PART I
Item 1. Business.
General Development of the Business
.
Universal Forest Products, Inc. (the "Company") is a holding company with subsidiaries throughout North America, Australia, Europe, and Asia that supply wood, wood composite and other products to three primary markets: retail, industrial, and construction. The Company is headquartered in Grand Rapids, Mich., and was founded in 1955. For more information about Universal Forest Products, Inc., or its affiliated operations, go to www.ufpi.com.
Information relating to current developments in our business is incorporated by reference from our Annual Report to Shareholders for the fiscal year ended December 31, 2016 ("2016 Annual Report") under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." Selected portions of the 2016 Annual Report are filed as Exhibit 13 with this Form 10-K Report.
Financial Information About Segments.
ASC 280,
Segment Reporting
(“ASC 280”) defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Our operating segments consist of our North, South, West, Alternative Materials, International, idX, and Corporate divisions. Separate financial information about our segments is incorporated by reference from Note N of the Consolidated Financial Statements presented under Item 8 herein.
Narrative Description of Business
.
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. Each of our markets, Retail, Industrial and Construction, are discussed in the paragraphs which follow. Our locations generally serve customers representing multiple markets.
Retail
. The customers comprising this market are national home center retailers, retail-oriented regional lumberyards and contractor-oriented lumberyards. Generally, terms of sale are established for annual or bi-annual periods, and orders are placed with our regional facilities in accordance with established terms. One customer, The Home Depot, accounted for approximately 20% of our total sales in fiscal 2016, 19% in 2015, and 17% in 2014.
We currently supply customers in this market from many of our locations. These regional facilities are able to supply mixed truckloads of products which can be delivered to customers with rapid turnaround from receipt of an order. Freight costs are a factor in the ability to competitively service this market, especially with treated wood products because of their heavier weight. The close proximity of our regional facilities to the various outlets of these customers is a factor when negotiating annual sales programs.
The products offered to customers in this market include dimensional lumber (both preserved and unpreserved) and various "value-added products," some of which are sold under our trademarks. In addition to our conventional lumber products, we offer a large portfolio of outdoor living products, including wood composite decking and decorative lawn and garden products. We also sell engineered wood components to this market, which include roof trusses, wall panels and engineered floor systems (see "Construction Market" below).
We are not aware of any competitor that currently manufactures, treats and distributes a full line of both value-added and commodity products on a national basis. We face competition on individual products from several different producers, but the majority of these competitors tend to be regional in their efforts and/or do not offer a full line of outdoor lumber products. We believe the breadth of our product offering, geographic dispersion, close proximity of our plants to core customers, purchasing and manufacturing expertise, and service capabilities provide competitive advantages in this market.
Industrial Market
. We define our industrial market as manufacturers and agricultural customers who use pallets, specialty crates, wooden boxes, and other containers used for packaging, shipping and material handling purposes, as well as various other products,
used in a variety of different applications. Many of the products sold to this market may be produced from the by-product of other manufactured products, thereby allowing us to increase our raw material yields while expanding our business. Competition is fragmented and includes virtually every supplier of lumber convenient to the customer. We service this market with our dedicated local sales teams and through national sales support efforts.
Our industrial market also includes the results of operations of idX Holdings, Inc. ("idX"). idX is a designer, manufacturer and installer of highly customized in-store environments that are used in a range of end markets. We acquired idX on September 16, 2016.
Construction Market
. Our construction market is made up of customers in three submarkets - manufactured housing, residential construction and commercial construction.
The customers comprising the manufactured housing market are producers of mobile, modular and prefabricated homes and recreational vehicles (RV). Products sold to customers in this market consist primarily of roof trusses, lumber cut and shaped to the customer's specification, plywood, oriented strand board and dimensional lumber, all intended for use in the construction of manufactured housing. Sales are made by personnel located at each regional facility based on customer orders. Our principal competitive advantages include our product knowledge, the strength of our engineering support services, the close proximity of our regional facilities to our customers, our purchasing and manufacturing expertise and our ability to provide national sales programs to certain customers. These factors have enabled us to accumulate significant market share in the products we supply. We also distribute products such as siding, electrical and plumbing products to manufactured housing and RV customers.
The customers comprising the residential construction market are primarily large-volume, multi-tract builders and smaller volume custom builders. We also supply builders engaged in multi-family and commercial construction. In addition, we supply wood forms and related products to set or form concrete for various structures including large parking garages, stadiums and bridges. Generally, terms of sale and pricing are determined based on contracts we entered into with our customers.
We currently supply customers in these markets from manufacturing facilities located in many different states. These facilities manufacture various engineered wood components used to frame residential or light commercial projects, including roof and floor trusses, wall panels, I-joists and lumber packages. Freight costs are a factor in the ability to competitively service this market due to the space requirements of these products on each truckload. We also provide framing services for customers in certain regional markets, in which we erect the wood structure. We believe that providing a comprehensive turn-key package, including installation, provides a competitive advantage.
Competition in this market is primarily fragmented, but we do compete with a small number of national and regional retail contractor yards who also manufacture components and provide framing services, as well as regional manufacturers of components. We believe our primary competitive advantages relate to the engineering and design capabilities of our regional staff, purchasing and manufacturing expertise, product quality, timeliness of delivery, and financial strength.
Suppliers
. We are one of the largest domestic buyers of solid sawn softwood lumber from primary producers (lumber mills). We use primarily southern yellow pine in our pressure-treating operations and site-built component plants in the Southeastern United States, which we obtain from mills located throughout the states comprising the Sunbelt. Other species we use include "spruce-pine-fir" from various provinces in Canada; hemlock, douglas fir and cedar from the Pacific Northwest; inland species of pine, plantation grown radiata and southern yellow pines from South America; and European spruce. There are numerous primary producers for all varieties we use, and we are not dependent on any particular source of supply. Our financial resources and size, in combination with our strong sales network and ability to remanufacture lumber, enable us to purchase a large percentage of a primary producer's output (as opposed to only those dimensions or grades in immediate need), thereby lowering our average cost of raw materials and allowing us to obtain programs such as consigned inventory. We believe this represents a competitive advantage.
Intellectual Property
. We own several patents and have several patents pending on technologies related to our business. In addition, we own numerous registered trademarks and claim common law trademark rights to several others. As we develop proprietary brands, we may pursue registration or other formal protection. While we believe our patent and trademark rights are valuable, the loss of a patent or any trademark would not be likely to have a material adverse impact on our competitive position.
Backlog
. Due to the nature of our retail and industrial businesses, backlog information is not meaningful. The maximum time between receipt of a firm order and shipment does not usually exceed a few days. Therefore, we would not normally have a backlog of unfilled orders in a material amount. The relationships with our major customers are such that we are either the exclusive supplier of certain products and/or certain geographic areas, or the designated source for a specified portion of the customer's requirements. In such cases, either we are able to forecast the customer's requirements or the customer may provide an estimate
of its future needs. In neither case, however, will we receive firm orders until just prior to the anticipated delivery dates for the products in question.
On December 31, 2016 and December 26, 2015, we estimate that backlog orders associated with our residential and commercial construction business approximated $62.6 million and $65.6 million, respectively. With respect to the former, we expect that these orders will be primarily filled within the next fiscal year; however, it is possible that some orders could be canceled.
Environmental
. Information required for environmental disclosures is incorporated by reference from Note M of the Consolidated Financial Statements presented under Item 8 herein.
Seasonality.
Information required for seasonality disclosures is incorporated by reference from Item 1A. Risk Factors under the caption “
Seasonality and weather conditions could adversely affect us
.”
Employees
. On December 31, 2016, we had approximately 9,300 employees.
Financial Information About Geographic Areas.
The dominant portion of our operations and sales occur in the United States. Separate financial information about foreign and domestic operations and export sales is incorporated by reference from Note N "Segment Reporting" of the Consolidated Financial Statements presented under Item 8 herein.
Available Information.
Our Internet address is www.ufpi.com. Through our Internet website under "Financial Information" in the Investor Relations section, we make available free of charge, as soon as reasonably practical after such information has been filed with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Also available through our Internet website under "Corporate Governance" in the Investor Relations section is our Code of Ethics for Senior Financial Officers.
Reports to Security Holders.
Not applicable.
Enforceability of Civil Liabilities Against Foreign Persons.
Not applicable.
Item 1A. Risk Factors.
We are subject to regional, national and global economic conditions.
A decline in economic conditions throughout the United States could reduce demand for our products.
We may be impacted by a decline in the value of the U.S. dollar.
We purchase a variety of raw materials and finished goods from sources around the world and export certain products. The impact of a change in U.S. dollar exchange rates would impact our import purchases and export sales, which totaled $97.4 and $104.5 million, respectively, in 2016.
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 and 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, cost of materials, and gross profits. Our products are generally priced to the customer based on a quoted, fixed selling price or "indexed" to the Lumber Market with a fixed dollar adder to cover conversion costs and profit. The impact on our profitability from changes in lumber prices is discussed in the "Historical Lumber Prices" and "Impact of the Lumber Market on Our Operating Results" captions of our Management's Discussion and Analysis of Financial Condition and Results of Operations section under Item 7 of this Form 10-K. Our material costs as a percentage of sales were 67.8%, 68.7%, and 71.3% in 2016, 2015, 2014, respectively, and lumber comprises approximately 59% of material costs.
Our growth may be limited by the markets we serve.
Our sales growth is dependent, in part, upon the growth of the markets we serve. If our markets do not achieve anticipated growth, or if we fail to maintain our market share, financial results could be impaired.
Our ability to achieve sales and margin goals, particularly on sales to the residential and commercial construction and manufactured housing markets, is impacted by housing starts and industry production of manufactured homes. If housing starts and manufactured housing production declines significantly, our financial results could be negatively impacted.
A significant portion of our sales are concentrated with one customer
. Our sales to The Home Depot comprised 20% of our total sales in 2016, 19% in 2015, and 17% in 2014.
Economic and credit market conditions impact our ability to collect a greater percentage of our receivables.
Economic and credit conditions may impact our bad debt expense. We continue to monitor our customers’ credit profiles carefully and make changes in our terms when necessary in response to this risk. Bad debt expense as a percentage of sales was 0.06%, 0.05%, and 0.06% in 2016, 2015, and 2014, respectively.
We may be impacted by vertical integration strategies.
In certain markets and product lines, our customers or vendors could pursue vertical integration strategies that could have an adverse effect on our sales. We strive to add value and be a low-cost producer while maintaining competitive pricing in each of our markets to mitigate this risk.
We may be impacted by excess capacity among suppliers.
There is excess capacity among suppliers of certain products in each of the markets we serve. Our selling prices and gross margins have been and are likely to continue to be impacted by this excess capacity.
Our growth may be limited by our ability to make successful acquisitions.
A key component of our growth strategy is to complete business combinations. Business combinations involve inherent risks, including assimilation and successfully managing growth. While we conduct extensive due diligence and have taken steps to ensure successful assimilation, factors beyond our control could influence the results of these acquisitions.
We may be adversely affected by the impact of environmental and safety regulations.
We are subject to the requirements of federal, state, and local environmental and occupational health and safety laws and regulations. There can be no assurance that we are at all times in complete compliance with all of these requirements. We have made and will continue to make capital and other expenditures to comply with environmental regulations. If additional laws and regulations are enacted, which restrict our ability to manufacture and market our products, including our treated lumber products, it could adversely affect our sales and profits. Changes in the interpretation of existing laws could also adversely impact our financial results.
The current version of federal health care legislation may significantly increase our costs
. The federal health care legislation enacted in 2010 and future regulations called for under the legislation may have a significant cost implication for our company. Our total health care costs totaled approximately $52.7 million, $41.3 million, and $34.8 million in 2016, 2015, and 2014, respectively.
Seasonality and weather conditions could adversely affect us
. Some aspects of our business are seasonal in nature and results of operations vary from quarter to quarter. In addition, the majority of our products sold to the Retail and Construction markets are used or installed in outdoor construction applications; therefore, short-term sales volume, productivity and gross profits can be negatively affected by adverse weather conditions, particularly in our first and fourth quarters.
Inbound and outbound transportation costs represent a significant part of our cost structure.
An increase in fuel and other operating expenses will significantly increase our costs. While we attempt to pass these costs along to our customers, there can be no assurance that they would agree to these price increases. Our total inbound and outbound transportation costs were approximately 9.6%, 9.9%, and 10.4% of sales in 2016, 2015, and 2014, respectively.
New alternatives may be developed to replace traditional treated wood products.
The manufacturers of wood preservatives continue to develop new preservatives. While we believe treated products are reasonably priced relative to alternative products such as composites or vinyl, new alternatives may impact the sales of treated wood products. In addition, new preservatives could increase our cost of treating products in the future. See Footnote N “Segment Reporting” within the Notes to Consolidated Financial Statements for our sales by product category.
We may be adversely affected by the impact of the duties related to the Softwood Lumber Agreement with Canada.
A 90 day retroactive duty may be applied to purchases of Spruce Pine from Canada. The scheduled February 2017 meeting, between the U.S. and Canadian governments, was recently postponed to late April 2017 to discuss the above mentioned retroactive duty.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our corporate headquarters building is located in suburban Grand Rapids, Michigan. We currently have approximately 118 facilities located throughout the United States, Canada, Mexico, Europe, Asia, and Australia. Depending upon function and location, these facilities typically utilize office, manufacturing, and indoor and outdoor storage space. Of these facilities, approximately 8 facilities are closed and are currently listed for sale or are being leased.
We own all of our properties, free from any significant mortgage or other encumbrance, except for approximately 24 facilities which are leased. We believe all of these operating facilities are adequate in capacity and condition to service our existing markets.
Item 3. Legal Proceedings.
Information regarding our legal proceedings is set forth in Note M of our Consolidated Financial Statements which are presented under Item 8 of this Form 10-K and are incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
Additional Item: Executive Officers of the Registrant.
The following table lists the names, ages, and positions of our executive officers as of February 1, 2017. Executive officers are elected annually by the Board of Directors at the first meeting of the Board following the annual meeting of shareholders.
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Name
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Age
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Position
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Matthew J. Missad
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56
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Chief Executive Officer, Universal Forest Products, Inc.
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Patrick M. Webster
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57
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President and Chief Operating Officer, Universal Forest Products, Inc.
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Michael R. Cole
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50
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Chief Financial Officer and Treasurer, Universal Forest Products, Inc.
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Allen T. Peters
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49
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President, UFP Western Division, Inc.
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Patrick Benton
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47
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President, UFP Northern Division, Inc.
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Jonathan West
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46
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President, UFP Southern Division, Inc.
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Robert D. Coleman
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62
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Executive Vice President of Manufacturing, Universal Forest Products, Inc.
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C. Scott Greene
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60
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Executive Vice President of Marketing
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Donald L. James
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57
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Executive Vice President of National Sales
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Michael F. Mordell
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59
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Executive Vice President of International Operations
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Chad C. Uhlig Eastin
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45
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Executive Vice President of Purchasing
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Matthew J. Missad
joined us in 1985. In February 1996, Mr. Missad was promoted to Executive Vice President of the Company. On July 13, 2011, Mr. Missad became Chief Executive Officer of the Company.
Patrick M. Webster
joined us in 1985. Mr. Webster became Vice President of the Far West Region in 1999, on July 1, 2007, he became President of UFP Western Division, Inc., and on January 1, 2009 became President and Chief Operating Officer of the Company.
Michael R. Cole
, CPA, CMA, joined us in 1993. In December 1999, he was promoted to Vice President of Finance. On July 19, 2000, Mr. Cole became Chief Financial Officer of the Company.
Allen T. Peters
joined us in 1997. In 2004 he became the General Manager of Operations of our plant in Harrisonville, MO and in 2007 became Regional Vice President of our Gulf Region. On January 1, 2011, Mr. Peters became President of UFP Western Division, Inc.
Patrick M. Benton
joined us in 1993. In 2008 he became Operations Vice President of the South Texas Region, and on July 1, 2014, he became Executive Vice President of UFP Eastern Division – North.
Jonathan E. West
joined us in 1994. In 2007 he became Regional Vice President of the Southeast Region, and on July 1, 2014, he became Executive Vice President of UFP Eastern Division – South.
Robert D. Coleman
, joined us in 1979. On January 1, 1999, Mr. Coleman was named the Executive Vice President of Manufacturing of the Company.
C. Scott Greene
joined us in 1991. In 2000, Mr. Greene became President of UFP Eastern Division, Inc. On October 1, 2011, Mr. Greene became Executive Vice President of New Business Development and on October 14, 2013, he became Executive Vice President of Marketing.
Donald L. James
joined us in 1998. On October 1, 2011, Mr. James became Executive Vice President of National Sales. Before this, he was Regional Vice President of operations in UFP Eastern Division, Inc.
Michael F. Mordell
joined us in 1993. In 1999 he became Executive Vice President of Purchasing of Universal Forest Products Western Division, Inc. In November 2007, he became General Manager of Operations for our facility in Lafayette, CO, and on January 1, 2010, Mr. Mordell became Executive Vice President of Purchasing. On October 1, 2016, he became Executive Vice President of International Operations.
Chad C. Uhlig Eastin
joined us in 1998. In 2007, he became General Manager of Operations of our plant in Chandler, AZ, and in 2014 he became Operations Vice President of our Mountain West Region, and became Regional Vice President of that region in 2015. On October 1, 2016, Mr. Eastin became the Executive Vice President of Purchasing for the Company.
PART II
The following information items in this Part II, which are contained in the 2016 Annual Report, are specifically incorporated by reference into this Form 10-K Report. These portions of the 2016 Annual Report that are specifically incorporated by reference are filed as Exhibit 13 with this Form 10-K Report.
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
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(a)
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The information relating to market, holders and dividends is incorporated by reference from the 2016 Annual Report under the captions “Price Range of Common Stock and Dividends” and “Stock Performance Graph.”
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There were no sales of unregistered securities during the last three years.
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(c)
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Issuer purchases of equity securities during the fourth quarter.
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Fiscal Month
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(a)
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(b)
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(c)
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(d)
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September 25 – October 29, 2016
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—
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—
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—
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2,869,603
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October 30 – November 26, 2016
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—
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—
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—
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2,869,603
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November 27 – December 31, 2016
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—
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—
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—
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2,869,603
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(a)
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Total number of shares purchased.
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(b)
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Average price paid per share.
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(c)
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Total number of shares purchased as part of publicly announced plans or programs.
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(d)
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Maximum number of shares that may yet be purchased under the plans or programs.
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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 2.9 million.
Item 6. Selected Financial Data.
The information required by this Item is incorporated by reference from the 2016 Annual Report under the caption "Selected Financial Data."
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The information required by this item is incorporated by reference from the 2016 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.
On December 31, 2016, the estimated fair value of our long-term debt, including the current portion, was $111.6 million. The estimated fair value is based on rates anticipated to be available to us for debt with similar terms and maturities. The estimated fair value of notes payable included in current liabilities and the revolving credit facility approximated the carrying values as these debt instruments have interest rates that fluctuate with current market conditions.
Expected cash flows over the next five years related to debt instruments are as follows:
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2017
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2018
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2019
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2020
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2021
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Thereafter
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Total
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($US equivalents, in thousands)
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Long-term Debt:
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Fixed Rate ($US)
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618
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256
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149
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132
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28
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$
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75,000
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$
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76,183
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Average interest rate
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5.76
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%
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5.76
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%
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5.76
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%
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5.76
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%
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5.76
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%
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3.94
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%
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Variable Rate ($US)
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2,016
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136
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23,860
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2,700
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$
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—
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$
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7,000
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$
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35,712
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Average interest rate
(1)
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5.30
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%
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5.30
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%
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1.70
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%
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0.60
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%
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0.55
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%
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(1)
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Average of rates at December 31, 2016.
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Item 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated by reference from the 2016 Annual Report under the following captions:
"Management’s Annual Report on Internal Control Over Financial Reporting"
"Report of Independent Registered Public Accounting Firm"
"Report of Independent Registered Public Accounting Firm"
"Consolidated Balance Sheets"
"Consolidated Statements of Earnings and Comprehensive Income"
"Consolidated Statements of Shareholders' Equity"
"Consolidated Statements of Cash Flows"
"Notes to Consolidated Financial Statements"
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
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(1)
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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 year ended December 31, 2016 (the "Evaluation Date"), have concluded that, as of such date, our disclosure controls and procedures were effective.
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(2)
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Management’s Annual Report on Internal Control Over Financial Reporting
. Management’s Annual Report on Internal Control Over Financial Reporting is included in the 2016 Annual Report under the caption “Management’s Annual Report on Internal Control Over Financial Reporting” and is incorporated herein by reference. Our independent registered public accounting firm’s attestation Report on our internal control over financial reporting is also included in the 2016 Annual Report in the caption “Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting” and is incorporated herein by reference.
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(3)
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Changes in Internal Controls
. During the fourth quarter ended December 31, 2016, 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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Item 9B. Other Information.
Not applicable.