UFP Industries
Annual Report 2013

Plain-text annual report

Report to Shareholders 2013 “A goal without a plan is just a wish.” Antoine de Saint-Exupéry To Our Shareholders: At Universal, we know that wishes don’t grow sales, pay our people or reward our investors. Those come from results that are created through careful planning, preparation and execution. That was our recipe for success in 2013 as the companies of Universal Forest Products, Inc., delivered the strongest results in years. We’re back to $2.5 billion in sales, which is up 20 percent over 2012, and had net earnings of $43 million, an 80 percent increase over last year. We’re on track to reach our goals: $3 billion in sales, operating margins at normal historical levels and earning a return in excess of our cost of capital by 2017. And we are excited, motivated and hard at work to beat our own expectations. Sales to our markets were up nearly 12 percent in retail, more than 31 percent in construction and 19 percent in industrial. While the numbers are reminiscent of our performance during the homebuilding and economic boom of the early 2000s, they feel—and are—much different: They were hard-fought, born of lessons learned from challenging times and derived from years of reinvention, refocus and determination. These results didn’t come easy, but they set a solid foundation for sustainable business growth in the years ahead. We are a wiser, more diversified company today, supplying more customers with new and better products and looking into the far corners of our markets, and deep into our experience and creativity, for continued growth. Our new product initiative, an important growth strategy, resulted in sales of $85 million in 2013. We’re proud of that achievement, and we have a long way to go. But, we now have systems and a mindset that encourage the development of ideas from concept to sale. We also are assessing current and future lines of business for new opportunities through innovation and development initiatives. These efforts are energizing employees throughout the companies of Universal at all levels of our organization, and producing results. In retail, we are focused on growing our business with big box and independent retailers, as well as with customers that focus on professional contractors. Our product mix is constantly evolving with a consistent focus on what the consumer needs and is willing to pay for. You probably would expect our companies to make preservative treated lumber, wood railings and lattice, but what about composite landscape rocks, glass and aluminum railing kits, and postcaps and deck lighting? These are in our portfolio, and we have plans for much, much more. Construction is becoming a healthier market again. We are focused on taking only business that makes financial sense. As we’ve said in the past, we can’t afford to take business for practice. We know what we’re good at and we want to do more of it, with great quality and a fair profit. We continue to add to our design and Universal Forest Products, Inc. 2013 Letter to Shareholders Page ii engineering strengths to assist our customers with the issues they face on job sites: shortage of skilled labor, tight time requirements and consistent quality. We provide manufactured items and engineered wood products, and other items that save time, money and headaches. We remain focused on growing our industrial business with new customers, products and services. It is a highly fragmented market, and a competitive one, and we believe our service and quality will continue to attract more customers. We have to fight hard and perform better than our competition to continue to grow in this market, and that’s what we’re doing. So far, our approach is working. We are determined to make sure our business isn’t “here today, gone tomorrow” by creating sustainable opportunities with trusted customers and vendors who value mutual success. Some are new relationships that we are carefully cultivating; some are decades old and have survived the tests of time, challenge and change. Together, these relationships and the hard work of our people allowed us to turn in some pretty solid results. What are the secrets to future success? Simply put: We hate to lose. We will work harder, train smarter and give our best to make sure the customer has better results by working with us. We continue to seek out growth opportunities that are in our strategic wheelhouse: a larger geographic footprint, new products, and partnerships and acquisitions that are great cultural fits and that have valuations that allow us to create value for our shareholders. We haven’t found too many acquisition opportunities that meet these requirements, but we are diligent, consistent and patient in our approach. To meet our business growth targets, we need our current employees to continue to grow and we need to recruit future leaders. We are doing that through enhanced training and development programs and regional recruiting. We are willing to reach out everywhere for talented employees—we’ll even shamelessly solicit our shareholders to help us find highly motivated and hard-working people to join our team. Send them our way! Next year, Universal will celebrate its 60th year of doing business. The two of us have been affiliated with the Company for 43 (Bill) and 35 (Matt) years, and these are as exciting and promising times as we’ve ever seen. We’re becoming a stronger, more sustainable, more diverse organization that has opportunities for growth in many corners of business and around the globe. And we have the best, hardest-working people delivering results in a competitive world and markets. But our fiercest competition comes from within: from our ongoing challenge to do better tomorrow than today and our determination to hold ourselves and each other accountable for doing exactly that. The vast majority of our employees own UFPI stock, so when we say we’re focused on creating great results for our valued stockholders, we have many motivations for achieving our goals. Thank you for placing your investment and trust in the Universal Forest Products family of companies. We don’t simply wish for your continued support and investment; we plan to earn it. William G. Currie Chairman of the Board Matthew J. Missad Chief Executive Officer Universal Forest Products, Inc. 2013 Letter to Shareholders Page iii 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) Consolidated Statement of Earnings Data Net sales Gross profit Earnings before income taxes Net earnings attributable to controlling interest Diluted earnings per share Dividends per share 2013 2012 2011 2010 2009 $2,470,448 280,552 70,258 $2,054,933 225,109 41,064 $1,822,336 199,727 8,787 $1,890,851 229,955 27,111 $1,673,000 243,664 38,583 43,082 $2.15 $0.410 23,934 $1.21 $0.400 4,549 $0.23 $0.400 17,411 $0.89 $0.400 24,272 $1.25 $0.260 Consolidated Balance Sheet Data Working capital(1) Total assets Total debt and capital lease obligations Shareholders' equity Statistics Gross profit as a percentage of net sales Net earnings attributable to controlling interest as a percentage of net sales Return on beginning equity(2) Current ratio Debt to equity ratio Book value per common share(3) $357,299 916,987 84,700 649,734 $338,389 860,540 95,790 607,525 $225,399 764,007 52,470 582,599 $263,578 789,396 55,291 581,176 $248,165 776,868 53,854 568,946 11.4% 11.0% 11.0% 12.2% 14.6% 1.7% 7.1% 3.59 0.13 $32.57 1.2% 4.1% 3.95 0.16 $30.68 0.2% 0.8% 2.70 0.09 $29.69 0.9% 3.1% 3.21 0.10 $30.06 1.5% 4.4% 3.06 0.09 $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 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. the markets we serve; government regulations, particularly in 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 3 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS reported an increase of approximately 1% and our industrial market increased by 8%, in part, due to recent acquisitions. • 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 2012 2013 2011 January February March April May June July August September October November December Annual average Annual percentage change $393 409 436 429 367 329 343 353 368 384 398 385 $383 18.2% $281 286 300 308 342 330 323 340 332 324 354 370 $324 19.1% $301 296 294 275 259 262 269 265 262 261 257 267 $272 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 2012 2011 2013 January February March April May June July August September October November December Annual average Annual percentage change $269 278 300 314 341 314 300 315 319 313 350 362 $315 20.7% $282 289 290 266 254 246 253 263 239 244 248 256 $261 $397 426 445 436 383 355 366 364 360 356 362 360 $384 21.9% 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. (cid:1) 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. (cid:1) 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: (cid:1) 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 6 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.) (cid:1) 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. Lumber cost .................................................. Conversion cost ............................................ = Product cost ............................................... Adder ............................................................ = Sell price ................................................... Gross margin ................................................ Period 1 Period 2 $400 50 450 50 $500 10.0% $300 50 350 50 $400 12.5% 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 Net sales Cost of goods sold Gross profit Selling, general, and administrative expenses Loss contingency for anti-dumping duty assessments Net loss (gain) on disposition of assets and other impairment and exit charges Earnings from operations Other expense, net Earnings before income taxes Income taxes Net earnings Less net earnings attributable to noncontrolling interest Net earnings attributable to controlling interest Years Ended December 28, 2013 December 29, 2012 December 31, 2011 100.0 % 89.0 11.0 100.0 % 89.0 11.0 88.6 11.4 100.0 % 8.3 0.1 - 3.0 0.2 2.8 1.0 1.9 (0.1) 9.0 0.1 (0.3) 2.2 0.2 2.0 0.7 1.3 (0.1) 10.0 - 0.3 0.7 0.2 0.5 0.2 0.3 (0.1) 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: (cid:1) 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. (cid:1) Expanding geographically in our core businesses, domestically and internationally. (cid:1) 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. (cid:1) 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 (cid:1) 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. Market Classification Retail Building Materials Industrial Manufactured Housing Residential Construction Commercial Construction and Concrete Forming Housing and Construction Total Gross Sales Sales Allowances Total Net Sales December 28, 2013 $936,590 701,688 388,697 340,296 136,641 865,634 2,503,912 (33,464) $2,470,448 Years Ended December 29, 2012 $836,670 589,893 314,095 255,544 89,804 659,443 2,086,005 (31,072) $2,054,933 % Change (0.3) 19.8 28.4 25.9 14.5 12.3 12.8 December 31, 2011 $838,903 492,476 244,663 202,970 78,402 526,035 1,857,414 (35,078) $1,822,336 % Change 11.9 19.0 23.8 33.2 52.2 20.0 20.2 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. 2013 versus 2012 ............................................... 2012 versus 2011 ............................................... 2011 versus 2010 ............................................... % Change in Units in Selling Prices 8% 12% 4% 8% 2% -5% in Sales 20% 12% -3% 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 10% 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. 2013................................................. 2012................................................. 2011................................................. 58.1% 58.7% 58.8% 41.9% 41.3% 41.2% Value-Added Commodity-Based 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: (cid:1) (cid:1) 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. 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. (cid:1) We lost some market share with a major retail customer in 2012, primarily in product lines with lower gross margins. (cid:1) 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 12 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS compensation and related expenses and as well as certain other expenses attributable to our continuing efforts to reduce our cost structure. 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 INTEREST, NET 13 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Eastern and Western Site-Built All Other Corporate Total December 28, 2013 $1,987,751 272,114 210,583 - $2,470,448 December 29, 2012 $1,635,178 222,824 196,931 - $2,054,933 December 31, 2011 $1,486,058 183,120 153,158 - $1,822,336 2013 vs 2012 2012 vs 2011 21.6% 22.1 6.9 - 20.2% 10.0% 21.7 28.6 - 12.8% (in thousands) Earnings from Operations December 28, 2013 December 29, 2012 Eastern and Western Site-Built All Other Corporate1 Total $79,419 7,947 (2,366) (10,732) $74,268 $60,573 1,299 (11,316) (6,028) $44,528 14 December 31, 2011 $28,198 (6,349) (8,731) (1,107) $12,011 2013 vs 2012 2012 vs 2011 31.1% 511.8 79.1 (78.0) 66.8% 114.8% 120.5 (29.6) (444.5) 270.7% 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). Contractual Obligation Long-term debt and capital lease obligations Estimated interest on long-term debt Operating leases Capital project purchase obligations Total Less than 1 Year Payments Due by Period After 5 Years 3 – 5 Years 1 – 3 Years $ - 2,979 4,235 4,152 $11,366 $ - 5,957 4,475 - $10,432 $- 5,957 1,448 - $7,405 $84,700 15,126 - - $99,826 Total $84,700 30,019 10,158 4,152 $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): Cash from operating activities Cash from investing activities Cash from financing activities Effect of exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents (overdraft), end of year December 28, 2013 $53,380 (43,625) (18,419) (62) (8,726) 7,647 $(1,079) December 29, 2012 ($5,721) (34,223) 36,695 244 (3,005) 10,652 $7,647 December 31, 2011 $11,515 (32,990) (10,314) (259) (32,048) 42,700 $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 17 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS quarters. In 2013, higher lumber prices and unit sales caused our investment in accounts receivable and inventory to increase. 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 18 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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: (cid:1) General liability, automobile, and workers' compensation reserves are accrued based on third party actuarial valuations of the expected future liabilities. (cid:1) 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. (cid:1) 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 20 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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. LONG-TERM GOALS FORWARD OUTLOOK 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 21 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS targeting goals of achieving $3 billion in sales and returning to operating margins at normal historical levels by 2017. 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 22 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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. 23 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • 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. • 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) ASSETS CURRENT ASSETS: Cash and cash equivalents Restricted cash Accounts receivable, net Inventories: Raw materials Finished goods Total inventories Refundable income taxes Deferred income taxes Other current assets TOTAL CURRENT ASSETS DEFERRED INCOME TAXES OTHER ASSETS GOODWILL INDEFINITE-LIVED INTANGIBLE ASSETS OTHER INTANGIBLE ASSETS, NET PROPERTY, PLANT AND EQUIPMENT: Land and improvements Building and improvements Machinery and equipment Furniture and fixtures Construction in progress PROPERTY, PLANT AND EQUIPMENT, GROSS Less accumulated depreciation and amortization PROPERTY, PLANT AND EQUIPMENT, NET TOTAL ASSETS December 28, 2013 December 29, 2012 $ - 720 180,452 $ 7,647 6,831 163,225 161,226 126,079 287,305 2,235 6,866 18,820 496,398 1,365 12,087 160,146 2,340 7,241 136,201 106,979 243,180 7,521 9,212 15,557 453,173 1,759 14,583 159,316 2,340 8,101 115,155 173,641 260,807 23,233 5,866 578,702 (341,292) 237,410 916,987 $ 108,545 165,307 239,175 23,750 6,818 543,595 (322,327) 221,268 860,540 $ 29 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Cash overdraft Accounts payable Accrued liabilities: Compensation and benefits Other TOTAL CURRENT LIABILITIES LONG-TERM DEBT DEFERRED INCOME TAXES OTHER LIABILITIES TOTAL LIABILITIES 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 Additional paid-in capital Retained earnings Accumulated other comprehensive earnings Employee stock notes receivable Total controlling interest shareholders' equity Noncontrolling interest TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY See notes to consolidated financial statements. December 28, 2013 December 29, 2012 $ 1,079 72,918 $ - 66,054 45,018 20,084 139,099 84,700 26,788 16,666 267,253 34,728 14,002 114,784 95,790 24,930 17,511 253,015 $ - $ - 19,948 156,129 461,812 3,466 (732) 640,623 9,111 649,734 916,987 $ 19,800 149,805 426,887 4,258 (982) 599,768 7,757 607,525 860,540 $ 30 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (in thousands, except per share data) Year Ended December 28, December 29, December 31, 2012 2013 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 ANTI-DUMPING DUTY ASSESSMENTS NET LOSS (GAIN) ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES 204,390 1,526 184,919 2,328 181,363 - 368 (6,666) 6,353 EARNINGS FROM OPERATIONS 74,268 44,528 12,011 INTEREST EXPENSE INTEREST INCOME EQUITY IN EARNINGS OF INVESTEE EARNINGS BEFORE INCOME TAXES INCOME TAXES NET EARNINGS LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST 4,851 (640) (201) 4,010 70,258 24,454 45,804 4,053 (510) (79) 3,464 41,064 15,054 26,010 3,732 (566) 58 3,224 8,787 2,874 5,913 (2,722) (2,076) (1,364) $ 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 COMPREHENSIVE INCOME ATTRIBUTABLE TO (2,730) (2,398) (862) 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 Accumulat- ed Other Comprehen- sive Earnings $ 4,165 Additional Paid-In Capital 138,573 $ Retained Earnings 414,108 $ 4,549 Common Stock $ 19,333 Employees Stock Notes Receivable $ (1,670) Noncontrolling Interest $ 6,667 1,364 $ Total 581,176 5,913 (565) (502) (1,067) 80 80 (7,818) 9 137 150 8 (4) 2,834 8 (8) 684 1,361 744 (208) (402) (1,413) (402) (1,413) (7,818) 2,971 167 - 684 1,361 744 (3) 209 206 (1,255) $ $ 5,794 206 582,599 $ Balance at December 25, 2010 Net earnings Foreign currency translation adjustment Capital contribution from noncontrolling interest Purchase of additional Current portion of long-term debt Distributions to noncontrolling interest Cash dividends - $0.400 per share Issuance of 137,029 shares under employee stock plans Issuance of 150,376 shares under stock grant programs Issuance of 7,995 shares under deferred compensation plans Tax benefits from non-qualified stock options exercised Expense associated with share-based compensation arrangements Accrued expense under deferred compensation plans Note receivable adjustment Payments received on employee stock notes receivable Balance at December 31, 2011 $ 19,624 $ 143,988 $ 410,848 $ 3,600 32 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and per share data) Common Stock Net earnings Foreign currency translation adjustment Capital contribution from noncontrolling interest Distributions to noncontrolling interest Cash dividends - $0.400 per share Issuance of 89,574 shares under employee stock plans Issuance of 49,536 shares under stock grant programs Issuance of 37,437 shares under deferred compensation plans Tax benefits from non-qualified stock options exercised Expense associated with share-based compensation arrangements Accrued expense under deferred compensation plans Note receivable adjustment Payments received on employee stock notes receivable Controlling Interest Shareholders' Equity Accumulat- ed Other Comprehen- sive Earnings Additional Paid-In Capital Retained Earnings 23,934 Employees Stock Notes Receivable Noncontrolling Interest 2,076 658 322 436 (871) (7,905) 10 90 50 37 (1) 1,971 37 (37) 765 1,270 1,836 (25) 27 Total 26,010 980 436 (871) (7,905) 2,061 97 - 765 1,270 1,836 1 246 (982) $ $ 7,757 246 607,525 $ Balance at December 29, 2012 $ 19,800 $ 149,805 $ 426,887 $ 4,258 33 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Controlling Interest Shareholders' Equity Accumulat- ed Other Comprehen- sive Earnings Additional Paid-In Capital Retained Earnings 43,082 Employees Stock Notes Receivable Noncontrolling Interest 2,722 Total 45,804 (792) 8 (784) 84 (1,460) 84 (1,460) (8,166) 2,144 60 - 290 1,874 2,219 - 106 144 (732) $ $ 9,111 144 649,734 $ (in thousands, except share and per share data) Common Stock Net earnings Foreign currency translation adjustment Capital contribution from noncontrolling interest Distributions to noncontrolling interest Cash dividends - $0.410 per share Issuance of 76,492 shares under employee stock plans Issuance of 30,808 shares under stock grant programs Issuance of 43,914 shares under deferred compensation plans Tax benefits from non-qualified stock options exercised Expense associated with share-based compensation arrangements Accrued expense under deferred compensation plans Note receivable adjustment Payments received on employee stock notes receivable (8,166) 9 76 31 44 (3) 2,068 20 (44) 290 1,874 2,219 (103) Balance at December 28, 2013 $ 19,948 $ 156,129 $ 461,812 $ 3,466 See notes to consolidated financial statements 34 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities: Depreciation Amortization of intangibles Expense associated with share-based compensation arrangements Excess tax benefits from share-based compensation arrangements Expense associated with stock grant plans Loss reserve on notes receivable Deferred income taxes Equity in earnings of investee Net (gain) loss on sale or impairment of property, plant and equipment Changes in: Accounts receivable Inventories Accounts payable Accrued liabilities and other NET CASH FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisitions, net of cash received Purchase of patents & product technology Advances on notes receivable Collections on notes receivable Cash restricted as to use Other, net NET CASH FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit facilities Repayment of long-term debt Borrowings of long-term debt Debt issuance costs Proceeds from issuance of common stock Purchase of additional noncontrolling interest Distributions to noncontrolling interest Capital contribution from noncontrolling interest Dividends paid to shareholders Excess tax benefits from share-based compensation arrangements Other, net NET CASH FROM FINANCING ACTIVITIES Effect of exchange rate changes on cash NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR December 28, 2013 Year Ended December 29, 2012 December 31, 2011 $ 45,804 $ 26,010 $ 5,913 31,091 2,473 1,874 (112) 58 15 4,453 (201) 297 - (17,886) (42,287) 6,756 21,026 53,361 (40,023) 1,778 (11,478) (143) (2,673) 2,814 6,111 11 (43,603) (11,090) - - (46) 2,144 - (1,460) 84 (8,166) 112 - (18,422) (62) (8,726) 7,647 30,461 2,918 1,270 (75) 97 2,131 2,526 (79) (6,890) (32,274) (45,529) 16,281 (2,568) (5,721) (30,344) 18,240 (16,974) (95) (1,183) 2,839 (6,178) (528) (34,223) 11,090 (42,774) 75,000 (266) 2,061 - (871) 281 (7,905) 75 4 36,695 244 (3,005) 10,652 30,804 5,183 1,361 (36) 167 - (1,939) 58 2,490 (6,784) (4,496) (9,964) (11,242) 11,515 (32,932) 1,814 - (175) (2,468) 472 10 289 (32,990) (2,109) (745) - (946) 2,971 (402) (1,413) 80 (7,818) 36 32 (10,314) (259) (32,048) 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) SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid Income taxes paid NON-CASH INVESTING ACTIVITIES Accounts receivable exchanged for notes receivable Notes receivable exchanged for property NON-CASH FINANCING ACTIVITIES: Common stock issued under deferred compensation plans See notes to consolidated financial statements December 28, 2013 Year Ended December 29, 2012 December 31, 2011 $ 4,883 14,427 $ 3,982 16,751 $ 3,654 6,163 $ $ 1,635 3,900 - - - - $ 1,800 1,310 246 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 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- 37 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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: (cid:1) Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges. (cid:1) 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. (cid:1) 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 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 - CONTINUED The following table presents the activity in our accounts receivable allowances (in thousands): Additions Charged to Beginning Costs and Balance Ending Expenses Deductions* Balance Year Ended December 28, 2013: Allowance for possible losses on accounts receivable ........................ $2,550 Year Ended December 29, 2012: Allowance for possible losses on accounts receivable ........................ $2,053 Year Ended December 31, 2011: Allowance for possible losses on accounts receivable ........................ $2,611 $17,114 ($17,604) $2,060 $16,687 ($16,190) $2,550 $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 $4.7 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 Year Ended December 29, 2012: Allowance for possible losses on $3,226 $887 $(3,088) $1,025 $ - $3,226 $ - $3,226 39 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Notes receivable 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 40 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED assumptions with the use of hindsight. Accordingly, the change will be applied prospectively. 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 Insurance Ltd.(“Ardellis”), was Our wholly-owned 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. insurance captive, Ardellis 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 41 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. REVENUE RECOGNITION Revenue is recognized at the time the product is shipped to the customer. Generally, title passes at the time of shipment. In certain circumstances, the customer takes title when the shipment arrives at the destination. However, our shipping process is typically completed the same day. Earnings on construction contracts are reflected in operations using percentage-of- completion accounting, under either 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 recognized 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 Cost and Earnings in Excess of Billings ....................... $6,903 Billings in Excess of Cost and Earnings ....................... 2,858 2012 $4,981 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 - CONTINUED Numerator: Net earnings attributable to controlling interest Adjustment for earnings allocated to non-vested restricted common stock Net earnings for calculating EPS Denominator: Weighted average shares outstanding Adjustment for non-vested restricted common stock Shares for calculating basic EPS Effect of dilutive stock options Shares for calculating diluted EPS Net earnings per share: Basic Diluted December 28, 2013 December 29, 2012 December 31, 2011 $43,082 $23,934 $4,549 (412) $42,670 (210) $23,724 (38) $4,511 19,952 19,800 19,572 (191) 19,761 54 19,815 $2.16 $2.15 (173) 19,627 6 19,633 $1.21 $1.21 (165) 19,407 126 19,533 $0.23 $0.23 No options were excluded from the computation of diluted EPS for 2013 or 2012. Options to purchase 105,000 shares of common stock were not included in the computation of diluted EPS for 2011, because the options' exercise prices were greater than the average market price of the common stock during the period and, therefore, would be antidilutive. USE OF ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We believe our estimates to be reasonable; however, actual results could differ from these estimates. RECENTLY ISSUED ACCOUNTING STANDARDS In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASC Topic 220) (“ASU 2013-02”). ASU 2013-02 amends prior presentation of comprehensive income guidance. ASU 2013- 02 requires that we report, in one place, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. Our adoption of the provisions of ASU 2013-02 in the first quarter of 2013 did not affect our consolidated financial position, results of operations or cash flows. 43 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED B. FAIR VALUE We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value. Assets and liabilities measured at fair value are as follows: December 28, 2013 Prices with Other Observable Inputs (Level 2) Quoted Prices in Active Markets (Level 1) $62 813 586 176 139 1,776 - $1,776 - - - - - - - - December 29, 2012 Prices with Other Observable Inputs (Level 2) Quoted Prices in Active Markets (Level 1) $62 613 500 145 140 1,398 - - - - - - Total $62 613 500 145 140 1,398 Total $62 813 586 176 139 1,776 - $1,776 - $1,460 $1,600 $1,600 $1,600 $3,060 (in thousands) Recurring: Money market funds Mutual funds: Domestic stock funds International stock funds Target funds Bond funds Total mutual funds Non-Recurring: Property, plant and equipment Assets at fair value We maintain money market and mutual funds in our non-qualified deferred compensation plan. These funds are valued at prices quoted in an active exchange market and are included in “Other Assets”. During our 2012 fourth quarter evaluation of the recoverability of our long-lived assets, we identified certain idle facilities which required an impairment loss for the excess of carrying value over the fair value, and as such were stated at fair value. The fair values of these long-lived property, plant and equipment assets are determined based on broker assessments of value, appraisals, or recent offers to acquire 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 unobservable inputs. C. BUSINESS COMBINATIONS We completed the following business combinations in fiscal 2013 and 2012, which were accounted for using the purchase method (in thousands). No business combinations were completed in fiscal 2011. Company Name Acquisition Date Purchase Price Intangible Assets Net Tangible Assets Operating Segment Business Description 44 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SE Panel and Lumber Supply, LLC (“SE Panel”) November 8, 2013 $2,181 (asset purchase) $ - $2,181 Eastern Division Premier Laminating Services, Inc. (“Premier Laminating”) May 31, 2013 $696 (asset purchase) $250 $446 Western Division Millry Mill Company, Inc. (“Millry”) February 28, 2013 $2,323 (asset purchase) $50 $2,273 Eastern Division Custom Caseworks, Inc. (“Custom Caseworks”) December 31, 2012 $6,278 (asset purchase) $2,000 $4,278 Western Division Nepa Pallet and Container Co., Inc. (“Nepa”) November 5, 2012 $16,175 (asset purchase) $1,350 $14,825 Western Division MSR Forest Products, LLC (“MSR”) May 16, 2012 $3,208 (asset purchase) $1,164 $2,044 Eastern Division A distributor of Olympic Panel overlay concrete forming panels and commodity lumber products to the concrete forming and construction industries. Facility is located in South Daytona, FL. SE Panel had annual sales of $5.4 million. A business specialized in environmentally sustainable laminated wooden products. Facility is located in Perris, CA. Premier Laminating had annual sales of $6.2 million. A highly specialized export mill that produces rough dimension boards and lumber. Facility is located in Millry, AL. Millry had annual sales of $4.7 million. A high-precision business-to-business manufacturer of engineered wood products in many commercial markets. Facility is located in Sauk Rapids, MN. Custom Caseworks had annual sales of $7 million. Manufactures pallets, containers and bins for agricultural and industrial customers. Facilities are located in Snohomish, Yakima and Wenatchee, WA. NEPA had trailing twelve month sales of $25 million. Supplies roof trusses and cut-to-size lumber to manufactured housing customers. Facilities are located in Haleyville, AL and Waycross, GA. MSR had annual sales of $10 million. 45 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The intangible assets for each of the acquisitions were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2013. This resulted in a $1.4 million reclassification from goodwill to amortizable intangible asset accounts. At December 28, 2013, the amounts assigned to major intangible classes for the business combinations mentioned above are as follows (in thousands): Non- Compete Agreements $250 50 220 330 - Customer Relationships Goodwill - - - - $1,160 $620 1,020 - 1,164 - Goodwill - Tax Deductible - - $1,160 1,020 1,164 Premier Laminating Millry Custom Caseworks Nepa MSR The business combinations mentioned above were not significant to our operating results individually or in aggregate, and thus pro forma results for 2013 and 2012 are not presented. D. NET LOSS (GAIN) ON DISPOSITION OF ASSETS, EARLY RETIRMENT AND OTHER IMPAIRMENT AND EXIT CHARGES We have long-lived assets that consist of certain vacant land and facilities we closed to better align manufacturing capacity with the prevailing business environment. The fair values were determined based on broker assessments of value, appraisals or recent offers to acquire assets. These and other idle assets were evaluated based on the requirements of ASC 360, which resulted in impairment and other exit charges included in “Net loss (gain) on disposition of assets, early retirement and other impairment and exit charges” for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively. In the second quarter of 2012, we sold certain real estate in Fontana, CA, for approximately $12.1 million and recognized a pre-tax gain of approximately $7.2 million which is included in the Eastern and Western Division segment. In the second quarter of 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 Corporate segment. E. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at 46 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED least annually in accordance with ASC 350, Intangibles-Goodwill and Other. We review the carrying amounts of goodwill and other non-amortizable intangibles by reporting unit to determine if such assets may be impaired. As the carrying amount of these assets are recoverable based upon a discounted cash flow and market approach analysis, no impairment was recognized. The changes in the net carrying amount of goodwill by reporting segment for the years ended December 28, 2013 and December 29, 2012, are as follows (in thousands): Balance as of December 25, 2011 Acquisitions Other Balance as of December 29, 2012 Acquisitions Other Balance as of December 28, 2013 Eastern and Western $123,311 2,514 2,100 127,925 1,160 (330) $128,755 Site-Built $21,720 All Other $9,671 21,720 9,671 $21,720 $9,671 Total $154,702 2,514 2,100 159,316 1,160 (330) $160,146 Indefinite-lived intangible assets totaled $2.3 million as of December 28, 2013 and December 29, 2012. The following amounts were included in other amortizable intangible assets, net as of December 28, 2013 and December 29, 2012 (in thousands): Non-compete agreements Customer relationships Licensing agreements Patents Total 2013 Accumulated Amortization ($514) (6,832) (1,606) (2,609) ($11,561) Assets $1,340 9,480 4,589 3,393 $18,802 Assets $3,730 8,860 4,589 3,250 $20,429 2012 Accumulated Amortization ($3,366) (5,465) (1,147) (2,350) ($12,328) Amortization is computed principally by the straight-line method over the estimated useful lives of the intangible assets as follows: Non-compete agreements .........................5 to 10 years Customer relationship ................................5 to 8 years Licensing agreements ...................................... 10 years Amortization expense of intangibles totaled $2.5 million, $2.9 million and $5.2 million in 2013, 2012 and 2011, respectively. The estimated amortization expense for intangibles for each of the five succeeding fiscal years is as follows (in thousands): 2014 ................................................... 2015 ................................................... $2,184 1,959 47 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2016 ................................................... 2017 ................................................... 2018 ................................................... Thereafter ........................................... Total ................................................... 954 797 535 812 $7,241 F. DEBT On December 17, 2012, we entered into an unsecured Note Purchase Agreement (the "Agreement") under which we issued our 3.89% Series 2012 A Senior Notes, due December 17, 2022, in the aggregate principal amount of $35 million and our 3.98% Series 2012 B Senior Notes, due December 17, 2024, in the aggregate principal amount of $40 million. Proceeds from the sale of the Series A Senior Notes and Series B Senior Notes were used to repay amounts due on our existing Series 2002-A Senior Notes, Tranche B totaling $40 million and our revolving credit facility. On November 14, 2011, we entered into a five-year, $265 million unsecured revolving credit facility, which includes amounts reserved for letters of credit. Cash borrowings are charged interest based upon an index we elect, equal to the U.S. prime rate (in the case of borrowings in US Dollars), the Canadian prime rate as determined by the agent (in the case of borrowings in Canadian Dollars), or the Eurodollar rate (in the case of any borrowing, including foreign currency borrowings), in each case, plus a margin ranging from 110 to 165 basis points, determined based upon our financial performance. We are also charged a facility fee on the entire amount of the lending commitment, at a per annum rate ranging from 15 to 35 basis points, also determined based upon our performance. Outstanding letters of credit extended on our behalf on December 28, 2013 aggregated $26.5 million, which includes approximately $9.8 million related to industrial development revenue bonds. Outstanding letters of credit extended on our behalf on December 29, 2012 aggregated $28.7 million, which includes approximately $9.8 million related to industrial development revenue bonds. Letters of credit have one year terms and include an automatic renewal clause. The letters of credit related to industrial development revenue bonds are charged an annual interest rate ranging from 110 to 165 basis points, based upon our financial performance. The letters of credit related to workers’ compensation are charged an annual interest rate of 75 basis points Long-term debt obligations are summarized as follows on December 28, 2013 and December 29, 2012 (amounts in thousands): 2013 2012 Series 2012 Senior Notes Tranche A, due on December 17, 2022, interest payable semi-annually at 3.89% .............................................. Series 2012 Senior Notes Tranche B, due on December 17, 2024, interest payable semi-annually at 3.98% .............................................. Revolving credit facility totaling $265 million due on November 14, 2016, $35,000 $35,000 40,000 40,000 48 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED interest payable monthly at a floating rate (1.27% on December 29,2012) ... Series 1999 Industrial Development Revenue Bonds, due on August 1, 2029, interest payable monthly at a floating rate (0.19% on December 28, 2013 and 0.35% on December 29, 2012) .............. Series 2000 Industrial Development Revenue Bonds, due on October 1, 2020, interest payable monthly at a floating rate (0.30% on December 28, 2013 and 0.46% on December 29, 2012) .............. Series 2002 Industrial Development Revenue Bonds, due on December 1, 2022, interest payable monthly at a floating rate (0.29% on December 28, 2013 and 0.45% on December 29, 2012) .............. Less current portion .......................................................................................... Long-term portion ............................................................................................ - 11,090 3,300 3,300 2,700 2,700 3,700 84,700 - $ 84,700 3,700 95,790 - $95,790 Financial covenants on the unsecured revolving credit facility and unsecured 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. On December 28, 2013, the principal maturities of long-term debt and capital lease obligations are as follows (in thousands): 2014 .............................. $ - - 2015 .............................. - 2016 .............................. - 2017 .............................. 2017 .............................. - Thereafter ...................... $84,700 $84,700 On December 28, 2013, the estimated fair value of our long-term debt, including the current portion, was $79.9 million. The estimated fair value is based on rates anticipated to be available to us for debt with similar terms and maturities. G. LEASES We lease certain real estate under operating lease agreements with original terms ranging from one to ten years. We are required to pay real estate taxes and other occupancy costs under these leases. Certain leases carry renewal options of five to fifteen years. We also lease motor vehicles, equipment, and an aircraft under operating lease agreements for periods of one to ten years. Future minimum payments under non-cancelable operating leases on December 28, 2013 are as follows (in thousands): 2014 ............................................................................... 2015 ............................................................................... Operating Leases $4,235 2,115 49 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2016 ............................................................................... 2017 ............................................................................... 2018 ............................................................................... Thereafter ....................................................................... Total minimum lease payments ..................................... 1,384 976 884 564 $10,158 Rent expense was approximately $5.2 million, $6.9 million, and $9.6 million in 2013, 2012, and 2011, respectively. H. DEFERRED COMPENSATION We have a program whereby certain executives irrevocably elected to defer receipt of certain compensation in 1985 through 1988. Deferred compensation payments to these executives will commence upon their retirement. We purchased life insurance on such executives, payable to us in amounts which, if assumptions made as to mortality experience, policy dividends, and other factors are realized, will accumulate cash values adequate to reimburse us for all payments for insurance and deferred compensation obligations. In the event cash values are not sufficient to fund such obligations, the program allows us to reduce benefit payments to such amounts as may be funded by accumulated cash values. The deferred compensation liabilities and related cash surrender value of life insurance policies totaled $2.0 million on December 28, 2013 and December 29, 2012 and are included "Other Liabilities" and "Other Assets," respectively. We also maintain a non-qualified deferred compensation plan (the "Plan") for the benefit of senior management employees who may elect to defer a portion of their annual bonus payments and salaries. The Plan provides investment options similar to our 401(k) plan, including our stock. The investment in our stock is funded by the issuance of shares to a Rabbi trust, and may only be distributed in kind. Assets held by the Plan totaled approximately $1.8 million and $1.5 million on December 28, 2013 and December 29, 2012, respectively, and are included in "Other Assets." Related liabilities totaled $8.4 million and $6.7 million on December 28, 2013 and December 29, 2012, respectively, and are included in "Other Liabilities" and "Shareholders' Equity." Assets associated with the Plan are recorded at fair market value. The related liabilities are recorded at fair market value, with the exception of obligations associated with investments in our stock which are recorded at the market value on the date of deferral. I. COMMON STOCK In April 2002, our shareholders approved the 2002 Employee Stock Purchase Plan ("Stock Purchase Plan") to succeed the Employee Stock Purchase Plan originally approved in 1994. In April 2008, our shareholders authorized additional shares to be allocated to the Stock Purchase Plan and extended the term of the Stock Purchase Plan to 2018. The plan allows eligible employees to purchase shares of our stock at a share price equal to 85% of fair market value on the purchase date. We have expensed the fair value of the compensation associated with these awards, which approximates the discount. The amount of expense is nominal. 50 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED In April 1994, our shareholders approved the Directors’ Retainer Stock Plan ("Stock Retainer Plan"). In April 2007, our shareholders authorized additional shares to be distributed pursuant to this plan. The Stock Retainer Plan allows eligible members of the Board of Directors to defer their retainer fees and receive shares of our stock at the time of their retirement, disability or death. The number of shares to be received is equal to the amount of the retainer fee deferred multiplied by 110%, divided by the fair market value of a share of our stock at the time of deferral. The number of shares is increased by the amount of dividends paid on the Company’s common stock. We recognized expense for this plan of $0.4 million in 2013 and $0.5 million in each of 2012 and 2011. On April 15, 2010, our shareholders approved an amended and restated Long Term Stock Incentive Plan (the "LTSIP”). The LTSIP reserves 1,000,000 shares, plus a balance of unused shares from prior plans of approximately 1.6 million shares, plus an annual increase of no more than 200,000 shares per year which may be added on the date of the annual meeting of shareholders. The LTSIP provides for the granting of stock options, reload options, stock appreciation rights, restricted stock, performance shares and other stock-based awards. A summary of the transactions under the stock option plans is as follows: Weighted- Average Exercise Price Per Share Average Remaining Contractual Term Outstanding at December 25, 2010 Exercised Forfeited or expired Outstanding at December 31, 2011 Exercised Forfeited or expired Outstanding at December 29, 2012 Exercised Forfeited or expired Outstanding at December 28, 2013 Vested or expected to vest at December 28, 2013 Exercisable at December 28, 2013 Stock Under Option 359,997 (122,517) (46,146) 191,334 (79,550) (1,678) 110,106 (77,632) - 32,474 (31,000) 1,474 24.04 21.33 20.57 26.60 21.82 21.84 30.13 29.49 - 31.65 31.70 $30.64 Aggregate Intrinsic Value 5,012,758 1,153,067 872,441 970,698 845,915 1,221,004 - 661,674 2.35 1.83 1.64 1.55 0.59 $31,529 The unrecognized compensation expense for stock options is nominal for 2013, 2012 or 2011. A summary of the nonvested restricted stock awards granted under the LTSIP is as follows: Weighted- Average Grant Date Fair Value Unrecognized Compensation Expense (in millions) Weighted- Average Period to Recognize Expense Restricted Awards 51 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Nonvested at December 25, 2010 Granted Vested Forfeited Nonvested at December 31, 2011 Granted Vested Forfeited Nonvested at December 29, 2012 Granted Vested Forfeited Nonvested at December 28, 2013 $219,794 71,950 (113,244) (15,500) 163,000 37,433 (859) (12,965) 186,609 36,481 (9,955) (6,715) $206,420 $28.17 38.19 29.13 30.12 31.75 35.05 29.72 30.35 32.22 40.58 40.58 31.96 $32.52 $2.8 2.30 years 3.4 3.37 years 3.2 2.68 years $2.9 2.00 years Under the Stock Purchase Plan and LTSIP, we recognized share-based compensation expense of $1.9 million, $1.3 million, and $1.4 million and the related total income tax benefits of $0.4 million, $0.5 million, and $0.5 million in 2013, 2012 and 2011, respectively. In 2013, 2012 and 2011, cash received from option exercises and share issuances under our plans was $2.1 million, $2.0 million and $3.0 million, respectively. The actual tax benefit realized in 2013, 2012 and 2011 for the tax deductions from option exercises totaled $0.3 million, $0.8 million and $0.7 million, respectively. On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 2010, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program. We repurchased 144,900 shares under this program in 2010. As of December 28, 2013, the cumulative total authorized shares available for repurchase is approximately 3.0 million shares. J. RETIREMENT PLANS We have a profit sharing and 401(k) plan for the benefit of substantially all of our employees, excluding the employees of certain wholly-owned subsidiaries. Amounts contributed to the plan are made at the discretion of the Board of Directors. We matched 25% of employee contributions in 2013 and 2012, on a discretionary basis, totaling $1.7 million and $1.6 million, respectively. The basis for matching contributions may not exceed the lesser of 6% of the employee's annual compensation or the IRS limitation. On July 14, 2011, the compensation committee of the board of directors approved a retirement plan for officers whereby we will pay, upon retirement, benefits totaling 150% of the officer’s highest base salary in the three years immediately preceding separation from service plus health care benefits for a specified period of time if certain eligibility requirements are met. Approximately $4.0 million and $3.4 million are accrued in “Other Liabilities” for this plan at December 28, 2013 and December 29, 2012, respectively. 52 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED K. INCOME TAXES Income tax provisions for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 are summarized as follows (in thousands): Currently Payable: Federal State and local Foreign Net Deferred: Federal State and local Foreign 2013 2012 2011 $12,683 $5,167 3,381 3,928 19,992 3,696 600 166 4,462 $24,454 2,160 3,123 10,450 3,464 946 194 4,604 $15,054 $453 1,419 3,000 4,872 (1,884) (137) 23 (1,998) $2,874 The components of earnings before income taxes consist of the following: 2013 2012 2011 U.S. Foreign Total $59,334 10,924 $70,258 $31,768 9,296 $41,064 $328 8,459 $8,787 The effective income tax rates are different from the statutory federal income tax rates for the following reasons: Statutory federal income tax rate State and local taxes (net of federal benefits) Effect of noncontrolling owned interest in earnings of partnerships Manufacturing deduction Tax credits, including foreign tax credit Change in valuation allowance Change in uncertain tax positions reserve Foreign rate differential Other permanent differences Other, net Effective income tax rate 2013 35.0% 4.2 (0.3) (2.0) (2.5) - 0.6 0.3 0.6 (1.1) 34.8% 2012 35.0% 5.2 (0.5) (1.6) (1.2) - (1.0) 0.7 1.1 (1.1) 36.6% 2011 34.0% 8.2 (3.0) (1.9) (15.4) - 0.4 0.4 4.9 4.9 32.5% Temporary differences which give rise to deferred income tax assets and (liabilities) on December 28, 2013 and December 29, 2012 are as follows (in thousands): Employee benefits Net operating loss carryforwards Foreign subsidiary capital loss carryforward 2013 $7,698 1,136 628 2012 $7,295 1,780 671 53 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Other tax credits Inventory Reserves on receivables Accrued expenses Other, net Gross deferred income tax assets Valuation allowance Deferred income tax assets Depreciation Intangibles Other, net Deferred income tax liabilities Net deferred income tax liability 2,141 113 1,011 4,470 3,172 20,369 (1,021) 19,348 (21,114) (15,269) (1,522) (37,905) ($18,557) 1,494 838 1,193 2,995 2,673 18,939 (859) 18,080 (18,248) (12,781) (1,010) (32,039) ($13,959) The valuation allowance consists of a capital loss carryforward we have for a wholly- owned subsidiary, Universal Forest Products of Canada, Inc. Based upon the business activity and the nature of the assets of this subsidiary, our ability to realize a future benefit from this loss carryforward is in doubt, therefore we have established an allowance for the entire amount of the future benefit. The loss has an unlimited carryforward and therefore will not expire unless there is a change in control of the subsidiary. L. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES ASC 740, Income Taxes (“ASC 740”) clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, and disclosure requirements. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Gross unrecognized tax benefits beginning of year Increase in tax positions for prior years Increase in tax positions for current year Settlements with taxing authorities Lapse in statute of limitations Gross unrecognized tax benefits end of year 2013 $1,531 230 481 - (319) $1,923 2012 $1,837 1 68 (137) (238) $1,531 2011 $1,253 225 391 - (32) $1,837 Our effective tax rate would have been affected by the unrecognized tax benefits had this amount been recognized as a reduction to income tax expense. We recognized interest and penalties for unrecognized tax benefits in our provision for income taxes. The liability for unrecognized tax benefits included accrued interest and 54 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED penalties of $0.2 million, $0.2 million and $0.3 million at December 28, 2013, December 29, 2012 and December 31, 2011, respectively. We file income tax returns in the United States and in various state, local and foreign jurisdictions. The federal and a majority of state and foreign jurisdictions are no longer subject to income tax examinations for years before 2010. A number of routine state and local examinations are currently ongoing. Due to the potential for resolution of state examinations, and the expiration of various statutes of limitation, and new positions that may be taken, it is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months. M. 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 $3.5 million on December 28, 2013 and December 29, 2012, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable. In 2012, we recorded a $2.3 million loss contingency for a Canadian anti-dumping duty. The Canadian government has imposed retroactive assessments for antidumping and countervailing duties tied to certain extruded aluminum products imported from China. An additional $0.6 million was recorded during 2013. We continue to work with the government to clarify the applicability of these rules to our products. During 2013, we accrued $0.9 million related to anti-dumping duty assessments estimated on plywood and steel nails imported from China. We continue to work with US Customs and Border Protection to mitigate potential charges. This duty is unrelated to the 2013 duty assessment disclosed above. 55 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED We are currently undergoing an unclaimed property audit with the state of Michigan covering the period July 1, 1994 to present. We anticipate that the audit will be completed during 2014 and do expect it to result in a material loss. In addition, on December 28, 2013, we were parties either as plaintiff or a defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims. On December 28, 2013, we had outstanding purchase commitments on capital projects of approximately $4.2 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 December 28, 2013, we had approximately $24.2 million in outstanding payment and performance bonds, which expire during the next two years. In addition, approximately $17.7 million in payment and performance bonds are outstanding for completed projects which are still under warranty. On December 28, 2013 we had outstanding letters of credit totaling $26.5 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below. In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $16.7 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements. We are required to provide irrevocable letters of credit in favor of the bond trustees for all of the industrial development revenue bonds that we have issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our 56 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks. Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 Senior Notes and our revolving credit facility. The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements. Many of our wood treating operations utilize "Subpart W" drip pads, defined as hazardous waste management units by the EPA. The rules regulating drip pads require that the pad be “closed” at the point that it is no longer intended to be used for wood treating operations or to manage hazardous waste. Closure involves identification and disposal of contaminants which are required to be removed from the facility. The cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contaminants, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed. Based on our present knowledge of existing circumstances, it is considered probable that these costs will approximate $0.6 million. As a result, this amount is recorded in other long-term liabilities on December 28, 2013. N. CONSULTING & NON-COMPETE AGREEMENTS On June 20, 2011 we entered into a consulting and non-compete agreement with our former CEO which provides for monthly payments through December 2015 that began upon resignation from Universal Forest Products, Inc. All amounts were fully accrued and vested on the date of resignation. 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. O. SEGMENT REPORTING ASC 280, Segment Reporting (“ASC 280”) defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our operating segments consist of the Eastern, Western, Site-Built, Consumer Products, Pinelli Universal and Distribution divisions. In accordance with ASC 280, due to the similar economic characteristics, nature of products, distribution methods, and customers, we have aggregated our Eastern and Western operating segments into one reportable segment. The Site-Built division is considered a separate reportable segment. Our other divisions do not collectively form a reportable segment because their respective operations are dissimilar and they do not meet the applicable quantitative requirements. 57 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED These operations have been included in the “All Other” column of the table below. The “Corporate” column includes unallocated administrative costs. Eastern and Western Divisions $1,987,751 86,050 404 1,424 18,617 79,419 642,652 23,159 Eastern and Western Divisions $1,635,178 62,806 373 1,667 17,762 60,573 588,567 15,411 Eastern and Western Divisions $1,486,058 77,858 440 3,571 19,036 28,198 520,506 14,870 Site-Built $272,114 15,918 - - 2,284 7,947 103,227 2,310 Site-Built $222,824 20,396 - - 2,054 1,299 102,923 830 Site-Built $183,120 24,907 154 - 2,380 (6,349) 87,160 1,007 2013 All Other $210,583 11,798 - 1,049 4,520 (2,366) 99,464 6,285 2012 All Other $196,931 12,724 51 1,251 4,286 (11,316) 103,309 11,967 2011 All Other $153,158 28,636 - 1,612 3,240 (8,731) 82,993 8,856 Corporate $ - - 4,447 - 5,670 (10,732) 71,644 8,269 Total $2,470,448 113,766 4,851 2,473 31,091 74,268 916,987 40,023 Corporate $ - - 3,629 - 6,359 (6,028) 65,741 2,136 Corporate $ - - 3,138 - 6,148 (1,107) 73,348 8,199 Total $2,054,933 95,926 4,053 2,918 30,461 44,528 860,540 30,344 Total $1,822,336 131,401 3,732 5,183 30,804 12,011 764,007 32,932 Net sales to outside customers Intersegment net sales Interest expense Amortization expense Depreciation expense Segment earnings from operations Segment assets Capital expenditures Net sales to outside customers Intersegment net sales Interest expense Amortization expense Depreciation expense Segment earnings from operations Segment assets Capital expenditures Net sales to outside customers Intersegment net sales Interest expense Amortization expense Depreciation expense Segment earnings from operations Segment assets Capital expenditures In 2013, 2012, and 2011, 17%, 18%, and 23% of net sales, respectively, were to a single customer. 58 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Information regarding principal geographic areas was as follows (in thousands): 2013 2012 2011 Long-Lived Tangible Assets $233,237 16,260 $249,497 Long-Lived Tangible Assets $222,272 17,097 $239,369 Long-Lived Tangible Assets $221,269 16,578 $237,847 Net Sales $1,779,909 42,427 $1,822,336 Net Sales $2,005,740 49,193 $2,054,933 Net Sales $2,410,313 60,135 $2,470,448 United States Foreign Total Sales generated in Canada and Mexico are primarily to customers in the United States of America. The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales. 2013 ............................................................................. 2012 ............................................................................. 2011 ............................................................................. 58.1% 58.7% 58.8% 41.9% 41.3% 41.2% Value-Added Commodity-Based Value-added product sales 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. Commodity-based product sales consist primarily of remanufactured lumber and preservative treated lumber. 59 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table presents, for the periods indicated, our gross sales (in thousands) by major product classification. December 28, 2013 Years Ended December 29, December 31, 2012 2011 Value-Added Sales Trusses – residential, modular and manufactured housing Fencing Decking and railing – composite, wood and other Turn-key framing and installed sales Industrial packaging and components Engineered wood products (eg. LVL; i-joist) Manufactured brite and other lumber Wall panels Outdoor DIY products (eg. stakes; landscape ties) Construction and building materials (eg. door packages; drywall) Lattice – plastic and wood Manufactured brite and other panels Siding, trim and moulding Hardware Manufactured treated lumber Manufactured treated panels Other Total Value-Added Sales Commodity-Based Sales Non-manufactured brite and other lumber Non-manufactured treated lumber Non-manufactured brite and other panels Non-manufactured treated panels Other Total Commodity-Based Sales Total Gross Sales Sales allowances Total Net Sales $238,093 120,765 131,102 159,811 251,224 60,335 64,465 36,908 47,251 162,362 38,959 80,335 29,157 16,295 11,183 5,882 106 1,454,233 421,071 349,156 239,641 30,450 9,361 1,049,679 2,503,912 (33,464) 2,470,448 $185,939 125,887 123,935 137,633 199,595 50,703 56,991 23,584 38,916 125,446 38,005 61,013 24,996 13,350 11,566 6,336 54 1,223,949 348,083 285,929 194,144 25,782 8,118 862,056 2,086,005 (31,072) 2,054,933 $148,715 145,486 126,832 120,317 174,057 41,313 49,355 19,049 40,716 94,768 42,792 39,772 20,088 12,094 11,749 5,418 94 1,092,615 304,070 285,340 144,236 23,386 7,767 764,799 1,857,414 (35,078) $1,822,336 P. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth selected financial information for all of the quarters, each consisting of 13 weeks during the years ended December 28, 2013 and December 29, 2012 (in thousands, except per share data): First Second Third Fourth Net sales Gross profit Net earnings (loss) 2013 $554,494 57,818 5,756 2012 $457,111 53,666 4,386 2013 $738,436 80,216 16,373 2012 $593,693 72,075 18,010 2013 $651,780 78,289 15,015 2012 $533,366 55,227 4,756 2013 $525,738 64,229 8,660 2012 $470,763 44,142 (1,141) 60 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Net earnings (loss) attributable to controlling interest Basic earnings (loss) per share Diluted earnings (loss) per share 5,224 4,155 15,772 17,509 14,091 4,198 7,995 (1,927) 0.26 0.26 0.21 0.21 0.79 0.79 0.88 0.88 0.71 0.71 0.21 0.21 0.40 0.40 (0.10) (0.10) 61 PRICE RANGE OF COMMON STOCK AND DIVIDENDS Our common stock trades on The Nasdaq Stock Market (“NASDAQ”) under the symbol UFPI. The following table sets forth the range of high and low sales prices as reported by NASDAQ. Fiscal 2013 High Low Fourth Quarter ............ 54.40 38.60 Third Quarter ............. 42.98 36.01 Second Quarter........... 45.60 33.23 First Quarter ............... 42.22 37.62 Fiscal 2012 High Low Fourth Quarter ............ 43.04 32.56 Third Quarter ............. 43.36 30.76 Second Quarter........... 39.62 30.92 First Quarter ............... 37.60 29.39 There were approximately 1,200 shareholders of record as of January 31, 2014. We paid dividends on our common stock of $0.20 per share each in June and December 2012 and June 2013. In Dec 2013, we paid dividends of $0.21 per share. We intend to continue with our current semi-annual dividend policy for the foreseeable future. 62 STOCK PERFORMANCE GRAPH The following graph depicts the cumulative total return on our common stock compared to the cumulative total return on the indices for The Nasdaq Stock Market (all U.S. companies) and an industry peer group we selected. The graph assumes an investment of $100 on December 27, 2008, and reinvestment of dividends in all cases. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2013 The companies included in our self-determined industry peer group are as follows: Bluelinx Holdings Inc. Builders FirstSource, Inc. Louisiana-Pacific Corp. The returns of each company included in the self-determined peer group are weighted according to each respective company's stock market capitalization at the beginning of each period presented in the graph above. In determining the members of our peer group, we considered companies who selected UFPI as a member of their peer group, and looked for similarly sized companies or companies that are a good fit with the markets we serve. 63 Directors and Executive Officers BOARD OF DIRECTORS EXECUTIVE OFFICERS William G. Currie Chairman of the Board Universal Forest Products, Inc. Matthew J. Missad Chief Executive Officer Universal Forest Products, Inc. John M. Engler President Business Roundtable John W. Garside President and Treasurer Woodruff Coal Company Gary F. Goode, CPA Chairman Titan Sales & Consulting, LLC Mark A. Murray Co-Chief Executive Officer Meijer, Inc. Louis A. Smith President Smith and Johnson, Attorneys, P.C. Matthew J. Missad Chief Executive Officer Patrick M. Webster President and Chief Operating Officer Michael R. Cole Chief Financial Officer and Treasurer Robert W. Lees President UFP Eastern Division, Inc. Allen T. Peters President UFP Western Division, Inc. Robert D. Coleman Executive Vice President Manufacturing C. Scott Greene Executive Vice President Marketing Thomas W. Rhodes President and Chief Executive Officer TWR Enterprises, Inc. Donald L. James Executive Vice President National Sales Bruce A. Merino Mary E. Tuuk Executive Vice President and Secretary Fifth Third Bankcorp Michael F. Mordell Executive Vice President UFP Purchasing, Inc. 64 Shareholder Information ANNUAL MEETING The annual meeting of Universal Forest Products, Inc. will be held at 8:30 a.m. on April 16, 2014, at 2880 East Beltline Lane NE, Grand Rapids, MI 49525. SHAREHOLDER INFORMATION Shares of the Company's stock are traded under the symbol UFPI on the NASDAQ Stock Market. The Company's 10-K report, filed with the Securities and Exchange Commission, will be provided free of charge to any shareholder upon written request. For more information contact: Investor Relations Department Universal Forest Products, Inc. 2801 East Beltline NE Grand Rapids, MI 49525 Telephone: (616) 364-6161 Web: www.ufpi.com SECURITIES COUNSEL Varnum, LLP Grand Rapids, MI INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP Grand Rapids, MI TRANSFER AGENT/SHAREHOLDER INQUIRIES American Stock Transfer & Trust Company serves as the transfer agent for the Corporation. Inquiries relating to stock transfers, changes of ownership, lost or stolen stock certificates, changes of address, and dividend payments should be addressed to: American Stock Transfer & Trust Co. 59 Maiden Lane New York, NY 10005 Telephone: (718) 921-8210 UNIVERSAL FOREST PRODUCTS®, INC., CORPORATE HEADQUARTERS 2801 East Beltline NE Grand Rapids, MI 49525 Telephone: (616) 364-6161 Facsimile: (616) 364-5558 65 UNIVERSAL FOREST PRODUCTS®, INC., AND ITS AFFILIATES Locations: Ashburn, GA Auburn, NY Auburndale, FL Bay City, MI Belchertown, MA Berlin, NJ Blanchester, OH Burlington, NC Chaffee, NY Chandler, AZ Chesapeake, VA Church Hill, TN Clinton, NY Conway, SC Cordele, GA Durango, Durango, Mexico Eaton, CO Eatonton, GA Elizabeth City, NC Elkhart, IN Folkston, GA Gordon, PA Grandview, TX Grand Rapids, MI Granger, IN Greene, ME Haleyville, AL Hamilton, OH Harrisonville, MO Hillsboro, TX Hudson, NY Hutchinson, MN Janesville, WI Jefferson, GA Lacolle, Quebec, Canada Lafayette, CO Liberty, NC McMinnville, OR Medley, FL Millry, AL Minneota, MN Morristown, TN Moultrie, GA Muscle Shoals, AL Naugatuck, CT New London, NC New Waverly, TX New Windsor, MD Parker, PA Pearisburg, VA Plainville, MA Ponce, Puerto Rico Prairie du Chien, WI Ranson, WV Riverside, CA Saginaw, TX Salina, KS Salisbury, NC San Antonio, TX Sauk Rapids, MN Selma, AL Schertz, TX Sidney, NY Snohomish, WA Stanfield, NC Stockertown, PA Thornton, CA Turlock, CA Union City, GA Warrens, WI Waycross, GA Wenatchee, WA White Bear Lake, MN White Pigeon, MI Windsor, CO Woodburn, OR Yakima, WA 66 

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