Ended June 25, 2011
 
   
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
 
 
Total
 
Net sales to outside customers
  $ 451,952     $ 47,313     $ 44,874     $ -       544,139  
Intersegment net sales
    22,735       7,106       12,310       -       42,151  
Segment operating profit (loss)
    9,663       (2,951 )     (583 )     1,648       7,777  
 
   
Six Months Ended June 30, 2012
 
   
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
 
 
Total
 
Net sales to outside customers
  $ 842,903     $ 100,931     $ 106,970     $ -     $ 1,050,804  
Intersegment net sales
    35,933       8,876       8,609       -       53,418  
Segment operating profit (loss)
    39,245       464       (1,275 )     (1,122 )     37,312  
 
 
UNIVERSAL FOREST PRODUCTS, INC.

   
Six Months Ended June 25, 2011
 
   
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
 
 
Total
 
Net sales to outside customers
  $ 771,900     $ 84,193     $ 75,279     $ -     $ 931,372  
Intersegment net sales
    43,344       12,947       20,847       -       77,138  
Segment operating profit (loss)
    8,935       (5,799 )     (2,075 )     1,635       2,696  

I.
INCOME TAXES

Our effective tax rate was 36.9% in the second quarter of 2012 compared to 35.8% for same period of 2011. Our effective tax rate was 37.1% in the first six months of 2012. Our effective tax rate was 16.5% in the first six months of 2011, which is well below our statutory rate. The profits of our non-U. S. subsidiaries and non-wholly owned partnerships that we consolidate comprised a greater percentage of our year to date profits have a lower tax rate.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

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 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. The Company’s subsidiaries also provide framing services for the residential market and forming products 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.

Please be aware that: Any statements included in this report that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by, and information currently available to, the Company at the time such statements were made. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: adverse lumber market trends, competitive activity, negative economic trends, government regulations and weather. Certain of these 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 2012.

OVERVIEW

Our results for the second quarter of 2012 were impacted by the following:

·
Our sales increased 9% primarily due to an increase in lumber prices.  Our  unit sales increased to all of our markets, except retail building materials  We experienced our strongest sales increases to the manufactured housing and industrial markets.

·
The retail building materials market, which has been adversely impacted by a decline in consumer demand in prior years, experienced  a trend up early in the year due in part to favorable weather.  More recently, consumer spending and confidence appears to have softened.  Our unit sales decrease was due to the fact we lost some market share with a major retail customer this year, primarily in product lines with lower gross margins.  This decrease was offset to some extent by gaining share with other customers in a variety of other product lines.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

·
National housing starts increased approximately 26% in the period of March through May of 2012 (our sales trail housing starts by about a month), compared to the same period of 2011.  Our unit sales increased slightly to this market.  We have lost share of the residential construction market due to our focus on profitability and cash flow and the significant excess capacity of suppliers servicing the market.

·
We experienced a strong sales increase in sales to our industrial customers due to share gains with existing customers and by adding new customers.

·
Shipments of HUD code manufactured homes were up 17% in April and May 2012, compared to the same period of 2011. We have maintained our share of the manufactured housing market in the product lines we offer and our sales increase reflects greater market activity.

·
Our gross profit percentage increased to 12.1% from 10.4% comparing 2012 to 2011.  In addition, our gross profit dollars increased by 27%, which compares favorably to our 1% increase in unit sales.  Our higher gross profit percentage in 2012 reflects the benefit of selling into a rising lumber market this year contrasted with selling into a falling market in 2011, as well as our focus on sales of product lines with higher gross margins, combined with improvements in productivity.

·
We sold certain real estate in Fontana, CA for approximately $12.1 million and recognized a pre-tax gain of approximately $7.2 million, or $0.22 per diluted share.
 
HISTORICAL LUMBER PRICES

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

   
Random Lengths Composite
 
   
Average $/MBF
 
   
2012
   
2011
 
             
January
  $ 281     $ 301  
February
    286       296  
March
    300       294  
April
    308       275  
May
    342       259  
June
    330       262  
                 
Second quarter average
  $ 327     $ 265  
Year-to-date average
    308       281  
                 
Second quarter percentage change
   
23.4
%        
Year-to-date percentage change
   
9.6
%        
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
In addition, a Southern Yellow Pine ("SYP") composite price, which we prepare and use, is presented below.  Sales of products produced using this species, which primarily consists of our preservative-treated products, may comprise up to 50% of our sales volume.
 
   
Random Lengths SYP
 
   
Average $/MBF
 
   
2012
   
2011
 
             
January
  $ 269     $ 282  
February
    278       289  
March
    300       290  
April
    314       266  
May
    341       254  
June
    314       246  
                 
Second quarter average
  $ 323     $ 255  
Year-to-date average
    303       271  
                 
Second quarter percentage change
    26.7 %        
Year-to-date percentage change
    11.8 %        
 
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.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

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.

·
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.

·
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:

·
Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market.  In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 17% of our total sales.  This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to the higher rate of inventory turnover.  We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs.  (Please refer to the “Risk Factors” section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.)
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
·
Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects.  We attempt to mitigate this risk through our purchasing practices by locking in costs.

In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.

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

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

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

RESULTS OF OPERATIONS

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

   
Three Months Ended
   
Six months Ended
 
   
June 30, 2012
   
June 25, 2011
   
June 30, 2012
   
June 25, 2011
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    87.9       89.6       88.1       89.5  
Gross profit
    12.1       10.4       11.9       10.5  
Selling, general, and administrative expenses
    8.3       8.3       9.0       9.9  
Net (gain) loss on disposition of assets, early retirement, and other impairment and exit charges
    (1.2 )     0.6       (0.6 )     0.4  
Earnings from operations
    5.0       1.4       3.6       0.3  
Other expense (income), net
    0.2       0.2       0.2       0.2  
Earnings before income taxes
    4.8       1.3       3.4       0.1  
Income taxes
    1.8       0.5       1.3       0.0  
Net earnings
    3.0       0.8       2.1       0.1  
Less net earnings attributable to noncontrolling interest
    (0.1 )     (0.0 )     (0.1 )     (0.0 )
Net earnings attributable to controlling interest
    2.9 %     0.8 %     2.1 %     0.1 %

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:

·
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.

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

·
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. Wood alternative products consist primarily of composite wood and plastics. Engineered wood components include roof trusses, wall panels, and floor systems.  Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals.
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
·
Developing new products and expanding our product offering for existing customers.

·
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.

   
Three Months Ended
   
Six Months Ended
 
Market Classification
 
June 30, 2012
   
June 25, 2011
   
% Change
   
June 30, 2012
   
June 25, 2011
   
% Change
 
Retail Building Materials
  $ 280,775     $ 287,475       (2.3 )   $ 477,646     $ 462,741       3.2  
Residential Construction
    60,176       56,611       6.3       112,103       104,442       7.3  
Commercial Construction and Concrete Forming
    24,180       21,139       14.4       44,386       35,791       24.0  
Industrial
    158,287       126,330       25.3       290,594       235,756       23.3  
Manufactured Housing
    80,693       64,607       24.9       143,732       111,654       28.7  
Total Gross Sales
    604,111       556,162       8.6       1,068,461       950,384       12.4  
Sales Allowances
    (10,418 )     (12,023 )             (17,657 )     (19,012 )        
Total Net Sales
  $ 593,693     $ 544,139       9.1     $ 1,050,804     $ 931,372       12.8  

Gross sales in the second quarter of 2012 increased 9% compared to the same period of 2011, primarily due to the impact of the Lumber Market on our selling prices.

Gross sales in the first six months of 2012 increased 12% compared to the same period of 2011, due to higher lumber prices in the second quarter and an increase in unit sales in the first quarter primarily resulting from improved demand in each of our markets and more favorable weather compared to inclement weather in 2011.

Changes in our gross sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market decreased 2% in the second quarter of 2012 compared to the same period of 2011, primarily due to a 10% decrease in our overall unit sales, offset by higher lumber prices.  Unit sales decreased primarily due to the loss of sales of low-margin products to a major retail customer.  This loss of market share was offset somewhat by increased sales to other retail customers. Within this market, sales to our big box customers decreased 14% and our sales to other retailers increased 21%.

Gross sales to the retail building materials market increased 3% in the first six months of 2012 compared to the same period of 2011, primarily due to the same factors discussed above and an increase in consumer spending in the first quarter.
 
 
UNIVERSAL FOREST PRODUCTS, INC.
 
Residential Construction:

Gross sales to the residential construction market increased 6% in the second quarter of 2012 compared to the same period of 2011 primarily due to an increase in selling prices. By comparison, national housing starts increased approximately 26% in the period of March through May of 2012 (our sales trail housing starts by about a month), compared to the same period of 2011.  Gross sales to the residential construction market increased 7% in the first six months of 2012 compared to the same period of 2011 primarily due to an increase in unit sales (plant closures since April of 2011 had the effect of decreasing unit sales by 2%).  By comparison, national housing starts increased approximately 27% in the period of December through May of 2012 (our sales trail housing starts by about a month), compared to the same period of 2011.  We continue to be selective in the business that we pursue in order to maximize profitability.  As a result, we have lost some share of this market.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 14% in the second quarter of 2012 compared to the same period of 2011.  Within this market, sales to commercial builders increased 2% and sales of products used to make concrete forms increased 25%. Gross sales to the commercial construction and concrete forming market increased 24% in the first six months of 2012 compared to the same period of 2011.  Within this market, sales to commercial builders increased 14% 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 32% due to our focus on growing our share of this market.

Industrial:

Gross sales to the industrial market increased 25% in the second quarter of 2012 compared to the same period of 2011, due an 18% increase in unit sales and a 7% increase in selling prices due to the lumber market.  We added almost 90 new customers this quarter and our sales to existing customers increased as we gained share with our top customers and demand improved.

Gross sales to the industrial market increased 23% in the first six months of 2012 compared to the same period of 2011, primarily due an increase in unit sales as a result of the same factors discussed above.

Manufactured Housing and Recreation Vehicles:

Gross sales to the manufactured housing market increased 25% in the second quarter of 2012 compared to 2011, primarily due to an 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 homes in April and May 2012 were up 17% compared to 2011.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

Gross sales to the manufactured housing market increased 29% in the first six months of 2012 compared to 2011, primarily due to an increase in unit sales.  Unit sales to this market increased due to the factors discussed above. Shipments of HUD-code homes in January through May 2012 were up 25% compared to 2011.

Value-Added and Commodity-Based Sales:

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales.  Value-added products generally carry higher gross margins than our commodity-based products.
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2012
   
June 25, 2011
   
June 30, 2012
   
June 25, 2011
 
                         
Value-Added
    59.4 %     59.9 %     59.2 %     59.0 %
Commodity-Based
    40.6 %     40.1 %     40.8 %     41.0 %

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 12.1% from 10.4% comparing the second quarter of 2012 to the same period of 2011.  In addition, our gross profit dollars increased by 27%, which compares favorably to our 1% increase in unit sales. This improvement is primarily due to the impact of the trend of the lumber market in each period.  In 2012, we were selling into a rising market for much of the quarter.  Conversely, we were selling into a falling market through the second quarter of 2011.  If lumber prices continue to decline in the third quarter of 2012 that may adversely impact our gross profit percentage and profitability.  In addition, our gross margins were impacted by our focus on sales of product lines with higher gross margins, combined with improvements in productivity

Our gross profit percentage increased to 11.9% from 10.5% comparing the first six months of 2012 to the same period of 2011.  In addition, our gross profit dollars increased by 28%, which compares favorably to our 7% increase in unit sales. This improvement is primarily due to the same factors discussed above combined with our increase in unit sales in the first quarter and the operating leverage we have in our cost structure.  In addition, more favorable weather in the first quarter of 2012 compared to 2011, when we lost many production days due to inclement weather, impacted our production efficiency and improved our gross profit percentage.  These increases were offset to some extent by pricing pressure experienced during the first six months.  In addition, we lost some market share with a major retail customer this year, primarily in product lines with lower gross margins.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $3.8 million, or 8.3%, in the second quarter of 2012 compared to the same period of 2011, while we reported a 1% 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 operating profits and return on investment.  Also impacting the increase SG&A expenses was a bad debt recovery in 2011. The expense for 2012 remained consistent with our normal trends.  These increases were offset by decreases in compensation and related expenses, amortization expense, and several other expenses as a result of our continuing efforts to reduce our cost structure.

Selling, general and administrative ("SG&A") expenses increased by approximately $3.1 million, or 3.3%, in the first six months of 2012 compared to the same period of 2011, while we reported a 7% increase in unit sales.  SG&A expenses were impacted in the first six months of 2012 by the same factors discussed above.
 
NET (GAIN) LOSS ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES

In the first six months of 2012, we incurred approximately $148,000 of severance costs, which was offset by net gains on the sale or disposal of real estate and other property, plant and equipment totaling approximately $6.9 million.

In the first six months of 2011, we recorded charges totaling $3.5 million relating to asset impairments and other costs associated with idled facilities and down-sizing efforts combined with early retirement expense.   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.

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

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

We currently have 11 operations which are experiencing operating losses and negative cash flow for the first six months of 2012.  The net book value of the long-lived assets of these operations, which could be subject to an impairment charge in the future, was $14.8 million at the end of June of 2012.  In addition, these operations had future fixed operating lease payments totaling $0.9 million at the end of June of 2012.
 
 
UNIVERSAL FOREST PRODUCTS, INC.

INTEREST, NET

Net interest costs were comparable in the second quarter and first six months of 2012 compared to the same periods of 2011. Our debt levels in 2012 were lower and 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 was 36.9% in the second quarter of 2012 compared to 35.8% for same period of 2011. Our effective tax rate was 37.1% in the first six months of 2012. Our effective tax rate was 16.5% in the first six months of 2011, which was well below our statutory rate. The profits of our non-U. S. subsidiaries and non-wholly owned partnerships that we consolidate comprised a greater percentage of our year to date profits and had a lower tax rate.

OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions other than operating leases.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
 
   
Six Months Ended
 
   
June 30, 2012
   
June 25, 2011
 
Cash from operating activities
  $ (19,712 )<