UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~June 29,~~September 28, 2019


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

Commission File Number 0-22684

UNIVERSAL FOREST PRODUCTS INC

(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code (616) 364-6161


	NONE
	(Former name or former address, if changed since last report.)

~~DDEN_ROW~~

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ⌧	Accelerated Filer ◻	Non-Accelerated Filer ◻	Smaller Reporting Company ☐
			Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


	Class		Outstanding as of ~~June 29,~~September 28, 2019
	Common stock, $1 par value		~~61,366,680~~61,390,216


Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Stock, no par value	UFPI	The Nasdaq Stock Market, LLC

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION.	Page No.

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at ~~June 29,~~September 28, 2019, December 29, 2018 and ~~June 30,~~September 29, 2018	3

		Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and ~~Six~~Nine Months Ended ~~June 29,~~September 28, 2019 and ~~June 30,~~September 29, 2018	4

		Condensed Consolidated Statements of Shareholders’ Equity for the ~~Six~~Nine Months Ended ~~June 29,~~September 28, 2019 and ~~June 30,~~September 29, 2018	5

		Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June 29,~~September 28, 2019 and ~~June 30,~~September 29, 2018	6

		Notes to Unaudited Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1719

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3033

	Item 4.	Controls and Procedures	3133

PART II.		OTHER INFORMATION

	Item 1.	Legal Proceedings – NONE

	Item 1A.	Risk Factors	3234

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3234

	Item 3.	Defaults upon Senior Securities – NONE

	Item 4.	Mine Safety Disclosures – NONE

	Item 5.	Other Information – NONE	3234

	Item 6.	Exhibits	3335

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


(in thousands, except share data)
	June 29,		December 29,		June 30,		September 28,		December 29,		September 29,
	2019		2018		2018		2019		2018		2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	20,497	$	27,316	$	27,501	$	64,498	$	27,316	$	26,327
Restricted cash		1,024		882		16,758		729		882		1,024
Investments		16,776		14,755		14,493		17,028		14,755		15,809
Accounts receivable, net		483,263		343,450		489,145		474,648		343,450		454,935
Inventories:
Raw materials		258,078		271,871		272,765		239,585		271,871		257,983
Finished goods		270,602		284,349		259,109		239,771		284,349		252,074
Total inventories		528,680		556,220		531,874		479,356		556,220		510,057
Refundable income taxes		—		14,130		2,396		1,550		14,130		9,124
Other current assets		46,868		38,525		30,464		54,295		38,525		29,575
TOTAL CURRENT ASSETS		1,097,108		995,278		1,112,631		1,092,104		995,278		1,046,851
DEFERRED INCOME TAXES		2,341		2,668		2,235		2,284		2,668		2,176
RESTRICTED INVESTMENTS		14,856		13,267		10,950		16,082		13,267		13,117
RIGHT OF USE ASSETS		70,650		—		—		75,436		—		—
OTHER ASSETS		23,328		8,662		7,081		23,085		8,662		7,052
GOODWILL		225,269		224,117		219,595		232,411		224,117		218,631
INDEFINITE-LIVED INTANGIBLE ASSETS		7,359		7,360		7,384		7,339		7,360		7,373
OTHER INTANGIBLE ASSETS, NET		41,176		41,486		36,045		46,877		41,486		35,662
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment		851,565		814,645		791,348		880,274		814,645		807,023
Less accumulated depreciation and amortization		(482,993)		(459,935)		(450,650)		(495,267)		(459,935)		(460,714)
PROPERTY, PLANT AND EQUIPMENT, NET		368,572		354,710		340,698		385,007		354,710		346,309
TOTAL ASSETS		1,850,659		1,647,548		1,736,619		1,880,625		1,647,548		1,677,171
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft	$	24,972	$	27,367	$	33,608	$	—	$	27,367	$	31,115
Accounts payable		189,649		136,901		197,408		180,767		136,901		175,912
Accrued liabilities:
Compensation and benefits		100,409		104,109		88,771		127,500		104,109		99,786
Income taxes		739		—		—
Other		48,746		41,645		50,038		61,463		41,645		51,316
Current portion of lease liability		14,918		—		—		15,566		—		—
Current portion of long-term debt		173		148		542		152		148		149
TOTAL CURRENT LIABILITIES		379,606		310,170		370,367		385,448		310,170		358,278
LONG-TERM DEBT		187,471		202,130		276,274		162,853		202,130		186,539
LEASE LIABILITY		55,875		—		—		59,870		—		—
DEFERRED INCOME TAXES		14,773		15,687		13,856		14,897		15,687		13,701
OTHER LIABILITIES		29,701		30,877		28,399		28,454		30,877		26,929
TOTAL LIABILITIES		667,426		558,864		688,896		651,522		558,864		585,447
SHAREHOLDERS’ EQUITY:
Controlling interest shareholders’ equity:
Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none	$	—	$	—	$	—	$	—	$	—	$	—
Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,366,680, 60,883,749, and 61,632,401		61,367		60,884		61,632
Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,390,216, 60,883,749, and 61,656,181								61,390		60,884		61,656
Additional paid-in capital		192,783		178,540		174,749		189,820		178,540		176,671
Retained earnings		917,704		839,917		800,237		969,564		839,917		841,431
Accumulated other comprehensive income		(4,479)		(5,938)		(4,077)		(5,315)		(5,938)		(3,638)
Total controlling interest shareholders’ equity		1,167,375		1,073,403		1,032,541		1,215,459		1,073,403		1,076,120
Noncontrolling interest		15,858		15,281		15,182		13,644		15,281		15,604
TOTAL SHAREHOLDERS’ EQUITY		1,183,233		1,088,684		1,047,723		1,229,103		1,088,684		1,091,724
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,850,659	$	1,647,548	$	1,736,619	$	1,880,625	$	1,647,548	$	1,677,171

See notes to consolidated condensed financial statements.

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME

(Unaudited)


(in thousands, except per share data)
	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 29,		June 30,		June 29,		June 30,		September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018		2019		2018		2019		2018
NET SALES	$	1,239,817	$	1,294,440	$	2,254,943	$	2,288,297	$	1,163,026	$	1,212,702	$	3,417,969	$	3,500,999
COST OF GOODS SOLD		1,053,091		1,128,751		1,913,950		1,991,719		975,756		1,054,029		2,889,706		3,045,748
GROSS PROFIT		186,726		165,689		340,993		296,578		187,270		158,673		528,263		455,251
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		112,688		104,595		218,631		197,800		115,652		102,704		334,283		300,505
NET (GAIN) LOSS ON DISPOSITION OF ASSETS		(199)		477		(321)		(6,057)
NET (GAIN) LOSS ON DISPOSITION OF ASSETS AND IMPAIRMENT OF ASSETS										1,151		(1,022)		830		(7,079)
EARNINGS FROM OPERATIONS		74,237		60,617		122,683		104,835		70,467		56,991		193,150		161,825
INTEREST EXPENSE		2,407		2,248		4,867		4,025		1,900		1,945		6,767		5,971
INTEREST AND INVESTMENT INCOME		(682)		(181)		(2,275)		(898)		(410)		(211)		(2,685)		(1,109)
NET INTEREST EXPENSE		1,725		2,067		2,592		3,127		1,490		1,734		4,082		4,862
EARNINGS BEFORE INCOME TAXES		72,512		58,550		120,091		101,708		68,977		55,257		189,068		156,963
INCOME TAXES		17,367		13,420		28,944		22,994		16,396		13,189		45,340		36,183
NET EARNINGS		55,145		45,130		91,147		78,714		52,581		42,068		143,728		120,780
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST		(630)		(1,086)		(1,092)		(1,836)		(722)		(849)		(1,814)		(2,684)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST	$	54,515	$	44,044	$	90,055	$	76,878	$	51,859	$	41,219	$	141,914	$	118,096

EARNINGS PER SHARE - BASIC	$	0.88	$	0.71	$	1.46	$	1.24	$	0.84	$	0.67	$	2.30	$	1.91
EARNINGS PER SHARE - DILUTED	$	0.88	$	0.71	$	1.46	$	1.24	$	0.84	$	0.66	$	2.30	$	1.91

OTHER COMPREHENSIVE INCOME:
NET EARNINGS		55,145		45,130		91,147		78,714		52,581		42,068		143,728		120,780
OTHER COMPREHENSIVE GAIN (LOSS)		471		(3,905)		1,844		(4,344)		(1,200)		1,174		644		(3,170)
COMPREHENSIVE INCOME		55,616		41,225		92,991		74,370		51,381		43,242		144,372		117,610
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST		(791)		(119)		(1,477)		(1,713)
LESS COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST										(358)		(1,583)		(1,835)		(3,296)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST	$	54,825	$	41,106	$	91,514	$	72,657	$	51,023	$	41,659	$	142,537	$	114,314

See notes to consolidated condensed financial statements.

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share and per share data)

Controlling Interest Shareholders’ Equity

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Noncontrolling


Stock

Capital

Earnings

Earnings

Interest

Total
Balance at December 30, 2017

$
61,192

$
161,928

$
736,212

$
144

$
14,547

$
974,023
Net earnings





76,878



1,836


78,714
Foreign currency translation adjustment







(3,669)

(123)


(3,792)
Unrealized gain (loss) on investment & foreign currency







(552)



(552)
Distributions to noncontrolling interest









(1,078)

(1,078)
Cash dividends - $0.180 per share





(11,090)





(11,090)
Issuance of 16,917 shares under employee stock plans

17

483








500
Issuance of 346,777 shares under stock grant programs

347

4,990








5,337
Issuance of 132,603 shares under deferred compensation plans

132

(132)








—
Repurchase of 55,784 shares

(56)

(1,763)

(1,819)
Expense associated with share-based compensation arrangements



1,817







1,817
Accrued expense under deferred compensation plans



5,663







5,663
Balance at June 30, 2018

$
61,632

$
174,749

$
800,237

$
(4,077)

$
15,182

$
1,047,723
Balance at December 29, 2018

$
60,884

$
178,540

$
839,917

$
(5,938)

$
15,281

$
1,088,684
Net earnings





90,055



1,092


91,147
Foreign currency translation adjustment







1,133

385


1,518
Unrealized gain (loss) on debt securities







326



326
Distributions to noncontrolling interest









(900)

(900)
Cash dividends - $0.200 per share





(12,271)





(12,271)
Issuance of 18,953 shares under employee stock purchase plans

19

523








542
Issuance of 309,250 shares under stock grant programs

309

5,839


3






6,151
Issuance of 154,728 shares under deferred compensation plans

155

(155)








—
Expense associated with share-based compensation arrangements



2,111







2,111
Accrued expense under deferred compensation plans



5,925







5,925
Balance at June 29, 2019

$
61,367

$
192,783

$
917,704

$
(4,479)

$
15,858

$
1,183,233


(in thousands, except share and per share data)
	Controlling Interest Shareholders’ Equity
							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive		Noncontrolling
	Stock		Capital		Earnings		Earnings		Interest		Total
Balance at December 30, 2017	$	61,192	$	161,928	$	736,212	$	144	$	14,547	$	974,023
Net earnings						118,096				2,684		120,780
Foreign currency translation adjustment								(3,562)		612		(2,950)
Unrealized gain (loss) on investment & foreign currency								(220)				(220)
Distributions to noncontrolling interest										(2,239)		(2,239)
Cash dividends - $0.180 per share						(11,090)						(11,090)
Issuance of 25,449 shares under employee stock plans		25		731								756
Issuance of 348,140 shares under stock grant programs		348		4,911								5,259
Issuance of 147,188 shares under deferred compensation plans		147		(147)								—
Repurchase of 56,484 shares		(56)				(1,787)						(1,843)
Expense associated with share-based compensation arrangements				2,613								2,613
Accrued expense under deferred compensation plans				6,635								6,635
Balance at September 29, 2018	$	61,656	$	176,671	$	841,431	$	(3,638)	$	15,604	$	1,091,724
Balance at December 29, 2018	$	60,884	$	178,540	$	839,917	$	(5,938)	$	15,281	$	1,088,684
Net earnings						141,914				1,814		143,728
Foreign currency translation adjustment								170		21		191
Unrealized gain on debt securities								453				453
Distributions to noncontrolling interest										(1,634)		(1,634)
Additional purchase of noncontrolling interest				(5,015)						(1,838)		(6,853)
Cash dividends - $0.200 per share						(12,270)						(12,270)
Issuance of 26,869 shares under employee stock purchase plans		27		785								812
Issuance of 310,320 shares under stock grant programs		310		5,766		3						6,079
Issuance of 169,278 shares under deferred compensation plans		169		(169)								—
Expense associated with share-based compensation arrangements				2,968								2,968
Accrued expense under deferred compensation plans				6,945								6,945
Balance at September 28, 2019	$	61,390	$	189,820	$	969,564	$	(5,315)	$	13,644	$	1,229,103

See notes to consolidated condensed financial statements.

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


(in thousands)	Six Months Ended				Nine Months Ended
	June 29,		June 30,		September 28,		September 29,
	2019		2018		2019		2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	91,147	$	78,714	$	143,728	$	120,780
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation		29,200		26,144		44,652		40,490
Amortization of intangibles		2,946		2,702		4,690		4,274
Expense associated with share-based and grant compensation arrangements		2,209		1,924		3,105		2,762
Deferred income taxes credits		(536)		(565)		(367)		(583)
Unrealized gain on investments		(1,518)		—		(1,611)		—
Net gain on disposition of assets		(321)		(6,057)
Net (gain) loss on disposition of assets and impairment of assets						830		(7,079)
Changes in:
Accounts receivable		(139,468)		(155,666)		(127,841)		(121,067)
Inventories		28,008		(61,828)		80,178		(39,448)
Accounts payable and cash overdraft		49,947		62,665		14,293		38,611
Accrued liabilities and other		9,334		15,895		36,423		21,361
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		70,948		(36,072)
NET CASH PROVIDED BY OPERATING ACTIVITIES						198,080		60,101
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(42,477)		(54,313)		(66,338)		(74,541)
Proceeds from sale of property, plant and equipment		977		36,724		1,180		37,612
Acquisitions, net of cash received		(5,034)		(37,960)		(38,710)		(38,963)
Purchases of investments		(4,859)		(9,348)		(6,475)		(12,401)
Proceeds from sale of investments		3,667		3,180		4,159		3,298
Other		(10)		(1,352)		199		(620)
NET CASH USED IN INVESTING ACTIVITIES		(47,736)		(63,069)		(105,985)		(85,615)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities		393,434		488,853		421,464		636,798
Repayments under revolving credit facilities		(408,027)		(431,657)		(460,537)		(668,941)
Borrowings of debt		—		1,639		—		927
Repayment of debt		(3,061)		(5,437)		(3,099)		(5,511)
Issuance of long-term debt		—		75,000		—		75,000
Proceeds from issuance of common stock		542		500		812		756
Dividends paid to shareholders		(12,271)		(11,090)		(12,270)		(11,090)
Distributions to noncontrolling interest		(900)		(1,078)		(1,634)		(2,239)
Repurchase of common stock		—		(1,819)		—		(1,843)
Other		28		(71)		41		(55)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(30,255)		114,840		(55,223)		23,802
Effect of exchange rate changes on cash		366		(256)		157		247
NET CHANGE IN CASH AND CASH EQUIVALENTS		(6,677)		15,443		37,029		(1,465)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR		28,198		28,816		28,198		28,816
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	21,521	$	44,259	$	65,227	$	27,351

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period	$	27,316	$	28,339	$	27,316	$	28,339
Restricted cash, beginning of period		882		477		882		477
Cash, cash equivalents, and restricted cash, beginning of period	$	28,198	$	28,816	$	28,198	$	28,816

Cash and cash equivalents, end of period	$	20,497	$	27,501	$	64,498	$	26,327
Restricted cash, end of period		1,024		16,758		729		1,024
Cash, cash equivalents, and restricted cash, end of period	$	21,521	$	44,259	$	65,227	$	27,351

SUPPLEMENTAL INFORMATION:
Interest paid	$	4,658	$	3,889	$	5,287	$	4,955
Income taxes paid		14,569		18,745		33,106		38,675
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		5,041		4,779		5,620		5,312

See notes to consolidated condensed financial statements.

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

NOTES TO UNAUDITED

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. BASIS OF PRESENTATION

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

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 29, 2018.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the ~~June 30,~~September 29, 2018 balances in the accompanying unaudited condensed consolidated ~~condensed~~ balance sheets.

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B. FAIR VALUE

We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value. Assets measured at fair value are as follows:


	June 29, 2019								June 30, 2018							September 28, 2019								September 29, 2018
	Quoted		Prices with						Quoted		Prices with					Quoted		Prices with						Quoted		Prices with
	Prices in		Other			Prices with			Prices in		Other		Prices with			Prices in		Other			Prices with			Prices in		Other		Prices with
	Active		Observable			Unobservable			Active		Observable		Unobservable			Active		Observable			Unobservable			Active		Observable		Unobservable
	Markets		Inputs			Inputs			Markets		Inputs		Inputs			Markets		Inputs			Inputs			Markets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)			(Level 3)	Total		(Level 1)		(Level 2)		(Level 3)	Total		(Level 1)		(Level 2)			(Level 3)	Total		(Level 1)		(Level 2)		(Level 3)	Total
Money market funds	$	57	$	1,051	$	—	$	1,108	$	56	$	1,513	—	$	1,569	$	56,781	$	843	$	—	$	57,624	$	56	$	1,381	—	$	1,437
Fixed income funds		2,709		11,222		—		13,931		2,879		7,968	—		10,847		733		14,566		—		15,299		2,846		9,484	—		12,330
Equity securities		8,651		—		—		8,651		7,892		—	—		7,892		8,840		—		—		8,840		8,203		—	—		8,203
Hedge funds		—		—		1,829		1,829					1,689		1,689
Alternative investments																	—		—		1,895		1,895		—		—	1,725		1,725
Mutual funds:															—															—
Domestic stock funds		2,472		—		—		2,472		413		—	—		413		2,630		—		—		2,630		2,970		—	—		2,970
International stock funds		2,059		—		—		2,059		3,951		—	—		3,951		2,054		—		—		2,054		948		—	—		948
Target funds		266		—		—		266		249		—	—		249		268		—		—		268		255		—	—		255
Bond funds		815		—		—		815		725		—	—		725		825		—		—		825		208		635	—		843
Alternative funds		1,696		—		—		1,696		—		—	—		—		1,531		—		—		1,531		1,364		—	—		1,364
Total mutual funds		7,308		—		—		7,308		5,338		—	—		5,338		7,308		—		—		7,308		5,745		635	—		6,380
Total	$	18,725	$	12,273		1,829	$	32,827	$	16,165	$	9,481	1,689	$	27,335	$	73,662	$	15,409		1,895	$	90,966	$	16,850	$	11,500	1,725	$	30,075
Assets at fair value	$	18,725	$	12,273		1,829	$	32,827	$	16,165	$	9,481	1,689	$	27,335	$	73,662	$	15,409		1,895	$	90,966	$	16,850	$	11,500	1,725	$	30,075

From the assets measured at fair value as of September 28, 2019, listed in the table above, $56.8 million of money market funds are held in Cash and Cash Equivalents, $17.0 million of mutual funds, equity securities, and alternative investments are held in Investments, $1.1 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $15.3 million of fixed income funds and $0.8 million of money markets funds are held in Restricted Investments.

We maintain money market, mutual funds, bonds, and/or stocks in our non-qualified deferred compensation plan, our wholly owned licensed captive insurance company, and assets held in financial institutions. These funds are valued at prices quoted in an active exchange market and are included in “Cash and Cash Equivalents”, “Investments”, “Other Assets”, and “Restricted Investments”. 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.

During 2018, we purchased a private real estate income trust which is valued as a Level 3 asset and is categorized as an “Alternative Investment”.

In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $32.3 million as of September 28, 2019, consisting of domestic and international stocks, alternative investments, and fixed income bonds.

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We maintain money market, mutual funds, bonds, and/or stocks in our non-qualified deferred compensation plan and our wholly owned licensed captive insurance company. These funds are valued at prices quoted in an active exchange market and are included in “Cash and Cash Equivalents”, “Investments”, “Restricted Cash”, and “Restricted Investments”. 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.~~

~~During 2018, we purchased a private real estate income trust which are valued as a Level 3 asset.~~

~~In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $30.7~~ ~~million as of June 29, 2019, consisting of domestic and international stocks, hedge funds, and fixed income bonds.~~

Ardellis’ available for sale investment portfolio, including funds held with the State of Michigan, consists of the following (in thousands):


	June 29,2019						September 28, 2019
			Unrealized						Unrealized
	Cost		Gain/(Loss)		Fair Value		Cost		Gain/(Loss)		Fair Value
Fixed Income	$	13,694	$	237	$	13,931	$	14,969	$	330	$	15,299
Equity		7,531		1,120		8,651		7,584		1,256		8,840
Mutual Funds		6,376		(79)		6,297		6,391		(98)		6,293
Hedge Funds		1,766		63		1,829
Alternative Investments								1,790		105		1,895
Total	$	29,367	$	1,341	$	30,708	$	30,734	$	1,593	$	32,327

Our fixed income investments consist of a blend of US Government and Agency bonds and investment grade corporate bonds with varying maturities. Our equity investments consist of small, mid, and large cap growth and value funds, as well as international equity. Our ~~hedge funds~~alternative investments consist of the private real estate income trust which is valued as a Level 3 asset. The net unrealized gain was ~~$1.3~~$1.6 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of ~~June 29,~~September 28, 2019.

C. REVENUE RECOGNITION

On May 28, 2014, the FASB issued ASU No. 2014-09 (Accounting Standard Codification 606), Revenue from Contracts with Customers. Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company has adopted the requirements of the new standard as of January 1, 2018, and utilized the modified retrospective method of transition which was applied to all contracts.

The Company completed the new revenue recognition standard assessment and determined that there was no material impact to our consolidated financial statements, aside from additional required disclosures, thus no needed adjustment to the opening retained earnings for the annual reporting period.

Within the ~~three~~3 markets (retail, industrial, and construction) that the Company operates, there are a variety of written and oral contracts that are utilized to generate revenue from the sale of wood, wood composite and other products. The transaction price is stated at the purchase order level, which includes shipping and/or freight costs and any applicable governmental authority taxes. The majority of our contracts have a single performance obligation concentrated around the delivery of goods to the carrier, Free On Board (FOB) shipping point. Therefore, revenue is recognized when this performance obligation is satisfied. Generally, title and control passes

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

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.

Certain customer products that we provide require installation by the Company or a 3^rd party. Installation revenue is recognized upon completion, which is typically 2-3 days after receipt. If it is determined to utilize a 3^rd party for installation, the party will act as an agent to the Company until completion of the installation. Installation revenue represents an immaterial share of the Company’s total sales.

The Company utilizes rebates, credits, discounts and/or cash-based incentives with certain customers which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration. The allocation of these costs are applied at the invoice level and recognized in conjunction with

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UNIVERSAL FOREST PRODUCTS, INC.

revenue. Additionally, the volume returns and refunds are estimated on a historical and expected basis which is a reduction of revenue recognized.

Earnings on construction contracts are reflected in operations using over time accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations, which is in accordance with ASC 606 as revenue is recognized when certain performance obligations are performed. Under over time accounting 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 over time accounting using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent.

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

The following table presents our gross revenues disaggregated by revenue source:


	Three Months Ended					Six Months Ended					Three Months Ended					Nine Months Ended
(in thousands)	June 29,		June 30,			June 29,		June 30,			September 28,		September 29,			September 28,		September 29,
Market Classification	2019		2018		% Change	2019		2018		% Change	2019		2018		% Change	2019		2018		% Change
FOB Shipping Point Revenue	$	1,220,844	$	1,281,557	-4.7%	$	2,217,667	$	2,263,248	-2.0%	$	1,140,853	$	1,197,959	-4.8%	$	3,358,520	$	3,461,208	-3.0%
Construction Contract Revenue		43,663		38,811	12.5%		78,445		68,787	14.0%		43,177		35,731	20.8%		121,622		104,518	16.4%
Total Gross Sales		1,264,507		1,320,368	-4.2%		2,296,112		2,332,035	-1.5%		1,184,030		1,233,690	-4.0%		3,480,142		3,565,726	-2.4%
Sales Allowances		(24,690)		(25,928)	-4.8%		(41,169)		(43,738)	-5.9%		(21,004)		(20,988)	0.1%		(62,173)		(64,727)	-3.9%
Total Net Sales	$	1,239,817	$	1,294,440	-4.2%	$	2,254,943	$	2,288,297	-1.5%	$	1,163,026	$	1,212,702	-4.1%	$	3,417,969	$	3,500,999	-2.4%

In the ~~second~~third quarter of 2019, the North and West segments comprise the construction contract revenue above, ~~$28.1~~$29.6 million and ~~$15.6~~$13.6 million, respectively, compared to ~~$26.7~~$24.8 million and ~~$12.1~~$10.9 million, respectively, during the same period of 2018. Similarly, in the first ~~six~~nine months of 2019, the North and West segments comprise the construction contract revenue above, ~~$47.5~~$77.0 million and ~~$30.9~~$44.6 million, respectively, compared to ~~$47.3~~$72.0 million and ~~$21.5~~$32.5 million, respectively, during the same period of 2018. Construction contract revenue is primarily made up of site-built and framing customers.

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

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


	June 29,		December 29,		June 30,		September 28,		December 29,		September 29,
	2019		2018		2018		2019		2018		2018
Cost and Earnings in Excess of Billings	$	6,309	$	6,945	$	5,501	$	6,815	$	6,945	$	5,167
Billings in Excess of Cost and Earnings		5,222		3,245		4,616		6,666		3,245		4,955

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D. EARNINGS PER SHARE

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

Three Months Ended

Six Months Ended


June 29,

June 30,

June 29,

June 30,


2019

2018

2019

2018

Numerator:









Net earnings attributable to controlling interest

$
54,515

$
44,044

$
90,055

$
76,878

Adjustment for earnings allocated to non-vested restricted common stock

(1,384)

(1,018)

(2,245)

(1,728)

Net earnings for calculating EPS

$
53,131

$
43,026

$
87,810

$
75,150

Denominator:









Weighted average shares outstanding

61,691

61,895

61,544

61,770

Adjustment for non-vested restricted common stock

(1,566)

(1,431)

(1,534)

(1,389)

Shares for calculating basic EPS

60,125

60,464

60,010

60,381

Effect of dilutive restricted common stock

23

85

21

80

Shares for calculating diluted EPS

60,148

60,549

60,031

60,461

Net earnings per share:









Basic

$
0.88

$
0.71

$
1.46

$
1.24

Diluted

$
0.88

$
0.71

$
1.46

$
1.24


	Three Months Ended				Nine Months Ended
	September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018
Numerator:
Net earnings attributable to controlling interest	$	51,859	$	41,219	$	141,914	$	118,096
Adjustment for earnings allocated to non-vested restricted common stock		(1,299)		(952)		(3,547)		(2,678)
Net earnings for calculating EPS	$	50,560	$	40,267	$	138,367	$	115,418
Denominator:
Weighted average shares outstanding		61,717		61,954		61,609		61,838
Adjustment for non-vested restricted common stock		(1,546)		(1,430)		(1,540)		(1,402)
Shares for calculating basic EPS		60,171		60,524		60,069		60,436
Effect of dilutive restricted common stock		24		90		22		84
Shares for calculating diluted EPS		60,195		60,614		60,091		60,520
Net earnings per share:
Basic	$	0.84	$	0.67	$	2.30	$	1.91
Diluted	$	0.84	$	0.66	$	2.30	$	1.91

E. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

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

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 wood preservation facilities in Stockertown, PA; Elizabeth City, NC; and Auburndale, FL. In addition, a reserve was established for our facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

On a consolidated basis, we have reserved approximately $2.0 million and $2.5 million on ~~June 29,~~September 28, 2019, and ~~June 30,~~September 29, 2018, respectively, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

In addition, on ~~June 29,~~September 28, 2019, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On ~~June 29,~~September 28, 2019, we had outstanding purchase commitments on commenced capital projects of approximately ~~$48.3~~$46.1 million.

We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We also 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

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longer exists or has the ability to pay. Historically, these costs have not had a material effect on our consolidated financial statements.

As part of our operations, 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 project 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 these bonds. As of ~~June 29,~~September 28, 2019, we had approximately ~~$14.8~~$14.6 million outstanding payment and performance bonds for open projects. We had approximately ~~$10.0~~$9.0 million in payment and performance bonds outstanding for completed projects which are still under warranty.

On ~~June 29,~~September 28, 2019, we had outstanding letters of credit totaling ~~$37.4~~$37.3 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. As of ~~June 29,~~September 28, 2019, we have irrevocable letters of credit outstanding totaling approximately ~~$27.6~~$27.5 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 industrial development revenue bonds that have been issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 and 2018 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.

We did not enter into any new guarantee arrangements during the ~~second~~third quarter of 2019 which would require us to recognize a liability on our balance sheet.

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F. BUSINESS COMBINATIONS

We completed the following acquisitions in 2019 and 2018, which were accounted for using the purchase method in thousands unless otherwise noted:

Net

Company
Acquisition

Intangible
Tangible
Operating
Name
Date
Purchase Price
Assets
Assets
Segment

May 1, 2019
$5,034
cash paid for 100% asset purchase
$
4,046
$
988
North
Wolverine Wood Products, Inc. ("Wolverine")
A manufacturer of wood panel components for furniture, store fixtures and case goods. Wolverine had annual sales of approximately $5 million. The acquisition of Wolverine allows us to expand capacity to produce value-added wood components for customers in the Midwest.

October 22, 2018
$15,115
cash paid for 100% asset purchase
$
8,592
$
6,523
North
Pak-Rite, LTD ("Pak-Rite")
A designer and manufacturer of packaging for high-value products, such as medical, aerospace and automation equipment. Pak-Rite had annual sales of approximately $15 million. The acquisition of Pak-Rite allows us to grow our portfolio of packaging products and our presence in this region.

July 31, 2018
$1,016
cash paid for 100% asset purchase
$
250
$
766
West
The Pallet Place, LLC ("Pallet Place")
A manufacturer and distributor of total packaging solutions in timber, crates, skids, and pallets. Pallet Place had annual sales of approximately $5 million. The acquisition of Pallet Place allows us to increase our industrial business and creates operating leverage by consolidating with another regional operation.

June 1, 2018
$23,866
cash paid for 100% asset purchase
$
12,497
$
11,369
South
North American Container Corporation ("NACC")
A manufacturer of structural packaging products, including steel, corrugated and hardwood packaging. NACC had annual sales of approximately $71 million. The acquisition of NACC allows us to enhance our presence in this region, expand our product offering, and serve customers more cost effectively.

April 9, 2018
$3,890
cash paid for 100% asset purchase
$
2,235
$
1,655
West
Fontana Wood Products ("Fontana")
A manufacturer and distributor of lumber and trusses in the Southern California region. Fontana had annual sales of approximately $12 million. The acquisition of Fontana allows us to expand our manufactured housing business and creates operating leverage by consolidating with another regional operation.

April 3, 2018
$1,347
cash paid for 100% asset purchase
$
1,287
$
60
All Other
Expert Packaging ("Expert")
A manufacturer and distributor of total packaging solutions in timber, crates, pallets, and skids. Expert had annual sales of approximately $3.6 million. The acquisition of Expert allows us to make progress on our goal of becoming a global provider of packaging solutions.

January 23, 2018
$2,942
cash paid for 100% asset purchase
$
850
$
2,092
West
Spinner Wood Products, LLC ("Spinner")
A manufacturer and distributor of agricultural bin and various industrial packaging. Spinner had annual sales of approximately $8 million. The acquisition of Spinner allows us to expand our industrial packaging product offering and creates operating leverage by consolidating with other regional operations.

January 15, 2018
$5,784
cash paid for 100% asset purchase
$
50
$
5,734
North
Great Northern Lumber, LLC
A manufacturer of industrial products as well as serving the concrete forming market in the Chicago area. Great Northern Lumber had annual sales of approximately $25 million. The acquisition of Great Northern Lumber enables us to expand our concrete forming product offering and regional coverage.


					Net
Company	Acquisition		Intangible		Tangible		Operating
Name	Date	Purchase Price	Assets		Assets		Segment
	September 16, 2019	$12,276 cash paid for 100% asset purchase	$	7,318	$	4,958	East
Pallet USA, LLC ("Pallet USA")	A manufacturer and distributor of wood pallet and crate products in the Midwest. Pallet USA had annual sales of approximately $18 million. The acquisition of Pallet USA allows us to expand our industrial product capacity and services in the Midwest.
	August 12, 2019	$15,100 cash paid for 100% asset purchase	$	5,301	$	9,799	West
Northwest Painting, Inc. ("Northwest")	A supplier of pre-painted building materials, including composite lap siding, soffit, panels and trim to the Western U.S. Northwest had annual sales of approximately $14 million. The acquisition of Northwest will expand our capacity to produce value-added siding and trim for customers in the Northwest and Mountain West regions.
	May 1, 2019	$5,034 cash paid for 100% asset purchase	$	4,046	$	988	North
Wolverine Wood Products, Inc. ("Wolverine")	A manufacturer of wood panel components for furniture, store fixtures and case goods. Wolverine had annual sales of approximately $5 million. The acquisition of Wolverine allows us to expand capacity to produce value-added wood components for customers in the Midwest.
	October 22, 2018	$15,115 cash paid for 100% asset purchase	$	8,592	$	6,523	North
Pak-Rite, LTD ("Pak-Rite")	A designer and manufacturer of packaging for high-value products, such as medical, aerospace and automation equipment. Pak-Rite had annual sales of approximately $15 million. The acquisition of Pak-Rite allows us to grow our portfolio of packaging products and our presence in this region.
	July 31, 2018	$1,016 cash paid for 100% asset purchase	$	250	$	766	West
The Pallet Place, LLC ("Pallet Place")	A manufacturer and distributor of total packaging solutions in timber, crates, skids, and pallets. Pallet Place had annual sales of approximately $5 million. The acquisition of Pallet Place allows us to increase our industrial business and creates operating leverage by consolidating with another regional operation.
	June 1, 2018	$23,866 cash paid for 100% asset purchase	$	12,497	$	11,369	South
North American Container Corporation ("NACC")	A manufacturer of structural packaging products, including steel, corrugated and hardwood packaging. NACC had annual sales of approximately $71 million. The acquisition of NACC allows us to enhance our presence in this region, expand our product offering, and serve customers more cost effectively.
	April 9, 2018	$3,890 cash paid for 100% asset purchase	$	2,235	$	1,655	West
Fontana Wood Products ("Fontana")	A manufacturer and distributor of lumber and trusses in the Southern California region. Fontana had annual sales of approximately $12 million. The acquisition of Fontana allows us to expand our manufactured housing business and creates operating leverage by consolidating with another regional operation.

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UNIVERSAL FOREST PRODUCTS, INC.


					Net
Company	Acquisition		Intangible		Tangible		Operating
Name	Date	Purchase Price	Assets		Assets		Segment
	April 3, 2018	$1,347 cash paid for 100% asset purchase	$	1,287	$	60	All Other
Expert Packaging ("Expert")	A manufacturer and distributor of total packaging solutions in timber, crates, pallets, and skids. Expert had annual sales of approximately $3.6 million. The acquisition of Expert allows us to make progress on our goal of becoming a global provider of packaging solutions.
	January 23, 2018	$2,942 cash paid for 100% asset purchase	$	850	$	2,092	West
Spinner Wood Products, LLC ("Spinner")	A manufacturer and distributor of agricultural bin and various industrial packaging. Spinner had annual sales of approximately $8 million. The acquisition of Spinner allows us to expand our industrial packaging product offering and creates operating leverage by consolidating with other regional operations.
	January 15, 2018	$5,784 cash paid for 100% asset purchase	$	50	$	5,734	North
Great Northern Lumber, LLC	A manufacturer of industrial products as well as serving the concrete forming market in the Chicago area. Great Northern Lumber had annual sales of approximately $25 million. The acquisition of Great Northern Lumber enables us to expand our concrete forming product offering and regional coverage.

The intangible assets for each acquisition were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2018 and 2019, except for the Wolverine, ~~acquisition.~~Northwest, and Pallet USA acquisitions. In aggregate, acquisitions completed since the end of ~~June~~September 2018 and not consolidated with other operations contributed approximately ~~$20.3~~

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

$7.9 million and ~~$48.9~~$56.8 million in revenue and a ~~$1.8~~$0.7 million and ~~$3.0~~$3.7 million in operating profit during the ~~second~~third quarter and first ~~six~~nine months of 2019, respectively.

G. SEGMENT REPORTING

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

The Company operates manufacturing, treating and distribution facilities throughout North America, but primarily in the United States. The Company manages the operations of its individual locations primarily through a geographic reporting structure under which each location is included in a region and regions are included in our North, South, West, and International divisions. The exceptions to this geographic reporting and management structure are (a) the Company’s Alternative Materials Division, which offers a portfolio of non-wood products and distributes those products nation-wide (b) the Company’s distribution unit (referred to as UFPD) which distributes a variety of products to the manufactured housing industry nation-wide and is accounted for as a reporting unit within the North segment, and (c) the idX division, which designs, produces, and installs customized in-store environments for customers world-wide.

With respect to the facilities in the ~~north, south,~~North, South, and ~~west~~West segments, these facilities generally supply the ~~three~~3 markets the Company serves nationally - Retail, Industrial, and Construction. Also, substantially all of our facilities support customers in the immediate geographical region surrounding the facility.

Our Alternative Materials, International and idX division have been included in the “All Other” column of the table below. The “Corporate” column includes unallocated administrative costs and certain incentive compensation expense.

During the second quarter and the first six months of 2019, management retrospectively reallocated the related bonus expense from Corporate to their respective segment to better assess the reporting unit’s productivity.

Three Months Ended June 29, 2019


      North

      South

      West

  All Other

  Corporate

      Total

Net sales to outside customers

$
380,242

$
258,802

$
421,273

$
179,500

$
—

$
1,239,817

Intersegment net sales

18,376

20,717

14,690

65,998

—

119,781

Segment operating profit

25,772

14,682

25,422

4,378

3,983

74,237

Three Months Ended June 30, 2018


      North

      South

      West

  All Other

  Corporate

      Total

Net sales to outside customers

$
390,821

$
291,320

$
456,825

$
155,474

$
—

$
1,294,440

Intersegment net sales

18,558

20,675

14,464

61,957

—

115,654

Segment operating profit

17,477

12,941

25,864

3,965

370

60,617

Six Months Ended June 29, 2019


      North

      South

      West

  All Other

  Corporate

      Total
Net sales to outside customers

$
658,575

$
503,043

$
781,370

$
311,955

$
—

$
2,254,943
Intersegment net sales

30,073

39,334

27,620

123,565

—

220,592
Segment operating profit

40,191

29,742

48,676

85

3,989

122,683

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During the third quarter and the first nine months of 2019, management retrospectively reallocated the related bonus expense from Corporate to their respective segment to better assess the reporting unit’s productivity.


	Six Months Ended June 30, 2018												Three Months Ended September 28, 2019
	North		South		West		All Other		Corporate		Total		North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	661,007	$	533,340	$	819,293	$	274,657	$	—	$	2,288,297	$	352,642	$	227,896	$	413,183	$	169,305	$	—	$	1,163,026
Intersegment net sales		30,583		39,323		30,063		124,677		—		224,646		15,928		15,462		12,982		54,512		—		98,884
Segment operating profit		24,712		31,264		44,558		624		3,677		104,835		22,914		12,968		28,949		(505)		6,141		70,467


	Three Months Ended September 29, 2018
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	341,334	$	270,077	$	434,123	$	167,168	$	—	$	1,212,702
Intersegment net sales		15,259		21,360		14,121		56,771		—		107,511
Segment operating profit		12,061		8,304		21,404		5,171		10,051		56,991


	Nine Months Ended September 28, 2019
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	1,011,217	$	730,939	$	1,194,553	$	481,260	$	—	$	3,417,969
Intersegment net sales		46,000		54,796		40,602		177,259		—		318,657
Segment operating profit		63,105		42,710		77,626		(421)		10,130		193,150


	Nine Months Ended September 29, 2018
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	1,002,341	$	803,417	$	1,253,416	$	441,825	$	—	$	3,500,999
Intersegment net sales		45,841		60,683		44,183		181,450		—		332,157
Segment operating profit		36,680		39,489		65,923		5,894		13,839		161,825

Beginning on January 1, 2020, the Company will be re-organized around the markets it serves rather than geography. The business segments will primarily align with the following markets: UFP Retail, UFP Construction and UFP Industrial. We believe this change in segmentation will, among other factors, allow for a more specialized and consistent sales approach among all Universal operations, more efficient use of resources and capital, and quicker introduction of new products and services.

H. INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences. Our effective tax rate was ~~24.0%~~23.8% in the ~~second~~third quarter of 2019 compared to ~~22.9%~~23.9% for same period in 2018. Our effective tax rate was ~~24.1%~~24.0% in the first ~~six~~nine months of 2019 compared to ~~22.6%~~23.1% for the same period in 2018. The increase was primarily due to recording certain discrete tax benefits in 2018 related to state income tax and stock-based compensation deduction, which lowered the effective tax rate last ~~year.~~year and additional non-deductible compensation in 2019.

I. LEASES

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 requires new disclosures that depict the

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UNIVERSAL FOREST PRODUCTS, INC.

amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. Companies are required to adopt the new standard for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The FASB decided to amend certain aspects of its new leasing standard in an attempt to provide a relief from implementation costs. Specifically, entities may elect not to restate their comparative periods in the period of adoption when transitioning to the new standard.

Upon adoption of ASC 842, there was no cumulative effect adjustment to retained earnings or other components of equity.

We elected the package of practical expedients whereby we are not required to 1) reassess whether any expired or existing contracts contain leases, 2) reassess the lease classification of existing leases, and 3) reassess initial direct costs for any existing leases. Additionally, we did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We did elect to account for lease and related non-lease components as a single lease component. We elected to not recognize leases with an original term of 12 months or less as they are not significant to our consolidated balance sheet and income statement. We have assessed and updated our business processes, systems, and controls to ensure compliance with the new accounting and disclosure requirements in accordance with the new standard.

We lease certain real estate under non-cancelable operating lease agreements with typical original terms ranging from one to ten years. We are required to pay real estate taxes and other occupancy costs under certain leases, which are variable in nature and not included in the right of use asset or lease liability. Certain leases carry renewal options of five to fifteen years. We believe that future leases will likely have similar terms. We also lease motor vehicles, equipment, and an aircraft under operating lease agreements for periods of one to ten years. We do not typically enter into leases with residual value guarantees.

We believe finance leases will have no significant impact to our consolidated balance sheet and income statement as of ~~June 29,~~September 28, 2019.

As of ~~June 29,~~September 28, 2019, we have no leases that have not yet commenced that would significantly impact the rights, obligations, and financial position of the Company.

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

The rates implicit in our leases are primarily not readily available. To determine the discount rate used to present value the lease payments, the Company utilized the 5-year treasury note rate plus a blend of rate spreads associated with our revolver and 10-12-year senior ~~notes.~~notes along with estimated spreads based on current market conditions. We feel the determined rate is a reasonable collectively representation of our lease population.

Future minimum payments under non-cancelable operating leases on ~~June 29,~~September 28, 2019 are as follows (in thousands):


	Operating		Operating
	Leases		Leases
2019 (remainder of year)	$	8,959	$	4,389
2020		16,165		16,258
2021		13,996		13,945
2022		11,958		11,511
2023		9,402		8,907
Thereafter		21,743		22,471
Total minimum lease payments	$	82,223	$	77,481
Less present value discount		(11,430)		(2,045)
Total lease liability	$	70,793	$	75,436

Rent expense was approximately ~~$6.3~~$7.0 million and ~~$7.8~~$4.7 million during the ~~second~~third quarter of 2019 and 2018, respectively.

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For comparison purposes, we have included the future minimum payments under non-cancelable operating leases on December 29, 2018, (in thousands):


	Operating
	Leases
	12/29/2018
2019	$	17,242
2020		11,969
2021		9,784
2022		8,346
2023		6,382
Thereafter		22,498
Total minimum lease payments	$	76,221

During the first quarter of 2018, the Company completed a sale and leaseback transaction related to one facility in Medley, Florida. The sale price for the property was approximately $36 million and created a $7 million pre-tax gain, which was entirely recognized in 2018. The Company leased back the facility for two years as it executes its long-term plan for Florida and the Southeast region, however, only a minor portion of the property sold was leased back.

As of ~~June 29,~~September 28, 2019, the weighted average lease term for operating leases is ~~6.96~~7.25 years. Similarly, the weighted average discount rate for operating leases is ~~3.78%~~3.02%.

J. COMMON STOCK

Below is a summary of common stock issuances for the first nine months of 2019 and 2018:


	September 28, 2019
Share Issuance Activity	Common Stock		Average Share Price
Shares issued under the employee stock purchase plan	27	$	35.52

Shares issued under the employee stock gift program	3		33.91
Shares issued under the director retainer stock program	4		35.44
Shares issued under the long term stock incentive plan	211		30.83
Shares issued under the executive stock match grants	109		31.57
Forfeitures	(17)		-
Total shares issued under stock grant programs	310	$	31.17

Shares issued under the deferred compensation plans	169	$	33.20
Total	506	$	32.05

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~~J. COMMON STOCK~~

~~Below is a summary of common stock issuances for the first six months of 2019 and 2018:~~


	September 29, 2018
Share Issuance Activity	Common Stock		Average Share Price
Shares issued under the employee stock purchase plan	25	$	34.97

Shares issued under the employee stock gift program	2		35.91
Shares issued under the director retainer stock program	99		16.91
Shares issued under the long term stock incentive plan	164		34.75
Shares issued under the executive stock match grants	94		32.94
Forfeitures	(10)		-
Total shares issued under stock grant programs	349	$	29.38

Shares issued under the deferred compensation plans	147	$	36.09
Total	521	$	31.50

June 29, 2019
Share Issuance Activity

Common Stock

Average Share Price
Shares issued under the employee stock purchase plan

19

$
33.63

Shares issued under the employee stock gift program

3

31.94
Shares issued under the director retainer stock program

2

33.74
Shares issued under the long term stock incentive plan

211

30.83
Shares issued under the executive stock match grants

109

31.57
Forfeitures

(16)

-
Total shares issued under stock grant programs

309

$
31.11

Shares issued under the deferred compensation plans

155

$
32.58
Total

464

$
31.66

June 30, 2018
Share Issuance Activity

Common Stock

Average Share Price
Shares issued under the employee stock purchase plan

17

$
34.78

Shares issued under the employee stock gift program

2

35.47
Shares issued under the director retainer stock program

97

16.57
Shares issued under the long term stock incentive plan

164

34.75
Shares issued under the executive stock match grants

94

32.94
Forfeitures

(10)

-
Total shares issued under stock grant programs

347

$
29.33

Shares issued under the deferred compensation plans

132

$
36.04
Total

479

$
31.27

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America, Europe, Asia, and in Australia that supply wood, wood composite and other products to three robust markets: retail, industrial, and construction. The Company is headquartered in Grand Rapids, Mich. For more information about Universal Forest Products, Inc., or its affiliated operations, go to www.ufpi.com.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2019.

OVERVIEW

Our results for the ~~second~~third quarter of 2019 were impacted by the following:

●

Our gross sales decreased by 4% compared to the ~~second~~third quarter of 2018, which was comprised of a 5%7% increase in unit sales, offset by ~~a 9%~~an 11% decrease in selling prices primarily due to the commodity lumber market (see Historical Lumber Prices below). Organic growth contributed 4%6% of our unit sales increase, while acquisitions contributed 1%. We experienced favorable unit growth to each of the primary markets we serve.

●

Our operating profits increased ~~over 22%~~nearly 24%, which compares favorably with our 5%7% increase in unit sales. The improvement in our profitability was primarily due to a favorable change in our product mix to sales of more value-added products, ~~and~~strong organic growth combined with leveraging fixed costs, the impact of lower lumber costs on products we sell with fixed selling ~~prices.~~prices and a more favorable trend in lumber prices in 2019 which resulted in a higher profit per unit of products sold with a variable price.

●

Our cash flow from operating activities for the third quarter improved by ~~$107~~$138 million compared to 2018 primarily due ~~in part,~~ to lower lumber prices, which lowered our investment in working capital, and opportunistic buying of inventory in the fourth quarter of 2018 which was sold in 2019.

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HISTORICAL LUMBER PRICES

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


	Random Lengths Composite					Random Lengths Composite
	Average $/MBF					Average $/MBF
	2019			2018		2019			2018
January	$	331		$	449	$	331		$	449
February		370			496		370			496
March		365			505		365			505
April		354			496		354			496
May		346			554		346			554
June		329			572		329			572
July							356			525
August							346			449
September							364			443

Second quarter average	$	343		$	541
Third quarter average						$	355		$	472
Year-to-date average	$	349		$	512	$	351		$	499

Second quarter percentage change		(36.6)	%
Third quarter percentage change							(24.8)	%
Year-to-date percentage change		(31.8)	%				(29.7)	%

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprised approximately 45% and 44% of total lumber purchases through the first ~~six~~nine months of 2019 and ~~2018.~~2018, respectively.


	Southern Yellow Pine					Southern Yellow Pine
	Average $/MBF					Average $/MBF
	2019			2018		2019			2018
January	$	370		$	418	$	370		$	418
February		403			459		403			459
March		408			480		408			480
April		401			483		401			483
May		383			535		383			535
June		344			562		344			562
July							359			512
August							348			449
September							355			440

Second quarter average	$	376		$	527
Third quarter average						$	354		$	467
Year-to-date average	$	385		$	490	$	375		$	482

Second quarter percentage change		(28.7)	%
Third quarter percentage change							(24.2)	%
Year-to-date percentage change		(21.4)	%				(22.2)	%

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UNIVERSAL FOREST PRODUCTS, INC.

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

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 were ~~43.4%~~42.6% and ~~52.8%~~51.5% of our sales in the first ~~six~~nine months of 2019 and 2018, respectively.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

Below is a general description of the primary ways in which our products are priced.

●

Products with fixed selling prices. These products include value-added products such as deck components and fencing sold to retail customers, as well as trusses, wall panels and other components sold to the 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 eventually allow us to re-price our products for changes in lumber costs from our suppliers. We believe our sales of these products are at their highest relative level in our third and fourth quarter.

●

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. We believe our sales of these products are at their highest relative level in our second quarter, primarily due to treated lumber sold to the retail market.

For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices.

The greatest risk associated with changes in the trend of lumber prices is on the following products:

●

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 16% 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.)

●

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.

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


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

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low. In order to more effectively evaluate our profitability in such periods, we believe it is useful to compare our change in units shipped with our changes in costs and profits.

BUSINESS COMBINATIONS

We completed ~~one~~three business ~~acquisition~~acquisitions during the first ~~six~~nine months of 2019 and seven during all of 2018. The annual historical sales attributable to acquisitions completed in the first ~~six~~nine months of 2019 and all of 2018 were approximately $5$37 million and $140 million, respectively. These business combinations were not significant to our quarterly or year-to-date operating results individually or in aggregate and thus pro forma results for 2019 or 2018 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.

RESULTS OF OPERATIONS

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 29,		June 30,		June 29,		June 30,		September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018		2019		2018		2019		2018
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	84.9		87.2		84.9		87.0		83.9		86.9		84.5		87.0
Gross profit	15.1		12.8		15.1		13.0		16.1		13.1		15.5		13.0
Selling, general, and administrative expenses	9.1		8.1		9.7		8.6		9.9		8.5		9.8		8.6
Net gain on disposition and impairment of assets	—		—		—		(0.3)		0.1		(0.1)		—		(0.2)
Earnings from operations	6.0		4.7		5.4		4.6		6.1		4.7		5.7		4.6
Other expense, net	0.1		0.2		0.1		0.1		0.1		0.1		0.1		0.1
Earnings before income taxes	5.8		4.5		5.3		4.4		5.9		4.6		5.5		4.5
Income taxes	1.4		1.0		1.3		1.0		1.4		1.1		1.3		1.0
Net earnings	4.4		3.5		4.0		3.4		4.5		3.5		4.2		3.4
Less net earnings attributable to noncontrolling interest	(0.1)		(0.1)		—		(0.1)		(0.1)		(0.1)		(0.1)		(0.1)
Net earnings attributable to controlling interest	4.4	%	3.4	%	4.0	%	3.4	%	4.5	%	3.4	%	4.2	%	3.4	%

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

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The following table presents, for the periods indicated, the components of our Consolidated Statements of Earnings as a percentage of net sales, adjusted to restate 2019 net sales and cost of goods sold at prior year lumber prices. The restated sales amounts were calculated by applying the decrease in lumber prices in 2019 to 2018 sales levels. By eliminating the “pass-through” impact of higher or lower lumber prices on net sales and cost of goods sold from year to year, we believe this provides an enhanced view of our change in profitability and costs as a percentage of sales. The amount of the adjustment to 2019 net sales was also applied to cost of goods sold so that gross profit remains unchanged.


	Adjusted for Lumber Market Change				Adjusted for Lumber Market Change				Adjusted for Lumber Market Change				Adjusted for Lumber Market Change
	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 29,		June 30,		June 29,		June 30,		September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018		2019		2018		2019		2018
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	86.2		87.2		86.0		87.0		85.6		86.9		85.7		87.0
Gross profit	13.8		12.8		14.0		13.0		14.4		13.1		14.3		13.0
Selling, general, and administrative expenses	8.3		8.1		9.0		8.6		8.9		8.5		9.0		8.6
Net gain on disposition and impairment of assets	—		—		—		(0.3)		0.1		(0.1)		—		(0.2)
Earnings from operations	5.5		4.7		5.0		4.6		5.4		4.7		5.2		4.6
Other expense, net	0.1		0.2		0.1		0.1		0.1		0.1		0.1		0.1
Earnings before income taxes	5.3		4.5		4.9		4.4		5.3		4.6		5.1		4.5
Income taxes	1.3		1.0		1.2		1.0		1.3		1.1		1.2		1.0
Net earnings	4.1		3.5		3.7		3.4		4.1		3.5		3.9		3.4
Less net earnings attributable to noncontrolling interest	—		(0.1)		—		(0.1)		(0.1)		(0.1)		—		(0.1)
Net earnings attributable to controlling interest	4.0	%	3.4	%	3.7	%	3.4	%	4.0	%	3.4	%	3.8	%	3.4	%

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, specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a variety of retail stores, commercial and other structures. Our strategic long-term sales objectives include:

●

Diversifying our end market sales mix by increasing sales of specialty wood and non-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, increasing our market share with independent retailers, and increasing our sales of customized interior fixtures used in a variety of markets.

●

Expanding geographically in our core businesses, domestically and internationally.

●

Increasing sales of "value-added" products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail market, specialty wood packaging, engineered wood components, customized interior fixtures, 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.

●

Maximizing unit sales growth while achieving return on investment goals.

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●

Developing new products and expanding our value-added product offering for existing customers. New ~~product~~products are defined as products that are within a 4-year cycle (launch year plus 3 full fiscal years), generate sales ~~were $175.3~~of at least a $1 million ~~in the second quarter of 2019 compared to $149.1 million during the same period of 2018.~~per year and are still growing. New product sales and gross profits in the third quarter were up 7% and 28%, respectively. New product sales and gross profits for the year-to-date ~~for 2019~~were up 12% and ~~2018 were $290.3 million and $253.3 million,~~25%, respectively. Our goal is to achieve annual new product sales of at least $525 million in 2019.


	New Product Sales by Market					New Product Sales by Market					New Product Sales by Market						New Product Sales by Market
	Three Months Ended					Six Months Ended					Three Months Ended						Nine Months Ended
	June 29,		June 30,		%	June 29,		June 30,		%	September 28,		September 29,		%		September 28,		September 29,		%
Market Classification	2019		2018		Change	2019		2018		Change	2019		2018		Change		2019		2018		Change
Retail	$	129,722		106,623	21.7%	$	204,828	$	175,033	17.0	$	97,022		88,949	9.1	%	$	295,962	$	258,171	14.6	%
Industrial		24,099		21,315	13.1%		46,604		37,839	23.2		25,562		26,364	(3.0)	%		72,797		64,444	13.0	%
Construction		21,527		21,209	1.5%		38,885		40,405	(3.8)		20,302		18,698	8.6	%		60,029		58,959	1.8	%
Total New Product Sales		175,348		149,147	17.6%		290,317		253,277	14.6		142,886		134,011	6.6	%		428,788		381,574	12.4	%

Note: Certain prior year product reclassifications and the change in designation of certain products as “new” resulted in a change in prior year’s sales.

Value-Added and Commodity-Based Sales:

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 29,		June 30,		June 29,		June 30,		September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018		2019		2018		2019		2018
Value-Added	66.9	%	60.1	%	66.7	%	60.8	%	67.6	%	62.1	%	66.9	%	61.2	%
Commodity-Based	33.1	%	39.9	%	33.3	%	39.2	%	32.4	%	37.9	%	33.1	%	38.8	%

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


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(in thousands)	June 29,		June 30,				June 29,		June 30,				September 28,		September 29,				September 28,		September 29,
Market Classification	2019		2018		% Change		2019		2018		% Change		2019		2018		% Change		2019		2018		% Change
Retail	$	520,964	$	544,612	(4.3)	%	$	878,451	$	915,013	(4.0)	%	$	437,092	$	441,916	(1.1)	%	$	1,315,543	$	1,356,920	(3.0)	%
Industrial ⁽¹⁾		357,301		347,258	2.9	%		686,999		632,749	8.6	%		332,537		353,660	(6.0)	%		1,019,535		986,410	3.4	%
Construction ⁽¹⁾		386,242		428,498	(9.9)	%		730,662		784,273	(6.8)	%		414,401		438,115	(5.4)	%		1,145,064		1,222,395	(6.3)	%
Total Gross Sales		1,264,507		1,320,368	(4.2)	%		2,296,112		2,332,035	(1.5)	%		1,184,030		1,233,691	(4.0)	%		3,480,142		3,565,725	(2.4)	%
Sales Allowances		(24,690)		(25,928)	(4.8)	%		(41,169)		(43,738)	(5.9)	%		(21,004)		(20,989)	0.1	%		(62,173)		(64,726)	(3.9)	%
Total Net Sales	$	1,239,817	$	1,294,440	(4.2)	%	$	2,254,943	$	2,288,297	(1.5)	%	$	1,163,026	$	1,212,702	(4.1)	%	$	3,417,969	$	3,500,999	(2.4)	%

Note: During 2019, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

(1)

We reclassified idX from industrial to the construction market to better align idX's core business, design, manufacture, distribution and installation of customized interior fixtures for a variety of retail and commercial structures, with the commercial construction market. The reclassification was recorded retrospectively.

Gross sales in the ~~second~~third quarter of 2019 decreased 4% compared to the same period of 2018, due to a 5%7% increase in unit sales, offset by ~~a 9%~~an 11% decrease in selling prices primarily due to the Lumber Market. Acquired operations contributed 1% to our unit sales growth, and our organic unit sales growth was 4%6%.

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Gross sales in the first ~~six~~nine months of 2019 decreased ~~almost~~ 2% compared to the same period of 2018, due to a 6% increase in unit sales, offset by an 8% decrease in selling prices primarily due to the Lumber Market. Acquired operations contributed 2% to our unit sales growth, and our organic unit sales growth was 4%.

Changes in our gross sales by market are discussed below.

Retail:

Gross sales to the retail market decreased ~~over 4%~~1% in the ~~second~~third quarter of 2019 compared to the same period of 2018, due to a 10% increase in unit sales, offset by an 11% decrease in selling prices. Within this market, sales to our big box customers increased over 5%, and sales to other independent retailers decreased almost 10%. Our organic unit growth was primarily due to an increase in new product sales, market share gains we achieved in our Deckorators product category and an increase in demand with one of our big box customers.

Gross sales to the retail market decreased 3% in the first nine months of 2019 compared to the same period of 2018, due to a 6% increase in ~~unit sales, offset by a 10% decrease in selling prices. Within this market, sales to our big box customers increased over 2%, and sales to other independent retailers decreased almost 16%. Our~~ organic unit growth was 6% primarily due to improved weather in the second quarter, an increase in new product sales, and market share gains we achieved in our Deckorators product category with one of our big box customers.

~~Gross sales to the retail market decreased 4% in the first six months of 2019 compared to the same period of 2018, due to a 5% increase in~~ unit sales, offset by a 9% decrease in selling prices. Within this market, sales to our big box customers increased over 2%3%, and sales to other independent retailers decreased over ~~13%~~12%. Our organic unit growth was ~~5% year to date~~ primarily due to ~~increased consumer demand, new products sales, and~~ the ~~market share gains~~same reasons mentioned above.

Industrial:

Gross sales to the industrial market ~~increased almost 3%~~decreased 6% in the ~~second~~third quarter of 2019 compared to the same period of 2018, resulting from ~~an 7%~~a 4% increase in unit sales, offset by a 4%10% decrease in selling prices. Businesses we acquired since the ~~second~~third quarter of 2018 contributed 6%2% to our growth in unit sales. Our organic unit growth was primarily due to gaining $10 million of sales to new customers in 2019.

Gross sales to the industrial market increased 3% in the first nine months of 2019 compared to the same period of 2018, resulting from an 8% increase in unit sales, offset by a 5% decrease in selling prices. Businesses we acquired since the third quarter of 2018 contributed 5% to our growth in unit sales. Our organic growth in unit sales of 1%3% was primarily due to ~~an increase in sales of new products and~~ increasing our share of business with existing ~~customers. Our organic unit growth was slower than previous quarters as a result of adding fewer new~~ customers and ~~emphasizing profitability~~adding new products and ~~margin requirements over units sales growth which resulted in eliminating less profitable business.~~

Gross sales to the industrial market increased almost 9% in the first six months of 2019 compared to the same period of 2018, resulting from an 11% increase in unit sales, offset by a 2% decrease in selling prices. Businesses we acquired since the second quarter of 2018 contributed 7% to our growth in unit sales. Our organic growth in unit sales of 4% was primarily due our efforts to improve market share, which is continuing to produce positive results.customers.

Construction:

Gross sales to the construction market decreased ~~10%~~5% in the ~~second~~third quarter of 2019 compared to 2018. The decrease was due to ~~a 4%~~an 8% increase in unit sales, offset by a ~~14%~~13% decrease in our selling prices. Our increase in unit sales was driven by a 5%15% increase to commercial construction customers, a 5%6% increase to residential construction customers, and a 1% increase to manufactured housing customers.

By comparison (and based upon various industry publications):

●

Production of HUD-code manufactured homes in ~~April~~July and ~~May~~August 2019, the most recent period reported, was down ~~3.2%~~1.0% compared to the same period of 2018.

●

~~Non-residential construction activity in April and May decreased approximately 1.1% compared to the same period of 2018.~~

●

Housing starts ~~decreased~~increased by approximately ~~5.7%~~4.1% in the period from ~~March~~June through ~~May~~August 2019 (our sales trail housing starts by about a month) compared to the same period of 2018.

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Our ~~ability to achieve~~ growth in ~~excess of the market is~~sales to commercial construction was primarily due to ~~a variety of factors including operating~~idX and adding 5 new customers in ~~regions that have more favorable market conditions.~~our Texas and Great Lakes regions.

Gross sales to the construction market decreased ~~almost 7%~~6% in the first ~~six~~nine months of 2019 compared to 2018. The decrease was due to a 4%5% increase in unit sales, offset by an 11% decrease in our selling prices. Our increase in unit sales was driven by

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an 9%11% increase to commercial construction customers and a 6% increase to residential construction customers, offset by a 2%1% decrease to manufactured housing customers.

COST OF GOODS SOLD AND GROSS PROFIT

Our gross margin increased to ~~15.1%~~16.1% from ~~12.8%~~13.1% comparing the ~~second~~third quarter of 2019 to the same period of 2018 due ~~to the~~to:

●

The lower level of lumber prices (See “Impact of the Lumber Market on Our Operating Results”).

●

An improvement in our sales mix of value-added products.

●

The impact of lower lumber costs on products we sell with fixed selling prices.

●

A more favorable lumber trend in lumber prices in 2019 which resulted in a higher profit per unit on products sold with variable price.

Our ~~Operating Results”) and an improvement in our sales mix of value-added products. Our $21~~$28.6 million, or ~~12.7%~~18.0%, increase in gross profit dollars compares favorably to our 5%7% increase in unit sales during the same period due to the factors above. In addition, acquired operations contributed $3$2.2 million of gross profit in the ~~second~~third quarter of 2019. Excluding acquisitions, our gross profits increased by ~~$18~~$26 million, or ~~10.8%~~16.3%, over the same period ~~last year primarily due to~~and was comprised of the ~~following:~~following changes by market:

●

~~Our gross profit to the retail market~~Retail increased by approximately $7$13 million.

●

~~Our gross profit on sales to the industrial market~~Industrial increased by approximately $5$9 million.

●

Construction declined by approximately $2 million.

●

~~Our gross profit on sales~~The remaining $6 million increase was due to ~~the construction market increased by approximately $5 million.~~a variety of factors including favorable labor and overhead cost variances in certain areas of our business.

Our gross margin increased to ~~15.1%~~15.5% from 13.0% comparing the first ~~six~~nine months of 2019 to the same period of 2018 due to the ~~lower~~ ~~level~~ ~~of lumber prices (See “Impact of the Lumber Market on Our Operating Results”),~~same factors discussed above along with atypical buying opportunities when lumber prices were low in the fourth quarter of 2018, which benefitted our gross profits in Q1 and ~~an improvement in our sales mix of value-added products.~~Q2. Our ~~$44~~$73 million, or ~~15.0%~~16.0%, increase in gross profit dollars compares favorably to our 6% increase in unit sales during the same period due to the factors above. In addition, acquired operations contributed $7$9.5 million of gross profit in the first ~~six~~nine months of 2019. Excluding acquisitions, our gross profits increased by ~~$37~~$64 million, or ~~12.5%~~14%, over the same period last year ~~primarily due to~~was comprised of the ~~following:~~following changes by market:

●

~~Our gross profit to the retail market~~Retail increased by approximately $23 million.

●

Industrial increased by approximately $24 million.

●

Construction increased by approximately $10 million.

●

~~Our gross profit on sales~~The remaining $7 million increase was due to ~~the industrial market increased by approximately $15 million.~~

●

~~Our gross profit on sales to the construction market increased by approximately $13 million.~~a variety of factors including favorable labor and overhead cost variances in certain areas of our business.

Due to several factors, including the variety of species we buy, the variety and number of products we sell, and pricing methodologies, estimating the impact of market-favorable lumber buying, that occurred in the fourth quarter of 2018, on our gross profits is difficult. Nevertheless, we estimate this contributed approximately $6 million to $7 million in additional gross profits in ~~the first quarter of~~ 2019.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (“SG&A”) expenses increased by approximately ~~$8.1~~$13.7 million, or ~~7.7%~~13.4%, in the ~~second~~third quarter of 2019 compared to the same period of 2018, while we reported a 5%7% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled ~~$18.3~~$22.6 million in the ~~second~~third quarter of 2019 compared to ~~$14.5~~$14.3 million in 2018. Acquired operations since the ~~second~~third quarter of 2018 contributed approximately ~~$1.6~~$1.4 million to our year over year increase in SG&A. The remaining increase was primarily due to ~~an increase~~sales incentives, marketing costs, and increases in wages, benefits, and ~~benefits costs~~payroll taxes associated with headcount and rate ~~increases, sales incentives, and marketing costs.~~ increases.

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Selling, general and administrative (“SG&A”) expenses increased by approximately ~~$20.8~~$33.9 million, or ~~10.5%~~11.3%, in the first ~~six~~nine months of 2019 compared to the same period of 2018, while we reported a 6% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled ~~$30.7~~$53.3 million in the first ~~six~~nine months of 2019 compared to ~~$23.6~~$37.9 million in 2018. Acquired operations since the ~~second~~third quarter of 2018 contributed approximately ~~$4.1~~$5.8 million to our year over year increase in SG&A. The remaining increase was primarily due to an

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

increase in wages and benefits costs associated with headcount and rate increases, sales incentives, medical costs, and marketing expenses.

INTEREST, NET

Interest expense was ~~slightly~~flat in the third quarter and higher in the ~~second quarter and the~~ first ~~six~~nine months of 2019 compared to the same periods of 2018. Our year to date interest rate increased as a result of a long-term debt issuance that we completed in June 2018 and used the proceeds to pay down our revolving credit facility. The impact of a higher overall rate was offset by lower debt levels in 2019.

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences. Our effective tax rate was ~~24.0%~~23.8% in the ~~second~~third quarter of 2019 compared to ~~22.9%~~23.9% for same period in 2018. Our effective tax rate was ~~24.1%~~24.0% in the first ~~six~~nine months of 2019 compared to ~~22.6%~~23.1% for the same period in 2018. The increase was primarily due to recording certain discrete tax benefits in 2018 related to state income tax and stock-based compensation deduction, which lowered the effective tax rate last ~~year.~~year, and additional non-deductible compensation in 2019.

SEGMENT REPORTING


	Net Sales								Earnings from Operations								Net Sales								Earnings from Operations
	Three Months Ended								Three Months Ended								Three Months Ended								Three Months Ended
	June 29,		June 30,		$		%		June 29,		June 30,		$		%		September 28,		September 29,		$		%		September 28,		September 29,		$		%
(in thousands)	2019		2018		Change		Change		2019		2018		Change		Change		2019		2018		Change		Change		2019		2018		Change		Change
North	$	380,242	$	390,821	$	(10,579)	(2.7)	%	$	25,772	$	17,477	$	8,295	47.5	%	$	352,642	$	341,334	$	11,308	3.3	%	$	22,914	$	12,061	$	10,853	90.0	%
South		258,802		291,320		(32,518)	(11.2)	%		14,682		12,941		1,741	13.5	%		227,896		270,077		(42,181)	(15.6)	%		12,968		8,304		4,664	56.2	%
West		421,273		456,825		(35,552)	(7.8)	%		25,422		25,864		(442)	(1.7)	%		413,183		434,123		(20,940)	(4.8)	%		28,949		21,404		7,545	35.3	%
All Other		179,500		155,474		24,026	15.5	%		4,378		3,965		413	10.4	%		169,305		167,168		2,137	1.3	%		(505)		5,171		(5,676)	(109.8)	%
Corporate		—		—		—	—			3,983		370		3,613	976.5	%		—		—		—	—			6,141		10,051		(3,910)	(38.9)	%
Total	$	1,239,817	$	1,294,440	$	(54,623)	(4.2)	%	$	74,237	$	60,617	$	13,620	22.5	%	$	1,163,026	$	1,212,702	$	(49,676)	(4.1)	%	$	70,467	$	56,991	$	13,476	23.6	%


	Net Sales								Earnings from Operations								Net Sales								Earnings from Operations
	Six Months Ended								Six Months Ended								Nine Months Ended								Nine Months Ended
	June 29,		June 30,		$		%		June 29,		June 30,		$		%		September 28,		September 29,		$		%		September 28,		September 29,		$		%
(in thousands)	2019		2018		Change		Change		2019		2018		Change		Change		2019		2018		Change		Change		2019		2018		Change		Change
North	$	658,575	$	661,007	$	(2,432)	(0.4)	%	$	40,191	$	24,712	$	15,479	62.6	%	$	1,011,217	$	1,002,341	$	8,876	0.9	%	$	63,105	$	36,680	$	26,425	72.0	%
South		503,043		533,340		(30,297)	(5.7)	%		29,742		31,264		(1,522)	(4.9)	%		730,939		803,417		(72,478)	(9.0)	%		42,710		39,489		3,221	8.2	%
West		781,370		819,293		(37,923)	(4.6)	%		48,676		44,558		4,118	9.2	%		1,194,553		1,253,416		(58,863)	(4.7)	%		77,626		65,923		11,703	17.8	%
All Other		311,955		274,657		37,298	13.6	%		85		624		(539)	(86.4)	%		481,260		441,825		39,435	8.9	%		(421)		5,894		(6,315)	(107.1)	%
Corporate		—		—		—	—			3,989		3,677		312	8.5	%		—		—		—	—			10,130		13,839		(3,709)	(26.8)	%
Total	$	2,254,943	$	2,288,297	$	(33,354)	(1.5)	%	$	122,683	$	104,835	$	17,848	17.0	%	$	3,417,969	$	3,500,999	$	(83,030)	(2.4)	%	$	193,150	$	161,825	$	31,325	19.4	%

(1)	Corporate primarily represents over (under) allocated administrative ~~costs and accrued bonus expense.~~costs.

During the ~~second~~third quarter and the first ~~six~~nine months of 2019, management retrospectively reallocated the related bonus expense from Corporate to their respective segment to better assess the reporting unit’s productivity.

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North


	Net Sales						Net Sales						Net Sales						Net Sales
	North Segment by Market						North Segment by Market						North Segment by Market						North Segment by Market
	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(in thousands)	June 29,		June 30,				June 29,		June 30,				September 28,		September 29,				September 28,		September 29,
Market Classification	2019		2018		% Change		2019		2018		% Change		2019		2018		% Change		2019		2018		% Change
Retail	$	186,038	$	191,260	(2.7)	%	$	285,885	$	286,894	(0.4)	%	$	162,170	$	152,538	6.3	%	$	448,055	$	439,432	2.0	%
Industrial		65,549		56,157	16.7	%		126,956		107,986	17.6	%		60,278		53,281	13.1	%		187,234		161,267	16.1	%
Construction		137,439		152,646	(10.0)	%		259,301		280,061	(7.4)	%		138,015		143,666	(3.9)	%		397,315		423,728	(6.2)	%
Total Gross Sales		389,026		400,063	(2.8)	%		672,142		674,941	(0.4)	%		360,463		349,485	3.1	%		1,032,604		1,024,427	0.8	%
Sales Allowances		(8,784)		(9,242)	(5.0)	%		(13,567)		(13,934)	(2.6)	%		(7,821)		(8,151)	(4.0)	%		(21,387)		(22,086)	(3.2)	%
Total Net Sales	$	380,242	$	390,821	(2.7)	%	$	658,575	$	661,007	(0.4)	%	$	352,642	$	341,334	3.3	%	$	1,011,217	$	1,002,341	0.9	%

Note: During 2019, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

~~Net sales attributable to the North reportable segment decreased in the second quarter of 2019 compared to 2018 primarily due to the impact of a falling lumber market.~~ The increase in sales to the industrial market was primarily due to acquired operations, which contributed ~~$5.0~~$6.0 million to ~~sales, and~~sales. The increase to the retail market was primarily due to an increase in ~~units sold~~demand with one of our big box customers. The decrease to ~~existing customers.~~the construction market was due to a combination of market growth and market share gains, offset by lower lumber prices.

Earnings from operations for the North reportable segment increased in the ~~second~~third quarter of 2019 by ~~$8.3~~$10.9 million, or ~~47.5%~~90.0%, due to a ~~$10.8~~$14.4 million increase in gross profits, offset by a ~~$2.5~~$3.5 million increase in SG&A expenses compared to last year. Gross profits were higher due to increases of ~~$3.0~~$4.8 million, ~~$3.0~~$4.2 million, and ~~$4.8~~$3.5 million within the retail, industrial, and construction markets, ~~respectively.~~respectively, and due to the same factors discussed above.

~~Net~~In spite of lower lumber prices, net sales attributable to the North reportable segment ~~decreased~~increased in the first ~~six~~nine months of 2019 compared to 2018 primarily due to an increase in unit sales to existing retail customers and acquired operations, which contributed $15 million in sales to the ~~lower lumber~~industrial market. The ~~increase in~~decrease to the ~~industrial~~construction market ~~was primarily due to acquired operations, $9.3 million, and the same factors previously discussed. The decrease in the retail and construction markets~~ was due to ~~the same factors previously discussed.~~market growth and market share gains, offset by lower lumber prices.

Earnings from operations for the North reportable segment increased in the first ~~six~~nine months of 2019 by ~~$15.5~~$26.4 million, or ~~62.6%~~72.0%, due to a ~~$20.8~~$33.8 million increase in gross profits, offset by a ~~$5.3~~$7.4 million increase in SG&A expenses compared to last year. Gross profits were higher due to increases of ~~$5.6~~$10.2 million, ~~$6.9~~$11.1 million, and ~~$9.0~~$12.5 million within the retail, industrial, and construction markets, ~~respectively. Opportunistic buying in~~respectively, and was due to the ~~fourth quarter of 2018 also contributed to higher gross profits in the first three months of 2019.~~same factors discussed above.

South


	Net Sales						Net Sales						Net Sales						Net Sales
	South Segment by Market						South Segment by Market						South Segment by Market						South Segment by Market
	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(in thousands)	June 29,		June 30,				June 29,		June 30,				September 28,		September 29,				September 28,		September 29,
Market Classification	2019		2018		% Change		2019		2018		% Change		2019		2018		% Change		2019		2018		% Change
Retail	$	111,684	$	130,851	(14.6)	%	$	212,784	$	246,059	(13.5)	%	$	97,104	$	109,212	(11.1)	%	$	309,888	$	355,271	(12.8)	%
Industrial		105,096		102,834	2.2	%		211,098		183,539	15.0	%		90,291		111,564	(19.1)	%		301,389		295,106	2.1	%
Construction		47,397		63,265	(25.1)	%		89,446		114,629	(22.0)	%		45,251		54,337	(16.7)	%		134,698		168,964	(20.3)	%
Total Gross Sales		264,177		296,950	(11.0)	%		513,328		544,227	(5.7)	%		232,646		275,113	(15.4)	%		745,975		819,341	(9.0)	%
Sales Allowances		(5,375)		(5,630)	(4.5)	%		(10,285)		(10,887)	(5.5)	%		(4,750)		(5,036)	(5.7)	%		(15,036)		(15,924)	(5.6)	%
Total Net Sales	$	258,802	$	291,320	(11.2)	%	$	503,043	$	533,340	(5.7)	%	$	227,896	$	270,077	(15.6)	%	$	730,939	$	803,417	(9.0)	%

Note: During 2019, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

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Net sales attributable to the South reportable segment decreased in the ~~second~~third quarter of 2019 compared to 2018 primarily due to the impact of a lower lumber market. ~~Acquired operations contributed $15.3 million to our growth in industrial sales and~~In addition, sales to our manufactured housing customers in the Southeast and East Central regions decreased in certain commodity product categories.

Earnings from operations for the South reportable segment increased in the ~~second~~third quarter of 2019 by ~~$1.7~~$4.7 million, or ~~13.5%~~56.2%, due to a ~~$4.0~~$6.7 million increase in gross profits, offset by a ~~$2.3~~$2.0 million increase in SG&A expenses compared to last year. Gross profits were higher due to increases of $3.5 million, $3.2 million, and ~~$1.0~~$1 million within the retail, industrial and construction markets, respectively. ~~Acquired acquisitions contributed $0.9 million to our earnings from operations during the second quarter of 2019.~~

Net sales attributable to the South reportable segment decreased in the first ~~six~~nine months of 2019 compared to 2018 primarily due to a lower lumber ~~market. Acquired~~market, offset by acquired operations which contributed ~~$39.0~~$37.0 million ~~to our growth~~ in sales to the industrial market. ~~The decrease in sales to the construction market was due to a $22.1 million decrease, or 26.5%, in~~In addition, sales to our manufactured housing customers in the Southeast and East Central regions declined in certain commodity product categories.

Earnings from operations for the South reportable segment ~~decreased~~increased in the first ~~six~~nine months of 2019 compared to the same period of 2018. Excluding the impact of the gain on the sale of our Medley, FL, plant in 2018, earnings from operations increased ~~$5.5~~$10.2 million due to an increase of ~~$11.1~~$17.8 million in gross profits offset by an increase in SG&A expenses of ~~$5.6~~$7.6 million compared to the same period of 2018. Gross profits were higher due to increases of ~~$9.4~~$3.4 million, $12.0 million, and ~~$1.7~~$2.7 million within the retail, industrial, and construction markets, ~~respectively.~~respectively, and due to the same factors discussed above. Acquired operations contributed $1.6 million to our earnings from operations during the first ~~six~~nine months of 2019.

West


	Net Sales						Net Sales						Net Sales						Net Sales
	West Segment by Market						West Segment by Market						West Segment by Market						West Segment by Market
	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(in thousands)	June 29,		June 30,				June 29,		June 30,				September 28,		September 29,				September 28,		September 29,
Market Classification	2019		2018		% Change		2019		2018		% Change		2019		2018		% Change		2019		2018		% Change
Retail	$	140,844	$	155,558	(9.5)	%	$	244,235	$	266,187	(8.2)	%	$	127,431	$	125,534	1.5	%	$	371,666	$	391,713	(5.1)	%
Industrial		148,668		153,103	(2.9)	%		282,147		280,902	0.4	%		144,935		151,771	(4.5)	%		427,081		432,671	(1.3)	%
Construction		138,469		155,116	(10.7)	%		266,753		284,472	(6.2)	%		147,011		162,981	(9.8)	%		413,765		447,463	(7.5)	%
Total Gross Sales		427,981		463,777	(7.7)	%		793,135		831,561	(4.6)	%		419,377		440,286	(4.7)	%		1,212,512		1,271,847	(4.7)	%
Sales Allowances		(6,708)		(6,952)	(3.5)	%		(11,765)		(12,268)	(4.1)	%		(6,194)		(6,163)	0.5	%		(17,959)		(18,431)	(2.6)	%
Total Net Sales	$	421,273	$	456,825	(7.8)	%	$	781,370	$	819,293	(4.6)	%	$	413,183	$	434,123	(4.8)	%	$	1,194,553	$	1,253,416	(4.7)	%

Note: During 2019, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Net sales attributable to the West reportable segment decreased in the ~~second~~third quarter of 2019 compared to 2018 primarily due to the impact of a lower lumber ~~market.~~market, offset by increases in unit sales to the retail and industrial markets.

Earnings from operations for the West reportable segment ~~decreased~~increased in the ~~second~~third quarter of 2019 by ~~$0.4~~$7.5 million, or ~~1.7%~~35.3%, compared to the same period in 2018 due to a ~~$1.3~~$11.4 million increase in gross profit, offset by a ~~$1.7~~$3.9 million increase in SG&A ~~expenses primarily due to losses of a small framing operation.~~expenses. Gross profits were higher due to ~~an increase~~increases of ~~$3.4 million within the industrial market, offset by decreases of $0.9~~$4.0 million and ~~$1.2~~$5.9 million ~~within~~in the retail and industrial markets, respectively, offset by a $0.5 million decrease in our construction ~~markets, respectively.~~market, as well as the same factors discussed above.

Net sales attributable to the West reportable segment decreased in the first ~~six~~nine months of 2019 compared to 2018 primarily due to the lower lumber ~~market.~~market, offset by increases in unit sales to the retail and industrial markets.

Earnings from operations for the West reportable segment increased in the first nine months of 2019 by $11.7 million, or 17.8%, compared to the same period in 2018 due to a $19.5 million increase in gross profit, offset by a $7.8 million

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Earnings from operations for the West reportable segment increased in the first six months of 2019 by $4.1 million, or 9.2%, compared to the same period in 2018 due to a $8.2 million increase in gross profit, offset by a $4.1 million increase in SG&A ~~expenses due to the same factors previously discussed.~~expenses. Gross profits were higher due to increases of ~~$8.9~~$2.1 million, $13.8 million, and ~~$1.8~~$1.3 million within the retail, industrial and construction markets, respectively, ~~offset by decreases of $2.1 million within~~and due to the ~~retail market.~~same factors discussed above.

All Other


	Net Sales						Net Sales						Net Sales						Net Sales
	All Other Segment by Market						All Other Segment by Market						All Other Segment by Market						All Other Segment by Market
	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(in thousands)	June 29,		June 30,				June 29,		June 30,				September 28,		September 29,				September 28,		September 29,
Market Classification	2019		2018		% Change		2019		2018		% Change		2019		2018		% Change		2019		2018		% Change
Retail	$	82,397	$	66,943	23.1	%	$	135,547	$	115,874	17.0	%	$	50,386	$	54,631	(7.8)	%	$	185,934	$	170,505	9.0	%
Industrial ⁽¹⁾		37,987		35,164	8.0	%		66,797		60,322	10.7	%		37,033		37,045	(0.0)	%		103,831		97,367	6.6	%
Construction ⁽¹⁾		62,938		57,469	9.5	%		115,238		105,110	9.6	%		84,124		77,130	9.1	%		199,362		182,240	9.4	%
Total Gross Sales		183,322		159,576	14.9	%		317,582		281,306	12.9	%		171,543		168,806	1.6	%		489,127		450,112	8.7	%
Sales Allowances & Other		(3,822)		(4,102)	(6.8)	%		(5,627)		(6,649)	(15.4)	%		(2,238)		(1,638)	36.6	%		(7,867)		(8,287)	(5.1)	%
Total Net Sales	$	179,500	$	155,474	15.5	%	$	311,955	$	274,657	13.6	%	$	169,305	$	167,168	1.3	%	$	481,260	$	441,825	8.9	%

Note: During 2019, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

(1)

Our All Other reportable segment consists of our Alternative Materials, International, idX, and certain other segments ~~which~~that are not significant.

Net sales attributable to All Other reportable segments increased in the ~~second~~third quarter of 2019 compared to 2018 primarily due to our sales to the ~~retail~~construction market ~~by our Alternative Materials segment,~~ which ~~won new sales of our Deckorators branded products with one of our big box customers. Our sales to the construction market~~ increased primarily due to our idX business unit.

Earnings from operations for All Other reportable segments ~~increased~~decreased during the ~~second~~third quarter of 2019 by ~~$0.4~~$5.7 million primarily due to ~~profits~~losses realized in our ~~retail~~construction market within our ~~Alternative Materials segment.~~idX business unit.

Net sales attributable to All Other reportable segments increased in the first ~~six~~nine months of 2019 compared to 2018 due to increases in sales to all our markets. The increase in sales to the retail market was primarily due to a ~~$41.4~~$50.3 million increase to one of our big-box customers within our Alternative Materials segment, offset by decreases in sales to certain independent retailers. Our sales to the construction market increased primarily due to our idX business unit.

Earnings from operations for All Other reportable segments decreased during the first ~~six~~nine months of 2019 by ~~$0.5~~$6.3 million primarily due to losses realized in our construction market within our idX business unit and expenses associated with an advertising campaign launched in 2019 for our Deckorators brand within our Alternative Materials segment.

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OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions.

LIQUIDITY AND CAPITAL RESOURCES

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


	Six Months Ended				Nine Months Ended
	June 29,		June 30,		September 28,		September 29,
	2019		2018		2019		2018
Cash provided by (used in) operating activities	$	70,948	$	(36,072)	$	198,080	$	60,101
Cash used in investing activities		(47,736)		(63,069)		(105,985)		(85,615)
Cash (used in) provided by financing activities		(30,255)		114,840		(55,223)		23,802
Effect of exchange rate changes on cash		366		(256)		157		247
Net change in all cash and cash equivalents		(6,677)		15,443		37,029		(1,465)
Cash, cash equivalents, and restricted cash, beginning of period		28,198		28,816		28,198		28,816
Cash, cash equivalents, and restricted cash, end of period	$	21,521	$	44,259	$	65,227	$	27,351

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

Seasonality has a significant impact on our working capital due to our primary selling season which occurs during the period from March to September. Consequently, our working capital increases during our first and second quarters which typically results in negative or modest cash flows from operations during those periods. Conversely, we experience a substantial decrease in working capital once we move beyond our peak selling season which typically results in significant cash flows from operations in our third and fourth quarters.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle increased to 5352 days from 4951 days during the ~~second~~third quarter of 2019 compared to the prior periods.


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 29,		June 30,		June 29,		June 30,		September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018		2019		2018		2019		2018
Days of sales outstanding		33		31		33		32		33		32		33		32
Days supply of inventory		41		38		46		42		40		39		44		41
Days payables outstanding		(21)		(20)		(21)		(21)		(21)		(20)		(21)		(21)
Days in cash cycle		53		49		58		53		52		51		56		52

The increase in days supply of inventory for the first nine months was primarily due to opportunistic buying when lumber prices were low during the fourth quarter of 2018 to improve 2019 gross profits and higher levels of “safety stock” we carried to address transportation challenges and ensure timely deliveries to our customers.

In the first ~~six~~nine months of 2019, our cash provided by operating activities was ~~$70.9~~$198.1 million, which was comprised of net earnings of ~~$91.1~~$143.7 million, ~~and $32.0~~$51.3 million of non-cash expenses, ~~offset by a $52.2~~and $3.1 million ~~seasonal increase~~decrease in working capital since the

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~~capital since the~~ end of December 2018. Comparatively, in the first ~~six~~nine months of 2018, our cash ~~used in~~provided by operating activities was ~~$36.1~~$60.1 million, which was comprised of net earnings of ~~$78.7~~$120.8 million and ~~$24.1~~$39.9 million of non-cash expenses, offset by a ~~$138.9~~$100.5 million seasonal increase in working capital since the end of December 2017. Our ~~seasonal increase~~investment in working capital ~~was lower~~declined in 2019 due to opportunistic inventory buying in the fourth quarter of 2018 of products sold in 2019, and lower lumber prices in ~~2019 helped mitigate the seasonal increase in our working capital.~~2019.

~~Property,~~Acquisitions and purchases of property, plant, and equipment comprised most of our cash used in investing activities during the first ~~six~~ nine months of 2019 and totaled ~~$42.5 million. Acquisitions comprised approximately $5.0~~$38.7 million ~~during the first six months of 2019.~~and $66 million, respectively. Outstanding purchase commitments on existing capital projects totaled approximately ~~$48.3~~$46.1 million on ~~June 29,~~September 28, 2019. We currently plan to spend up to $100 million for the year on capital expenditures. ~~Major anticipated expenditures~~Notable areas of spending include projects to replace our capacity in South Florida resulting from the sale of our Medley facility last year, expand capacity and enhance the productivity of our Deckorators decking product line due to favorable demand trends and share gains we’ve achieved, ~~and~~as well as several projects to expand manufacturing capacity to serve industrial customers and achieve efficiencies through automation. We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year. The sale and purchase of investments totaling ~~$4.9~~$4.2 million and ~~$3.7~~$6.5 million, respectively, are due to investment activity in our captive insurance subsidiary. Comparatively, acquisitions and purchases of property, plant, and equipment ~~comprised most of our cash used in investing activities~~ during the first ~~six~~nine months of 2018 ~~and~~ totaled ~~$38.0~~$39.0 million and ~~$54.3~~$74.5 million, ~~respectively. Proceeds~~respectively, and proceeds from the sale of our Medley, FL, plant provided approximately $36 million in net cash proceeds.

Cash flows from financing activities primarily consisted of net repayments under our revolving credit facility of approximately ~~$14.6~~$39.1 million. Additionally, we paid a semi-annual dividend totaling $12.3 million or $0.20 per share.

On ~~June 29,~~September 28, 2019, we had ~~$37.7~~$3.3 million outstanding on our $375 million revolving credit ~~facility. The amount outstanding on the revolving credit~~ facility, ~~includes letters of credit totaling approximately $9.8 million on June 29, 2019; as a result,~~and we had approximately ~~$337.3~~$361.9 million in remaining availability ~~on our revolver~~ after considering $9.8 million in outstanding letters of credit. Additionally, we have $150 million in availability under an amended “shelf agreement” for long term debt with a current lender after considering the second quarter 2018 issuance of long-term Senior Notes. Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were in compliance with all our covenant requirements on ~~June 29,~~September 28, 2019.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, “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. There have been no material changes in our policies or estimates since December 29, 2018.

On an ongoing basis, we evaluate long-lived assets for indicators of impairment. Although there were no indicators for impairment for any of our reporting units, we continue to monitor the results of the idX reporting unit. They have performed below expectations year-to-date through September; however, management believes the long-term projection for idX is still reasonable and attainable. While the risk of impairment exists, management does not feel an impairment is necessary. Should the Company’s future analysis indicate a significant change in any of the triggering events for this reporting unit, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company’s future goodwill impairment testing will not result in a charge to earnings.

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UNIVERSAL FOREST PRODUCTS, INC.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect

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~~UNIVERSAL FOREST PRODUCTS, INC.~~

future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.

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

Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in their local currency, which is their functional currency, compared to the U.S. ~~dollar.~~Dollar. Additionally, certain of our operations enter into transactions that will be settled in a currency other than the U.S. Dollar. We entered into forward foreign exchange rate contracts in 2018, which have since expired, and may enter into further forward contracts in the future associated with mitigating the foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended ~~June 29,~~September 28, 2019 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)

Changes in Internal Controls. During the quarter ended ~~June 29,~~September 28, 2019, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors.

None.

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

(a)

None.

(b)

None.

(c)

Issuer purchases of equity securities.


Fiscal Month	(a)	(b)	(c)	(d)
~~March 31~~June 30 - ~~April 4,~~August 3, 2019	—	—	—	1,860,354
~~April 5~~August 4 - ~~June 1,~~August 31, 2019	—	—	—	1,860,354
~~June 2~~September 1 - ~~29,~~28, 2019	—	—	—	1,860,354

(a)	Total number of shares purchased.

(b)	Average price paid per share.

(c)	Total number of shares purchased as part of publicly announced plans or programs.

(d)	Maximum number of shares that may yet be purchased under the plans or programs.

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. The total number of remaining shares that may be repurchased under the program is approximately 1.9 million.

Item 5. Other Information.

None.

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PART II. OTHER INFORMATION

Item 6. Exhibits.

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


31	Certifications.

	(a)	Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

	(b)	Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32	Certifications.

	(a)	Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

	(b)	Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

101	Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language).

	(INS)	iXBRL Instance Document.

	(SCH)	iXBRL Schema Document.

	(CAL)	iXBRL Taxonomy Extension Calculation Linkbase Document.

	(LAB)	iXBRL Taxonomy Extension Label Linkbase Document.

	(PRE)	iXBRL Taxonomy Extension Presentation Linkbase Document.

	(DEF)	iXBRL Taxonomy Extension Definition Linkbase Document.

104	Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).

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SIGNATURES

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

	UNIVERSAL FOREST PRODUCTS, INC.

Date: ~~August 7,~~October 30, 2019	By:	/s/ Matthew J. Missad
	Matthew J. Missad,
	Chief Executive Officer and Principal Executive Officer


Date: ~~August 7,~~October 30, 2019	By:	/s/ Michael R. Cole
	Michael R. Cole,
	Chief Financial Officer,
	Principal Financial Officer and
	Principal Accounting Officer

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	Three Months Ended June 29, 2019
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	380,242	$	258,802	$	421,273	$	179,500	$	—	$	1,239,817
Intersegment net sales		18,376		20,717		14,690		65,998		—		119,781
Segment operating profit		25,772		14,682		25,422		4,378		3,983		74,237


	Three Months Ended June 30, 2018
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	390,821	$	291,320	$	456,825	$	155,474	$	—	$	1,294,440
Intersegment net sales		18,558		20,675		14,464		61,957		—		115,654
Segment operating profit		17,477		12,941		25,864		3,965		370		60,617


	Six Months Ended June 29, 2019
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	658,575	$	503,043	$	781,370	$	311,955	$	—	$	2,254,943
Intersegment net sales		30,073		39,334		27,620		123,565		—		220,592
Segment operating profit		40,191		29,742		48,676		85		3,989		122,683