meeting market
challen ges
2009 AnnuAl RepoRt
2009 annual report
UFP Technologies, Inc.
(Nasdaq: UFPT) is a leading
supplier of custom-engineered
packaging solutions and
component products.
We create a broad array of interior protective packaging
solutions, using molded and fabricated foams, vacuum-
formed plastics, and molded fiber. We also provide
engineered component solutions, using the latest
laminating, molding, and fabricating technologies.
We market these solutions through our three brands:
United Foam, Molded Fiber, and Simco Automotive.
Our customers include leading companies in six target
markets: Automotive, Computers & Electronics, Medical
& Scientific, Aerospace & Defense, Consumer, and
Industrial. Learn more about us at www.ufpt.com.
Contents
2
President’s letter
4
Strategic acquisitions
5 Medical/Biotech
6 Molded Fiber
7
Aerospace/Defense
8
Selected financial data
10 Management’s discussion
and analysis of financial
condition and results
of operations
15 Financial statements
36 Stockholder information
dear fellow
shareholders,
2009 was a dynamic and exciting year
for UFP Technologies.
Dear Fellow Shareholders,
opportunities to increase market share and position
2009 was a dynamic and exciting year for UFP
UFP for long-term success. Together, the three
acquisitions have been profitable, have added
Technologies. A difficult economic environment
to our operating income, and have quickly made
provided both challenges and opportunities for the
UFP a stronger company. We also recorded one-
company. I believe the events of this year also
time transaction gains in each case, as a result of
demonstrated our flexibility and depth, and validated
successful negotiations on purchase price. These
the effectiveness of our strategy.
With customer demand significantly reduced in early
2009, we scaled back our business to ensure that we
acquisitions illustrate the growth opportunities that
exist for UFP Technologies, as well as our ability to
successfully integrate them.
remained profitable, shifting resources within the company
We will continue to search for companies that
to minimize layoffs and cutbacks. We were careful to
provide a good strategic and cultural fit, improve our
retain the resources we would need to capitalize on the
position in our target markets, increase the value
new growth opportunities we believed would come our way
we bring our customers, and further differentiate us
in such a volatile environment. Once we identified these
from our competitors. With newly acquired factories
opportunities, we had the resources on hand to successfully
and changing market dynamics, we will also review
negotiate and quickly close three important acquisitions,
our operating footprint to make sure our plant
and efficiently integrate each business into UFP.
locations line up well with future opportunities, and
In March, we acquired certain assets of Foamade
consider changes where appropriate.
Industries, Inc. In July, we acquired E.N. Murray
Our market diversity proved to be a key asset for
Co. Then, in August, we purchased certain assets of
UFP in 2009, as strength in the medical and
Advanced Materials Group (AMI). These were all exciting
military markets helped offset significant downturns
2
in other markets, particularly automotive. Going forward, we see many
I would like to thank our talented team members, who worked
more exciting opportunities in the medical and military markets, as well
incredibly hard to make 2009 a success. Despite the cutbacks and
as in our case insert business, molded fiber business, and elsewhere.
market challenges, they showed great skill in integrating the three
We also now see a series of emerging opportunities in the automotive
acquisitions and improving our base business as the economy improved.
space, where the difficult economy has reduced competition. As the
We are particularly fortunate to have what we believe is our industry’s
auto industry improves, we believe we can grow our business with
largest and best engineering team. We will continue to increase our
minimal investment.
investment in engineering resources, as they are a great competitive
Our key strategic tenets that have guided us through both growth years
advantage and strong differentiator.
and challenging years remain unchanged:
By taking advantage of unique opportunities to invest in acquisitions,
1. Market to our sweet spot. Focus our team and capital
we ended 2009 in better shape than ever, and again generated strong
resources on those market opportunities that are the best fit
earnings for our shareholders. With our diverse customer base, scalable
with UFP’s skills and abilities, and are therefore the areas
business model, strong balance sheet, and hard-working team, I am
equipment, and new programs that we expect will benefit us for years,
where we create most value.
2. Increase the value we bring our customers. Solve more of our
customers’ problems and continuously improve their experience
in doing business with UFP.
3. Leverage our size and breadth. Share best practices, cross-sell
between divisions, and leverage our purchasing power.
very optimistic about 2010 and beyond. Thank you for your continued
support of UFP and our strategy. We will continue to work very hard to
increase the long-term value of UFP Technologies and your investment
in our company.
Sincerely,
4. Position UFP for long-term growth. Continuously improve all
aspects of our business; invest in research and development of
new materials and processes, supplier relationships, and the
R. Jeffrey Bailly
Chairman and CEO
development of our people.
OPERATING INCOME
SALES
EARNINGS PER SHARE
1
7
1
,
2
$
5
0
0
2
2
5
0
,
5
$
6
0
0
2
7
4
2
,
7
$
7
0
0
2
5
2
4
,
8
$
8
0
0
2
0
8
1
,
8
$
9
0
0
2
2
6
9
,
3
8
$
5
0
0
2
9
4
7
,
3
9
$
6
0
0
2
5
9
5
,
3
9
$
7
0
0
2
2
3
0
,
0
1
1
$
8
0
0
2
1
3
2
,
9
9
$
9
0
0
2
4
1
.
0
$
5
0
0
2
5
4
.
0
$
6
0
0
2
1
7
.
0
$
7
0
0
2
2
8
.
0
$
8
0
0
2
4
9
.
0
$
9
0
0
2
1.0
0.8
0.6
0.4
0.2
0.0
3
strategic
acquisitions
We added important new
customers and capabilities in 2009
Our acquisition strategy paid big dividends in 2009, with three transactions
that strengthened our medical business. In March, we acquired certain assets
of Foamade Industries, Inc., which brought us an estimated $5 million book
of business, specialized equipment, and important new customers. We folded
their two facilities into our Grand Rapids, Michigan, operation (acquired in our
2008 purchase of Stephenson & Lawyer). And it all happened very quickly;
the transaction closed just a couple of weeks after the process began.
In July, we acquired E.N. Murray Co. (ENM), a medical market leader specializing
in technical polyurethane foams. ENM brought us a $13 million profitable
book of business, strong customer relationships, and a complementary product
line. It also brought a Colorado location that strengthens our position in
the western United States. Our western presence received another boost
in September, when we purchased certain assets of Advanced Materials
Group (AMI). With its ISO 13485 Quality Certification, FDA certification,
and clean room facilities, AMI’s California plant is another solid addition to
our medical capabilities. All these moves will enable us to serve our medical
customers with a broader range of high-quality products and services.
4
4
medical/
biotech
Unique products and capabilities
position us for growth
It’s no coincidence that our 2009 acquisitions were all in the medical/biotech
space, now UFP’s largest market. Our share of this market has been growing for
years, and for very good reasons. Customers rely on us for critical applications
that require the highest levels of innovation and quality. These solutions must
meet complex specifications and exacting tolerances. As such, they are a
perfect fit for our engineering skills and tightly controlled quality systems.
For these customers, we provide high-performance packaging for medical
devices and equipment; components for orthopedic products, wound
care solutions, and infection control products; and more. In the biotech
space, our breakthrough products, T-Tubes™ and BioShell™, provide
insulation and protection uniquely suited for life sciences manufacturing,
with an array of benefits that no competitor in the world can match. With
our ability to engineer solutions with unique combinations of materials,
we will continue to expand our presence in this growing market.
5
5
molded
fiber
Demand for our sustainable
packaging is on the rise
Across the business world, solutions that reduce waste and protect the
environment continue to gain importance. We are uniquely positioned
to meet the growing demand for sustainable packaging. Molded Fiber, a
UFP Technologies brand, is North America’s leading producer of interior
packaging solutions made from 100% recycled paper. We pioneered
the process, hold many industry patents, and have more manufacturing
capacity than any direct North American competitor. And in recent
years, we’ve been taking molded fiber packaging to new levels.
Typically these solutions have been associated with items, like box
inserts, that have limited aesthetic appeal. But our design skills and
manufacturing techniques have opened a wide range of eye-catching
possibilities. As a result, we’re seeing greater demand in consumer
markets for solutions like our innovative CD cases and beauty product
packaging in addition to our Wine Packs™ and candle packs. These
applications augment our continued leadership in traditional markets for
durable, lightweight interior packaging, for items such as electronics and
industrial products. Whatever the application, our sustainable solutions
provide excellent protection – for our customers and the environment.
6
6
aerospace/
defense
Diverse solutions meet
increasingly complex needs
UFP continues to deliver a broad range of custom-engineered solutions to the
aerospace and defense markets. In this space, our ability to manufacture
high-quality parts in ISO–certified U.S. factories, combined with our strong
partnerships with other defense contractors, gives us an important edge. For
example, along with our partners Pelican Products and Armstrong Tool, we
are now in the second year of a five-year contract for the General Mechanics
Tool Kit (GMTK), a mobile storage solution for tools used to service military
vehicles. We also produce tool control solutions for military aircraft, protective
packaging for weapon systems, and fire-retardant foam aircraft components.
In addition, we provide uniform and gear components for waist belts,
shoulder straps, firearm holsters, replaceable knee and elbow pads,
and more. Helping to keep our military members comfortable and
safe in highly challenging environments is a responsibility we take very
seriously. With these products and many others, we are proud to provide
our brave men and women with the superior solutions they need.
7
7
SeleCTeD FINaNCIal DaTa
The following selected financial data for the five years ended December 31, 2009, is derived from the audited consolidated financial statements of the Company.
The data should be read in conjunction with the consolidated financial statements and the related notes included in this report, and in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Selected conSolidated Financial data
Years ended december 31
(in thousands, except per share data)
Consolidated statement of operations data1
Net sales
Gross profit
Operating income
Net income attributable to UFP Technologies, Inc.
Diluted earnings per share
Weighted average number of diluted shares outstanding
2009
$
99,231
26,719
8,180
5,929
0.94
6,294
2008
110,032
28,563
8,4252
5,116
0.82
6,263
2007
93,595
22,810
7,247
4,159
0.71
5,861
as of december 31
(in thousands)
consolidated balance sheet data
2009
2008
Working capital
Total assets
Short-term debt and capital lease obligations
Long-term debt and capital lease obligations, excluding current portion
Total liabilities
Stockholders’ equity
$
27,702
59,452
623
7,502
20,446
39,005
18,688
48,723
1,419
4,852
16,832
31,890
2007
14,952
45,553
1,419
6,271
20,726
24,827
2006
93,749
19,237
5,054
2,515
0.45
5,571
2006
8,236
39,037
1,767
6,921
19,796
19,241
2005
83,962
14,601
2,171
659
0.14
5,261
2005
3,321
44,000
9,716
7,650
28,605
15,395
1 See Note 21 to the consolidated financial statements for segment information.
2 Amount includes restructuring charges of $1.3 million.
Market Price
From July 8, 1996, until April 18, 2001, the Company’s common stock was listed on the NASDAQ National Market under the symbol “UFPT.” Since April 19,
2001, the Company’s common stock has been listed on the NASDAQ Capital Market. The following table sets forth the range of high and low quotations for the
common stock as reported by NASDAQ for the quarterly periods from January 1, 2008, to December 31, 2009:
Fiscal Year ended december 31, 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
8.20
14.63
12.18
7.09
High
$
6.10
5.20
6.46
7.10
low
$ 5.20
7.36
6.71
3.92
Low
$
3.47
4.03
4.09
5.91
8
nuMber oF StockHolderS
As of February 16, 2010, there were 84 holders of record of the Company’s Common Stock.
Due to the fact that many of the shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number
of individual stockholders represented by these holders of record.
dividendS
The Company did not pay any dividends in 2008 or 2009. The Company presently intends to retain all of its earnings to provide funds for the operation
of its business, although it would consider paying cash dividends in the future. The Company’s ability to pay dividends is subject to approval by its
principal lending institution.
Stock PlanS
The Company maintains two active stock option plans to provide long-term rewards and incentives to the Company’s key employees, officers, employee directors,
non-employee directors, and advisors. The 1993 Employee Stock Option Plan provides for the issuance of up to 1,550,000 shares of the Company’s common
stock. The 2009 Non-Employee Director Stock Incentive Plan provides for the issuance of up to 975,000 shares of the Company’s common stock to non-
employee directors. Additional details of these plans are discussed in Note 13 to the consolidated financial statements.
The Company also maintains the 2003 Incentive Plan, which provides the Company with the ability to offer equity-based incentives to present and future
executives and other employees who are in a position to contribute to the long-term success and growth of the Company.
Each of these plans and their amendments has been approved by the Company’s stockholders.
Summary plan information as of December 31, 2009, is as follows:
Number of shares of
UFPT common stock
to be issued1
Weighted average
UFPT common stock
exercise price of
remaining available
outstanding options
for future issuance
Number of shares of
605,000
391,609
996,609
276,124
1,272,733
$ 2.33
4.12
$ 3.03
—
$ —
312,293
282,089
594,382
297,918
892,300
1993 Employee Plan
1998 Director Plan
total option Plans
2003 Incentive Plan
total all Stock Plans
1 Will be issued upon exercise of outstanding options or vesting of stock unit awards.
9
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
Results of opeRations
The following table sets forth, for the years indicated, the percentage of revenues represented by the items as shown in the Company’s consolidated statements
of operations:
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expenses
Restructuring charge
Operating income
Total other expenses (income), net
Income before income taxes
Income tax expense
Net income
2009
100.0%
73.1
26.9
18.7
0.0
8.2
-0.7
8.9
2.9
2008
100.0%
74.0
26.0
17.1
1.2
7.7
0.3
7.4
2.8
2007
100.0%
75.6
24.4
16.7
0.0
7.7
0.5
7.2
2.8
6.0%
4.6%
4.4%
oveRview
UFP Technologies is an innovative designer and custom converter of foams, plastics, and fiber products. The Company serves a myriad of markets, but
specifically targets opportunities in the automotive, computers and electronics, medical, aerospace and defense, industrial, and consumer markets.
On March 9, 2009, the Company acquired selected assets of the Hillsdale, Michigan, operations of Foamade Industries, Inc. (“Foamade”), a business specializing
in the fabrication of technical urethane foams for a myriad of industries. The Company transitioned the acquired assets to its Grand Rapids, Michigan, plant.
On July 7, 2009, the Company acquired substantially all of the assets of E.N. Murray Co. (“ENM”), a Denver, Colorado-based foam fabricator. ENM specialized
in the fabrication of technical urethane foams, primarily for the medical industry. This acquisition brings to the Company further access and expertise in
fabricating technical urethane foams and a seasoned management team.
On August 24, 2009, the Company acquired selected assets of Advanced Materials, Inc. (“AMI”), a wholly-owned subsidiary of Advanced Materials Group, Inc.
Located in Rancho Dominguez, California, AMI specialized in the fabrication of technical urethane foams, primarily for the medical industry.
On October 29, 2009, the Company’s largest customer, Recticel Interiors North America, filed for bankruptcy protection pursuant to Chapter 11 of the bankruptcy
code. Sales to Recticel for the fiscal years ended December 31, 2009, 2008, and 2007 were $8.0 million, $13.8 million, and $16.5 million, respectively. On
October 29, 2009, the Company was owed $897,445 from Recticel, all of which was within contractual payment terms. The Company had not recorded a
specific reserve against this receivable in its December 31, 2009, financial statements, as on December 31, 2009, the Company believed that full collection was
probable. The entire $897,445 was paid on March 8, 2010. The Company also expects that the bankruptcy filing will have no impact on future orders from
Recticel, and that program volumes will fluctuate based upon consumer demand for the program vehicles.
The Company experienced significantly lower sales in the first half of fiscal 2009, largely due to the weak economy and materially reduced demand for cars in
North America. However, sales improved in the third and fourth quarters as many of the Company’s customers increased forecasts (both business segments).
Although sales for the fiscal year were down, the Company reported record earnings largely due to gains recorded from acquisitions, and the impact on gross
margins and selling, general, and administrative expenses of cost-control efforts.
The Company’s current strategy includes organic growth and growth through strategic acquisitions.
2009 CompaRed to 2008
Net sales decreased 9.8% to $99.2 million in the year ended December 31, 2009, from $110.0 million in the same period of 2008. Without sales from its newly
acquired Foamade, E.N. Murray Co., and AMI operations (all within the Component Products segment), sales would have declined 19.5% for the year ended December
31, 2009. Sales in the Component Products segment (including those from the newly acquired operations) increased slightly to $61.0 million in 2009, from
$60.8 million in 2008. Without sales from the newly acquired operations, Component Product sales would have declined 17.3% to $50.4 million for the
year ended December 31, 2009. This decrease in sales is primarily due to a decrease in sales to the automotive industry of approximately $9.6 million. Sales in the
Packaging segment decreased 22.2% to $38.2 million for the year ended December 31, 2009, from $49.2 million in the same period of 2008. The decrease in sales
is largely due to a decrease in sales of $3.9 million to a key electronics customer and overall reduced demand for packaging because of the impact of the poor economy
on demand for our customers’ products, partially offset by an increase in demand for environmentally friendly molded fiber packaging of approximately $700,000.
10
Gross profit as a percentage of sales (“Gross Margin”) increased to 26.9% in 2009 from 26.0% in 2008. The improvement in gross margin is primarily attributable
to Companywide manufacturing efficiency and cost-cutting initiatives, as well as a favorable shift in product mix (lower auto sales); material cost as a percentage of
sales is down 1.2%, partially offset by higher overhead as a percentage of sales due to the fixed-cost components of overhead measured against lower sales.
Selling, General, and Administrative Expenses (“SG&A”) decreased 1.5% to $18.5 million for the year ended December 31, 2009, from $18.8 million in 2008.
As a percentage of sales, SG&A was 18.7% and 17.1% in the years ended December 31, 2009, and 2008, respectively. The decline in SG&A for the year
ended December 31, 2009, is primarily due to reduced administrative variable compensation of approximately $900,000 (both business segments) and reduced
SG&A associated with the consolidation of the Company’s two Michigan facilities of approximately $550,000 (Component Products segment), partially offset by
SG&A associated with newly acquired companies of approximately $1.3 million (Component Products segment). The increase in SG&A as a percentage of sales
is primarily a result of the fixed-cost components of SG&A being measured against lower sales.
The Company recorded a restructuring charge of approximately $1.3 million during the year ended December 31, 2008, associated with the consolidation of
its Macomb Township, Michigan, automotive operations into its newly acquired plant in Grand Rapids, Michigan. The $1.3 million charge was for the costs
associated with vacating the Macomb Township premises, severance, relocation, and stay-bonuses for its employees, equipment moving and hook-up costs, and
training and other start-up costs. As of December 31, 2008, the move was completed and all significant costs had been incurred. The Company believes that
cost savings exceeded $1.4 million as a result of the consolidation for the fiscal year ended December 31, 2009.
The Company recorded acquisition-related gains of approximately $840,000 for the year ended December 31, 2009. The acquisitions of Foamade, ENM, and
AMI all resulted in bargain purchase gains as the consideration paid was less than the fair market value of the net assets acquired. The Company believes the
net assets were acquired at a bargain purchase due to the overall weak economy.
Interest expense decreased to approximately $233,000 for the year ended December 31, 2009, from $334,000 in 2008. The decrease in interest expense is
primarily attributable to lower average interest rates.
The Company recorded income tax expense as a percentage of pre-tax income of 32.0% and 36.7% for the years ended December 31, 2009, and 2008,
respectively. The primary reason for the decrease in income tax expense as a percentage of pre-tax income is due to the non-taxable gains recorded on the
acquisitions of Foamade, ENM, and AMI. The Company has deferred tax assets on its books associated with net operating losses generated in previous
years. The Company has considered both positive and negative available evidence in its determination that the deferred tax assets will be realized, and has not
recorded a tax valuation allowance at December 31, 2009. The Company will continue to assess the realizability of deferred tax assets created by recording tax
benefits on operating losses and, when appropriate, will record a valuation allowance against these assets. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.
2008 coMPared to 2007
Net sales increased 17.6% to $110.0 million in the year ended December 31, 2008, from $93.6 million in the same period of 2007. Without its newly acquired
plant in Grand Rapids, Michigan (Component Products segment), sales increased 4% for the year ended December 31, 2008. Sales in the Component Products
segment increased 13.1% to $60.8 million for the year ended December 31, 2008, from $53.8 million in the same period of 2007. The increase is primarily
due to sales of $12.7 million from the newly acquired plant in Grand Rapids, partially offset by a decrease in sales to the automotive industry of approximately
$5.9 million. The Company believes that sales to the automotive industry will continue to weaken in 2009. Sales in the Engineered Packaging segment
increased 23.5% to $49.2 million for the year ended December 31, 2008, from $39.8 million in the same period of 2007. The increase in sales is largely due
to an increase in sales of $3.9 million to a key electronics customer, as well as increased demand for environmentally friendly molded fiber packaging.
Gross profit as a percentage of sales (“Gross Margin”) increased to 26.0% in 2008 from 24.4% in 2007. The improvement in gross margin is primarily
attributable to Company-wide continued strategic pricing and manufacturing efficiency initiatives (material and labor as a percentage of sales are down 1.2% and
0.8%, respectively) partially offset by lower gross margins in the Company’s automotive plants (Component Products segment).
Selling, General, and Administrative Expenses (“SG&A”) increased 20.9% to $18.8 million for the year ended December 31, 2008, from $15.6 million in 2007.
As a percentage of sales, SG&A was 17.1% and 16.7% in the years ended December 31, 2008, and 2007, respectively. The increase in SG&A spending is
primarily attributable to increased SG&A from the newly acquired plant in Grand Rapids of approximately $2.2 million (Component Products segment) as well as
increased equity-based compensation of approximately $600,000 (Component Products and Packaging segments).
The Company recorded a restructuring charge of approximately $1.3 million during the year ended December 31, 2008, associated with the consolidation of its
Macomb Township, Michigan, automotive operations into its newly acquired plant in Grand Rapids, Michigan. The $1.3 million charge is for the costs associated
with vacating the Macomb Township premises, severance, relocation, and stay-bonuses for its employees, equipment moving and hook-up costs, and training
and other start-up costs. As of December 31, 2008, the move was completed and all significant costs had been incurred.
Interest expense decreased to approximately $334,000 for the year ended December 31, 2008, from $479,000 in 2007. The decrease in interest expense is
primarily attributable to lower average borrowings.
The Company recorded income tax expense as a percentage of pre-tax income of 36.7% and 37.9% for the years ended December 31, 2008, and 2007,
respectively. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has considered
both positive and negative available evidence in its determination that the deferred tax assets will be realized, and has not recorded a tax valuation allowance
at December 31, 2008. The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating losses and,
when appropriate, will record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however, could be
reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.
11
liquiditY and caPital reSourceS
The Company funds its operating expenses, capital requirements, and growth plan through internally generated cash and bank credit facilities.
As of December 31, 2009, and 2008, working capital was approximately $27,702,000 and $18,688,000, respectively. The increase in working capital is
primarily attributable to an increase in cash of approximately $8.3 million due to cash generated from operations and an increase in accounts receivable of
approximately $1.5 million due mostly to strong December 2009 sales partially offset by an increase in accounts payable of approximately $970,000 due to
the timing of year-end cash disbursements. Cash provided from operations was approximately $10.7 million and $6.7 million in 2009 and 2008, respectively.
The primary reason for the increase in cash generated from operations in 2009 is an increase in profits of approximately $821,000, a decrease in inventory,
net of amounts acquired in business combinations, of approximately $1.9 million during the fiscal year ended December 31, 2009, compared to an increase
in inventory of approximately $435,000 during fiscal 2008 (due to inventory management efforts), an increase in accounts payable, net of amounts acquired
in business combinations, of approximately $393,000 for the year ended December 31, 2009, compared to a decrease in accounts payable of approximately
$2.8 million for the year ended December 31, 2008 (difference in the timing of check runs at the end of the respective years), partially offset by an increase
in accounts receivable, net of accounts receivable acquired in business combinations, of approximately $342,000 for the year ended December 31, 2009,
compared to a decrease in accounts receivable of approximately $777,000 for the year ended December 31, 2008 (due mostly to strong December 2009 sales).
Net cash used in investing activities in 2009 was approximately $4.3 million and was used primarily for the acquisitions of the selected assets of Foamade
Industries, Inc, E.N. Murray Co., and Advanced Materials Group of approximately $2.4 million (net of cash acquired) and the acquisition of new manufacturing
equipment of approximately $1.9 million.
On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is comprised of: (i) a revolving credit
facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-line
amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization. Extensions of credit under the revolving credit facility are based in
part upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. As of December 31, 2009, the
Company had availability of approximately $14.4 million based upon collateral levels in place as of that date. The credit facility calls for interest of LIBOR plus a
margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases
the applicable margin is dependent upon Company performance. The loans are collateralized by a first priority lien on all of the Company’s assets, including its
real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the credit facility, the Company is subject to a minimum fixed-charge
coverage financial covenant. The Company’s $17 million revolving credit facility matures November 30, 2013; the term loans are all due on January 29, 2016.
At December 31, 2009, the interest rate on these facilities was 1.26%.
UDT has a mortgage note collateralized by the Florida facility, dated May 22, 2007. The note had an original principal balance of $786,000 and calls for 180
monthly payments of $7,147. The interest rate is fixed at approximately 7.2%.
coMMitMentS, contractual obligationS, and oFF-balance SHeet arrangeMentS
The following table summarizes the Company’s contractual obligations at December 31, 2009:
Payments due in:
Leases
Mortgage
Loans
Loans
Mortgage
Mortgage
Interest
Retirement
Total
Operating
Grand Rapids
Equipment
Term
Massachusetts
UDT
Debt Supplemental
2010
2011
2012
2013
$ 1,803,371
$ 200,000
$
5,755 $
288,360
$
92,300 $
36,592 $ 217,456
$
96,250 $
2,740,084
1,338,139
200,000
35,095
288,360
92,300
39,120
209,361
75,000
2,277,375
1,180,901
200,000
779,534
200,000
—
—
—
288,360
92,300
42,025
192,197
75,000
2,070,783
288,360
92,300
45,147
174,265
75,000
1,654,606
624,784
1,399,883
540,457
624,918
170,833
6,983,060
2014 and thereafter
588,853
3,033,332
$ 5,690,798
$ 3,833,332
$ 40,850 $ 1,778,224
$ 1,769,083 $ 703,341 $ 1,418,197 $ 492,083
$ 15,725,908
The Company requires cash to pay its operating expenses, purchase capital equipment, and to service the obligations listed above. The Company’s principal
sources of funds are its operations and its revolving credit facility. Although the Company generated cash from operations in the year ended December 31, 2009,
it cannot guarantee that its operations will generate cash in future periods.
The Company does not believe that inflation has had a material impact on its results of operations in the last three years.
The Company had no off-balance sheet arrangements in 2009.
critical accounting PolicieS
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including
those related to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring charges, contingencies, and litigation.
12
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
including current and anticipated worldwide economic conditions, both in general and specifically in relation to the packaging industry, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. The
Company believes the following critical accounting policies necessitated that significant judgments and estimates be used in the preparation of its consolidated
financial statements.
The Company has reviewed these policies with its Audit Committee.
• Revenue Recognition The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive
evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is
reasonably assured of collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these
criteria, in some cases, requires management’s judgments. Should changes in conditions cause management to determine that these criteria are not
met for certain future transactions, revenue for any reporting period could be adversely affected.
•
Intangible Assets Intangible assets include patents and other intangible assets. Intangible assets with an indefinite life are not amortized. Intangible
assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from eight to 14 years. Indefinite-lived intangible
assets are tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change
that would indicate that the carrying amount may be impaired. Intangible assets with a definite life are tested for impairment whenever events or
circumstances indicate that their value may be reduced.
• Goodwill Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances
change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting
units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic
characteristics. The Company’s reporting units include its Component Products segment, Packaging segment (excluding its Molded Fiber operation),
and its Molded Fiber operation. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets
exceeds the estimated fair value of the reporting unit. The Company completed its annual goodwill impairment test as of December 31, 2009. Fair
values of the reporting units were determined using a combination of several valuation methodologies, including income and market approaches,
which include the use of Level 1 and Level 3 inputs (see Note 19 to the Consolidated Financial Statements). The fair values of reporting units that
have goodwill balances were estimated to be more than 100% greater than their respective carrying values and, therefore, it was determined that no
goodwill was impaired.
• Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. These allowances for doubtful accounts are determined by reviewing specific accounts that the Company has deemed are
at risk of being uncollectible and other credit risks associated with groups of customers. If the financial condition of the Company’s customers were
to deteriorate or economic conditions were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required with a resulting charge to results of operations.
•
Inventories The Company provides reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the
inventory and the estimated market value based upon assumptions about future demand and market conditions. The Company fully reserves for
inventories deemed obsolete. The Company performs periodic reviews of all inventory items to identify excess inventories on hand by comparing
on-hand balances to anticipated usage using recent historical activity, as well as anticipated or forecasted demand, based upon sales and marketing
inputs through its planning systems. If estimates of demand diminish or actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required with a resulting charge to operations.
• Deferred Income Taxes The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance. Should the Company determine that it would not be able to realize all or part of its net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
QUaNTITaTIve aND QUalITaTIve DISCloSUreS aboUT MarkeT rISk
The following discussion of the Company’s market risk includes “forward-looking statements” that involve risk and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements.
Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices. At
December 31, 2009, the Company’s cash and cash equivalents consisted of bank accounts in U.S. dollars, and their valuation would not be affected by market
risk. The Company has four debt instruments where interest is based upon either the Prime rate or LIBOR and, therefore, future operations could be affected by
interest rate changes; however, the Company believes that the market risk of the debt is minimal.
13
rePorT oF INDePeNDeNT regISTereD PUblIC aCCoUNTINg FIrM
the board of directors and Stockholders
uFP technologies, inc.
georgetown, Ma
We have audited the accompanying consolidated balance sheets of UFP Technologies, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the years in the three year period ended
December 31, 2009. Our audits also included the financial statement schedule for each of the years
in the three year period ended December 31, 2009 as listed in the index at Item 15(a)(2). These
consolidated financial statements and schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of UFP Technologies, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth therein.
Westborough, Massachusetts
March 30, 2010
14
CoNSolIDaTeD balaNCe SheeTS
aSSetS
Current assets:
Cash and cash equivalents
Receivables, net
Inventories, net
Prepaid expenses
Deferred income taxes
Total current assets
Property, plant, and equipment
Less accumulated depreciation and amortization
Net property, plant, and equipment
Goodwill
Intangible Assets
Other assets
december 31
2009
2008
$
14,998,514
$
6,729,370
14,218,005
7,647,517
476,381
1,410,780
38,751,197
43,582,578
(31,364,683)
12,217,895
6,481,037
817,737
1,183,930
12,754,875
8,152,746
516,388
1,488,575
29,641,954
40,666,779
(28,912,455)
11,754,323
6,481,037
175,841
669,505
Total assets
$
59,451,796
$
48,722,661
liabilitieS and StockHolderS’ equitY
Current liabilities:
Accounts payable
Accrued taxes and other expenses
Current installments of long-term debt
Current installments of capital lease obligations
Total current liabilities
Long-term debt, excluding current installments
Capital lease obligations, excluding current installments
Deferred income taxes
Retirement and other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $.01 par value. Authorized 1,000,000 shares;
no shares issued or outstanding
Common stock, $0.1 par value. Authorized 20,000,000 shares; issued and
outstanding 5,945,357 shares in 2009 and 5,666,703 shares in 2008
Additional paid-in capital
Retained earnings
Total UFP Technologies, Inc. stockholders’ equity
Non-controlling interests
Total stockholders’ equity
$
4,273,625
$
3,304,194
6,152,826
623,007
—
11,049,458
7,501,823
—
776,877
1,118,197
20,446,355
—
59,454
15,009,613
23,465,812
38,534,879
470,562
39,005,441
6,230,001
716,697
702,765
10,953,657
3,941,996
909,900
113,073
913,644
16,832,270
—
56,667
13,774,334
17,536,387
31,367,388
523,003
31,890,391
Total liabilities and stockholders’ equity
$
59,451,796
$
48,722,661
The accompanying notes are an integral part of these consolidated financial statements.
15
Consolidated statements of operations
Net sales
Cost of sales
Gross profit
Years Ended December 31
2009
2008
2007
$
99,231,334
$
110,031,601
$
93,595,140
72,511,919
81,468,539
26,719,415
28,563,062
Selling, general, and administrative expenses
Restructuring charge
Operating Income
Other income (expense):
Interest expense, net
Equity in net income of unconsolidated partnership
Other, net
Gains on acquisitions
Total other (expense) income
Income before income tax provision
Income tax expense
Net income from consolidated operations
18,539,005
—
8,180,410
(232,747)
—
11,206
839,690
618,149
8,798,559
2,816,575
5,981,984
Net income attributable to non-controlling interests
(52,559)
18,822,965
1,315,366
8,424,731
(334,293)
7,218
57,457
—
(269,618)
8,155,113
2,994,648
5,160,465
(44,465)
70,784,986
22,810,154
15,562,800
—
7,247,354
(479,171)
15,038
32,500
—
(431,633)
6,815,721
2,584,250
4,231,471
(72,370)
Net income attributable
to UFP Technologies, Inc.
Net income per share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
$
5,929,425
$
5,116,000
$ 4,159,101
$
$
1.02
0.94
$
$
0.92
0.82
5,829,580
6,293,964
5,549,830
6,262,666
$
$
0.78
0.71
5,306,948
5,861,420
The accompanying notes are an integral part of these consolidated financial statements.
16
CoNSolIDaTeD STaTeMeNTS oF SToCkholDerS’ eQUITy
Years ended December 31, 2009, 2008, and 2007
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Non-
Controlling
Interests
Total
Stockholders’
Equity
balance at december 31, 2006
5,156,764
$ 51,568
$ 10,311,682
$ 8,261,286
$ 616,157
$ 19,240,693
Stock issued under
Employee Stock Purchase Plan
4,721
Stock issued in lieu of compensation
55,189
Share-based compensation
41,000
47
552
410
23,848
255,524
691,614
Exercise of stock options, net
of shares presented for exercise
Excess tax benefits on
share-based compensation
Net income
Distribution to non-contolling interests
117,707
1,177
271,037
—
—
—
—
—
—
215,094
—
—
—
—
—
—
—
—
—
—
—
—
23,895
256,076
692,024
272,214
215,094
4,159,101
72,370
4,231,471
—
(104,994)
(104,994)
balance at december 31, 2007
5,375,381
$ 53,754
$ 11,768,799
$ 12,420,387
$ 583,533
$ 24,826,473
Stock issued under
Employee Stock Purchase Plan
2,817
Stock issued in lieu of compensation
55,644
Share-based compensation
93,680
28
556
937
20,535
343,324
1,304,852
Exercise of stock options
139,181
1,392
331,634
Net share settlement of
restricted stock units
Excess tax benefits on
share-based compensation
Net income
Distribution to non-contolling interests
—
—
—
—
—
—
—
—
(206,044)
211,234
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,563
343,880
1,305,789
333,026
(206,044)
211,234
5,116,000
44,465
5,160,465
—
(104,995)
(104,995)
balance at december 31, 2008
5,666,703
$ 56,667
$ 13,774,334
$ 17,536,387
$ 523,003
$ 31,890,391
Stock issued in lieu of compensation
43,279
Share-based compensation
Exercise of stock options
Excess tax benefits on
share-based compensation
Net income
Distribution to non-contolling interests
196,000
39,375
—
—
—
433
1,960
394
—
—
—
183,067
898,853
129,938
23,421
—
—
—
—
—
—
—
183,500
—
—
—
900,813
130,332
23,421
5,929,425
52,559
5,981,984
—
(105,000)
(105,000)
balance at december 31, 2009
5,945,357
$ 59,454
$ 15,009,613
$ 23,465,812
$ 470,562
$ 39,005,441
The accompanying notes are an integral part of these consolidated financial statements.
17
CoNSolIDaTeD STaTeMeNTS oF CaSh FloWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Restructuring charge—leasehold improvement write-off
Equity in net income of unconsolidated affiliate and partnership
Gain on disposal of property, plant, and equipment
Gain on acquisitions
Share-based compensation
Stock issued in lieu of compensation
Deferred income taxes
Changes in operating assets and liabilities, net of effects
from acquisition:
Receivables, net
Inventories
Prepaid expenses
Accounts payable
Accrued taxes and other expenses
Retirement and other liabilities
Other assets
Years ended december 31
2009
2008
2007
$
5,981,984
$
5,160,465
$
4,231,471
2,895,062
2,976,550
2,815,021
—
—
(11,206)
(839,690)
900,813
183,500
226,950
(341,536)
1,863,118
72,715
392,641
(330,726)
204,553
(509,425)
170,000
(7,218)
(57,457)
—
1,305,789
343,880
16,469
777,392
(434,506)
350,013
(2,776,715)
(937,577)
(119,173)
(98,161)
—
(15,038)
(32,500)
—
692,024
256,076
1,209,664
(166,829)
53,051
(54,783)
1,073,753
760,267
94,560
(228,077)
Net cash provided by operating activities
10,688,753
6,669,751
10,688,660
Cash flows from investing activities:
Additions to property, plant, and equipment
Acquisition of Stephenson & Lawyer net of cash acquired
Acquisition of Foamade Industries, Inc.’s assets
Acquisition of E.N. Murray Co. net of cash acquired
Acquisition of Advanced Materials Group assets
Payments received on affiliated partnership
Proceeds from sale of property, plant, and equipment
(1,856,837)
—
(375,000)
(1,440,534)
(620,000)
—
13,364
(2,763,250)
(5,181,066)
—
—
—
7,218
101,020
(2,100,584)
—
—
—
—
15,038
32,500
Net cash used in investing activities
(4,279,007)
(7,836,078)
(2,053,046)
Cash flows from financing activities:
Proceeds from long-term borrowings
Distribution to United Development Company Partners
(non-controlling interest)
Excess tax benefits on share-based compensation
Proceeds from sale of common stock
Proceeds from exercise of stock options
Principal repayment of long-term debt
Principal repayment of obligations under capital leases
Cash settlements of restricted stock units
4,000,000
—
786,000
(105,000)
23,421
—
130,332
(576,690)
(1,612,665)
—
(104,995)
211,234
20,563
333,026
(714,027)
(704,407)
(206,044)
(104,994)
215,094
23,895
272,214
(1,095,607)
(688,991)
—
Net cash provided by (used in) financing activities
1,859,398
(1,164,650)
(592,389)
Net change in cash
Cash and cash equivalents at beginning of year
8,269,144
6,729,370
(2,330,977)
9,060,347
8,043,225
1,017,122
Cash and cash equivalents at end of year
$ 14,998,514
$ 6,729,370
$ 9,060,347
The accompanying notes are an integral part of these consolidated financial statements.
18
NoTeS To CoNSolIDaTeD FINaNCIal STaTeMeNTS
December 31, 2009, and 2008
(1) Summary of Significant Accounting Policies
UFP Technologies, Inc. (“The Company”) is an innovative designer and custom converter of foams, plastics, and natural fiber products principally serving
the automotive, computer and electronics, medical, aerospace and defense, consumer, and industrial markets. The Company was incorporated in the State
of Delaware in 1993.
(a) Principles of Consolidation
The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc., its wholly-owned subsidiaries,
Moulded Fibre Technology, Inc., Simco Automotive Trim, Inc., Simco Technologies, Inc., and Stephenson & Lawyer, Inc. and its wholly-owned
subsidiary, Patterson Properties Corporation. The Company also consolidates United Development Company Limited, of which the Company owns
26.32% (see Note 8). All significant inter-company balances and transactions have been eliminated in consolidation.
(b) Codification
Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official
source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The historical GAAP hierarchy was
eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. The
Company’s accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to
the Company’s consolidated financial statements have been changed to refer to the appropriate section of ASC.
(c) Accounts Receivable
The Company periodically reviews the collectability of its accounts receivable. Provisions are recorded for accounts that are potentially uncollectible.
Determining adequate reserves for accounts receivable requires management’s judgment. Conditions impacting the realizability of the Company’s
receivables could cause actual asset write-offs to be materially different than the reserved balances as of December 31, 2009.
(d)
Inventories
Inventories that include material, labor, and manufacturing overhead are valued at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method.
The Company periodically reviews the realizability of its inventory for potential obsolescence. Determining adequate obsolescence requires
management’s judgment. Conditions impacting the realizability of the Company’s inventory could cause actual asset write-offs to be materially
different than the reserve balances as of December 31, 2009.
(e) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and are depreciated or amortized using the straight-line method over the estimated useful lives
of the assets or the related lease term, if shorter (for financial statement purposes) and accelerated methods (for income tax purposes). Certain
manufacturing machines that are dedicated to a specific program—where total units to be produced over the life of the program are estimable—are
depreciated using the modified units of production method for financial statement purposes.
Estimated useful lives of property, plant, and equipment are as follows:
Leasehold improvements
Buildings and improvements
Equipment
Furniture and fixtures
Shorter of estimated useful life or remaining lease term
31.5 years
8–10 years
5–7 years
Property, plant, and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the
estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss
to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash
flow analysis.
(f)
Income Taxes
The Company’s income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax expense (benefit) results
19
from the net change during the year in deferred tax assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation
allowance. Should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such determination was made.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial
statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
settlement. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense.
(g) Revenue Recognition
The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an
arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured
of collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these criteria, in some
cases, requires management’s judgments. Should changes in conditions cause management to determine these criteria are not met for certain future
transactions, revenue for any reporting period could be adversely affected.
(h)
Investments in Realty Partnership
The Company has invested in Lakeshore Estates Associates, a realty limited partnership. The Lakeshore Estates investment is stated at cost, plus or
minus the Company’s proportionate share of the limited partnership’s income or losses, less any distributions received from the limited partnership.
The Company has recognized its share of Lakeshore Estates Associates’ losses only to the extent of its original investment in, and advances to, this
partnership. The Company’s carrying amount for this investment is zero at December 31, 2009, and 2008, respectively.
(i) Goodwill
Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that
would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one
level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics.
The Company’s reporting units include its Component Products segment, Packaging segment (excluding its Molded Fiber operation), and its Molded
Fiber operation. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated
fair value of the reporting unit. The Company completed its most recent annual goodwill impairment test as of December 31, 2009. Fair values of the
reporting units were determined using several valuation methodologies, including a combination of income and market approaches, which include the
use of Level 1 and Level 3 inputs (Note 19). The fair values of both reporting units that had goodwill balances were estimated to be more than 100%
greater than their respective carrying values and, therefore, it was determined that there was no goodwill impairment in 2009. There also was no
goodwill impairment in 2008 or 2007.
(j)
Intangible Assets
Intangible assets include patents and other intangible assets. Intangible assets with an indefinite life are not amortized. Intangible assets with a
definite life are amortized on a straight-line basis, with estimated useful lives ranging from eight to 14 years. Indefinite-lived intangible assets are
tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate
that the carrying amount may be impaired. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate
that their value may be reduced.
(k) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2009,
and 2008, cash equivalents primarily consisted of money market accounts and certificates of deposit that are readily converted into cash. The
Company utilizes zero-balance disbursement accounts to manage its funds. As such, outstanding checks at the end of a year are reclassified to
accounts payable. At December 31, 2009, and 2008, the amount reclassified was approximately $1.6 million.
The Company maintains its cash in bank deposit accounts, money market funds, and certificates of deposit that at times exceed federally insured
limits. The Company periodically reviews the financial stability of institutions holding its accounts, and does not believe it is exposed to any significant
risk on cash.
(l) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets
20
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(m) Segments and Related Information
The Company has adopted the provisions of ASC 280, Segment Reporting, which established standards for the way that public business enterprises
report information and operating segments in annual financial statements, and requires reporting of selected information in interim financial reports
(see Note 21).
(n) Share-Based Compensation
When accounting for equity instruments exchanged for employee services, share-based compensation cost is measured at the grant date, based on
the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of
the equity grant).
Share-based compensation cost that has been charged against income for stock compensation plans is as follows:
Selling, general, and administrative expense
$
900,813
$ 1,305,789
$
692,024
Year ended december 31
2009
2008
2007
The compensation expense for stock options granted during the three-year period ended December 31, 2009, was determined as the intrinsic
fair market value of the options, using a lattice-based option valuation model with the assumptions noted as follows:
Expected volatility
Expected dividends
Risk-free interest rate
Exercise price
2009
2008
2007
Year ended december 31
68.8% to 84.6%
88.0%
76.7% to 89.3%
None
3.6%
None
4.0%
Closing price on
date of grant
Closing price on
date of grant
None
3.4% to 5.0%
Closing price on
date of grant
Imputed life
4.1 to 7.9 years (output in
7.9 years (output in
4.1 to 7.9 years (output in
lattice-based model)
lattice-based model)
lattice-based model)
The weighted average grant date fair value of options granted during 2009, 2008, and 2007 was $1.83, $2.87, and $2.38, respectively.
The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was approximately
$291,000, $458,000, and $223,000, for the years ended December 31, 2009, 2008, and 2007, respectively.
(o) Deferred Rent
The Company accounts for escalating rental payments on a straight-line basis over the term of the lease.
(p) Shipping and Handling Costs
Costs incurred related to shipping and handling are included in cost of sales. Amounts charged to customers pertaining to these costs are included
as revenue.
(q) Research and Development
On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as incurred. Approximately
$1.4 million, $1.4 million, and $1.3 million were expensed in the years ended December 31, 2009, 2008, and 2007, respectively.
(r) Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, and accrued taxes and other expenses are stated at carrying amounts that
approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair
value as the interest rate on the debt approximates the Company’s current incremental borrowing rate.
21
(s) Fair Value Measurement
The Company has adopted ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes guidelines for measuring fair
value, and expands disclosures regarding fair value measurements for all assets and liabilities that are measured at fair value on either a recurring
or non-recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities,
which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would
transact and the market-based risk measurement or assumptions that market participants would use in pricing the asset or liability, such as inherent
risk, transfer restrictions, and credit risk.
The Company has not elected fair value accounting for any financial instruments for which fair value accounting is optional.
(2) New Accounting Pronouncements
Non-Controlling Interests The Company adopted updated guidance included in ASC 810, Consolidation, effective January 1, 2009. The updated
guidance in ASC 810 requires (i) that non-controlling (minority) interests be reported as a component of stockholders’ equity; (ii) that net income
attributable to the parent and the non-controlling interest be separately identified in the consolidated statements of operations; (iii) that changes in a parent’s
ownership interest while the parent retains the controlling interest be accounted for as equity transactions; (iv) that any retained non-controlling equity
investment upon the deconsolidation of a subsidiary be initially measured at fair value; and (v) that sufficient disclosures be provided that clearly identify
and distinguish between the interests of the parent and the interests of the non-controlling owners. As a result of the adoption, the Company has reported
its non-controlling interest in United Development Company Limited (“UDT”) as a component of stockholders’ equity in the consolidated balance sheets,
and the net income attributable to its non-controlling interest in UDT has been separately identified in the consolidated statements of operations. The prior
periods presented have also been reclassified to conform to the current classification required by ASC 810.
Business Combinations The Company adopted updated guidance included in ASC 805, Business Combinations, effective January 1, 2009. ASC 805
now requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, and
establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain
provisions of this updated guidance will, among other things, impact the determination of acquisition date fair value of consideration paid in a business
combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. Implementation
of this updated guidance resulted in the Company recognizing gains of approximately $81,000 related to its acquisition of selected assets of Foamade
Industries, Inc. (“Foamade”) in the first quarter of 2009, as well as gains of approximately $558,000 and $201,000 related to its acquisition of selected
assets of E.N. Murray Co. (“ENM”) and Advanced Materials, Inc. (“AMI”), a wholly-owned subsidiary of Advanced Materials Group, Inc., respectively, in the
third quarter of 2009 (Note 19). Cumulative acquisition-related costs of $90,000, that would otherwise have been included as part of the acquisition cost
prior to the adoption of this updated guidance, were charged to expense as incurred.
Variable Interest Entities In June 2009, the FASB issued guidance to change financial reporting of enterprises with variable interest entities (“VIEs”) to
require an enterprise to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the enterprise (1) has the power to
direct the activities of a VIE that most significantly impact the VIE’s economic performance and (2) has the obligation to absorb losses of the VIE or the
right to receive benefits from the VIE that could potentially be significant to the VIE. Also, the guidance requires an ongoing reconsideration of the primary
beneficiary and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information
about an enterprise’s involvement in a VIE. This guidance shall be effective as of the beginning of the Company’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company is currently evaluating the impact of this new guidance.
(3) Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Interest
Income taxes, net of refunds
$
$
205,828
1,648,764
$
355,221
$ 3,817,383
$
$
486,826
322,824
Year ended december 31
2009
2008
2007
22
(4) Receivables
Receivables consist of the following:
Accounts receivable-trade
Less allowance for doubtful receivables
2009
$ 14,691,917
(473,912)
december 31
2008
$
13,141,912
(387,037)
$ 14,218,005
$ 12,754,875
The Company’s accounts receivable balance is comprised of many accounts. The highest receivable account balance as of December 31, 2009,
represented 6% of the total accounts receivable balance as of that date. The Company performs credit evaluations on its customers and obtains credit
insurance on a large percentage of its accounts.
The top customer in the Company’s Component Products segment comprises 13% of that segment’s total sales and 8% of the Company’s total sales for the
year ended December 31, 2009. The top customer in the Company’s Packaging segment comprises 10.6% of that segment’s total sales and 4.1% of the
Company’s total sales for the year ended December 31, 2009.
(5)
Inventories
Inventories consist of the following:
Raw materials
Work in process
Finished goods
Less reserve for obsolescence
december 31
2009
2008
$
4,924,228
$
5,120,755
699,102
2,574,813
(550,626)
324,782
3,012,984
(305,775)
$
7,647,517
$
8,152,746
(6) Other Intangible Assets
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2009, and 2008 are as follows:
Patents
Non-Compete
Customer List
Total
Gross amount December 31, 2009
$
448,306
$ 200,000
$ 769,436
$ 1,417,742
Accumulated amortization at December 31, 2009
(385,933)
(53,240)
(160,832)
(600,005)
Net balance at December 31, 2009
$
62,373
$ 146,760
$ 608,604
$ 817,737
Gross amount December 31, 2008
Accumulated amortization at December 31, 2008
448,306
(351,481)
50,000
(26,720)
120,436
(64,700)
$ 618,742
(442,901)
Net balance at December 31, 2008
$
96,825
$
23,280
$
55,736
$ 175,841
Amortization expense related to intangible assets was $157,104, $69,072, and $69,072 for the years ended December 31, 2009, 2008, and
2007, respectively. Future amortization for the years ending December 31 will be approximately:
2010
2011
2012
2013
$ 228,872
197,456
159,800
159,800
2014 and thereafter
71,809
Total
$ 817,737
23
(7) Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
december 31
2009
2008
Land and improvements
Buildings and improvements
Leasehold improvements
Equipment
Furniture and fixtures
Construction in progress—equipment/buildings
$
589,906
6,579,670
2,778,894
31,133,446
2,480,510
20,152
$
470,872
6,496,542
1,570,906
28,873,836
2,288,428
966,195
$ 43,582,578
$
40,666,779
Depreciation and amortization expense for the years ended December 31, 2009, 2008, and 2007 was $2,737,958, $2,907,478,
and $2,745,948, respectively.
(8)
Investment in and Advances to Affiliated Partnership
The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). The Company has
consolidated the financial statements of UDT for all periods presented because it has determined that UDT is a VIE, and the Company is the primary
beneficiary.
Included in the December 31 consolidated balance sheets are the following amounts related to UDT:
december 31
2009
2008
Cash
Net property, plant, and equipment
Accrued expenses
Current and long-term debt
$
166,940
1,187,966
12,900
703,341
$
148,746
1,311,273
12,900
737,289
(9)
Indebtedness
On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is comprised of: (i) a revolving credit
facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20 year straight-
line amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization. Extensions of credit under the revolving credit facility are
based in part upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. As of December 31,
2009, the Company had availability of approximately $14.4 million based upon collateral levels in place as of that date. The credit facility calls for interest
of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25%
to zero. In both cases the applicable margin is dependent upon Company performance. The loans are collateralized by a first priority lien on all of the
Company’s assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the credit facility, the Company
is subject to a minimum fixed-charge coverage financial covenant. The Company’s $17 million revolving credit facility matures November 30, 2013; the
term loans are all due on January 29, 2016. At December 31, 2009, the interest rate on these facilities was 1.26%.
UDT has a mortgage note collateralized by the Florida facility, dated May 22, 2007. The note had an original principal balance of $786,000 and calls for
180 monthly payments of $7,147. The interest rate is fixed at approximately 7.2%.
The Company had capital lease debt of $1,612,665 as of December 31, 2008, which was paid off in full with proceeds from the above credit facilities.
24
Long-term debt consists of the following:
Mortgage notes
Note payable
UDT mortgage
Equipment loan
Total long-term debt
Current Installments
december 31
2009
2008
$
5,602,415
$
1,859,000
1,778,224
703,341
40,850
8,124,830
(623,007)
2,062,405
737,288
—
4,658,693
(716,697)
Long-term debt, excluding current installments
$
7,501,823
$
3,941,996
Aggregate maturities of long-term debt are as follows:
Year ending December 31:
2010
2011
2012
2013
2014 and there after
(10) Accrued Taxes and Other Expenses
Accrued taxes and other expenses consist of the following:
$
623,007
654,875
622,685
625,807
5,598,456
$
8,124,830
Compensation
Benefits/self-insurance reserve
Paid time off
Commissions payable
Plant consolidation
Income taxes payable (overpayment)
Unrecognized tax benefits
Other
december 31
2009
2008
$
2,116,597
$
2,215,874
648,791
764,576
334,356
—
389,384
545,000
1,354,122
901,580
688,315
370,432
316,000
(573,953)
560,000
1,751,753
$
6,152,826
$
6,230,001
(11) Income Taxes
The Company’s income tax provision (benefit) for the years ended December 31, 2009, 2008, and 2007 consists of the following:
Current:
Federal
State
Deferred:
Federal
State
Years ended december 31
2009
2008
2007
$
2,100,000
$
2,270,000
$
490,000
709,000
983,000
391,000
2,590,000
2,979,000
1,374,000
263,000
(36,000)
227,000
41,000
(25,000)
16,000
1,147,000
63,000
1,210,000
Total income tax provision
$
2,817,000
$
2,995,000
$
2,584,000
25
At December 31, 2009, the Company has net operating loss carryforwards for federal income tax purposes of approximately $2,192,000 and for state
income tax purposes of approximately $1,545,000, which are available to offset future taxable income and expire during the federal tax years ending
December 31, 2019 through 2024. The future benefit of the federal net operating loss carryforwards will be limited to approximately $300,000 per year in
accordance with Section 382 of the Internal Revenue Code.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and (liabilities) are approximately as follows:
Equity-based compensation
Compensation programs
Retirement liability
Net operating loss carryforwards
Inventory capitalization
Reserves
Other
Excess of book over tax basis of fixed assets
Goodwill
Acquisition gains
Inventory method change
december 31
2009
2008
$
401,000
$
387,000
474,000
95,000
806,000
230,000
489,000
49,000
(930,000)
(563,000)
(270,000)
(147,000)
497,000
184,000
866,000
246,000
412,000
(5,000)
(417,000)
(499,000)
—
(295,000)
Net deferred tax assets
$
634,000
$ 1,376,000
The amount recorded as net deferred tax assets as of December 31, 2009, and 2008 represents the amount of tax benefits of existing deductible
temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the
carryforward period. The Company believes that the net deferred tax asset of $634,000 at December 31, 2009, is more likely than not to be realized
in the carryforward period. This balance includes the tax benefit associated with the acquisition of the common stock of Stephenson & Lawyer, Inc., as
discussed in Note 19. Management reviews the recoverability of deferred tax assets during each reporting period.
The actual tax provision for the years presented differs from the “expected” tax provision for those years, computed by applying the U.S. federal corporate
rate of 34% to income before income tax expense as follows:
Computed “expected” tax rate
34.0%
34.0%
Years ended december 31
2009
2008
Increase (decrease) in income taxes resulting from:
State taxes, net of federal tax benefit
Meals and entertainment
R&D credits
Domestic production deduction
Non-deductible ISO stock option expense
Acquisition gains
Other
3.4
0.2
(0.9)
(1.7)
0.2
5.6
0.2
(1.2)
(2.1) —
0.4
0.5
(3.3) — —
0.1
(0.2)
2007
34.0%
4.5
0.3
(1.1)
(0.3)
37.9%
Effective tax rate
32.0%
36.7%
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company has not been audited by the Internal
Revenue Service since 2001 or by any states in connection with income taxes, with the exception of returns filed in Michigan (which have been audited
through 2004) and income tax returns filed in Massachusetts for 2005 and 2006 (which are currently being audited). The tax returns for the years
2004 through 2006, and certain items carried forward from earlier years and utilized in those returns, remain open to examination by the IRS and
various state jurisdictions.
26
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) resulting from uncertain tax positions is as follows:
Federal and State Tax
2009
2008
Gross UTB balance at beginning of fiscal year
$
560,000
Reductions for tax position for prior years
(15,000)
$ 560,000
—
Gross UTB balance at December 31
$
545,000
$
560,000
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2009, and 2008 are $545,000
and $560,000, respectively, for each year.
At December 31, 2009, and 2008, accrued interest and penalties on a gross basis, which are included above the gross (UTB) balance, were $115,000
for each year.
(12) Net Income Per Share
Basic income per share is based upon the weighted average common shares outstanding during each year. Diluted income per share is based upon the
weighted average of common shares and dilutive common stock equivalent shares outstanding during each year. The weighted average number of shares
used to compute both basic and diluted income per share consisted of the following:
Basic weighted average common shares
outstanding during the year
Weighted average common equivalent
shares due to stock options and
restricted stock units
Diluted weighted average common
shares outstanding during the year
Years ended december 31
2009
2008
2007
5,829,580
5,549,830
5,306,948
464,384
712,836
554,472
6,293,964
6,262,666
5,861,420
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average
market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included
in the computation of diluted earnings per share because the effect would have been antidilutive. For the years ended December 31, 2009, 2008, and
2007, the number of stock awards excluded from the computation was 190,484, 41,769, and 29,877, respectively.
(13) Stock Option and Equity Incentive Plans
Employee Stock Option Plan
The Company’s 1993 Employee Stock Option Plan (“Employee Stock Option Plan”), which is stockholder approved, provides long-term rewards and
incentives in the form of stock options to the Company’s key employees, officers, employee directors, consultants, and advisors. The plan provides for
either non-qualified stock options or incentive stock options for the issuance of up to 1,550,000 shares of common stock. The exercise price of the
incentive stock options may not be less than the fair market value of the common stock on the date of grant, and the exercise price for non-qualified stock
options shall be determined by the Compensation Committee. These options expire over five- to ten-year periods.
Options granted under the plan generally become exercisable with respect to 25% of the total number of shares subject to such options at the end of each
12-month period following the grant of the options, except for options granted to officers, which may vest on a different schedule. At December 31, 2009,
there were 605,000 options outstanding under the Employee Stock Option Plan.
27
Incentive Plan
In June 2003, the Company formally adopted the 2003 Incentive Plan (the “Plan”). The Plan was originally intended to benefit the Company by offering
equity-based incentives to certain of the Company’s executives and employees, thereby giving them a permanent stake in the growth and long-term success
of the Company and encouraging the continuance of their involvement with the Company’s businesses. The Plan was amended effective June 4, 2008,
to permit certain performance-based cash awards to be made under the Plan. The amendment also added appropriate language so as to enable grants
of stock-based awards under the Plan to continue to be eligible for exclusion from the $1,000,000 limitation on deductibility under Section 162(m) of the
Internal Revenue Code (the “Code”).
Two types of equity awards may be granted to participants under the Plan: restricted shares or other stock awards. Restricted shares are shares of
common stock awarded subject to restrictions and to possible forfeiture upon the occurrence of specified events. Other stock awards are awards that are
denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of common stock. Such awards may
include Restricted Stock Unit Awards (“RSUs”), unrestricted or restricted stock, nonqualified options, performance shares, or stock appreciation rights. The
Company determines the form, terms, and conditions, if any, of any awards made under the Plan. The maximum number of shares of common stock, in
the aggregate, that may be delivered in payment or in respect of stock issued under the Plan is 1,250,000 shares.
Through December 31, 2009, 675,958 shares of common stock have been issued under the 2003 Incentive Plan, none of which have been restricted. An
additional 276,124 shares are being reserved for outstanding grants of RSUs and other share-based compensation that are subject to various performance
and time-vesting contingencies.
Director Plan
Effective July 15, 1998, the Company adopted the 1998 Director Plan for the benefit of non-employee directors of the Company. The 1998 Director Plan
provides for options for the issuance of up to 975,000 shares of common stock. These options become exercisable in full at the date of grant and expire 10
years from the date of grant. At December 31, 2009, there were 391,609 options outstanding under the 1998 Director Plan. On June 3, 2009, the 1998
Director Plan was amended to permit the issuance of other equity-based securities and was renamed the 2009 Non-Employee Director Stock Incentive Plan.
The following is a summary of stock option activity under all plans:
Outstanding December 31, 2008
Granted
Exercised
Cancelled or expired
Outstanding December 31, 2009
Exercisable at December 31, 2009
Vested and expected to vest at
December 31, 2009
Shares
Weighted Average
Under Options
Exercise Price
Aggregate
Intrinsic Value
973,183
69,301
(39,375)
(6,500)
996,609
975,359
$
$
$
2.97
4.17
3.31
3.65
3.03
2.99
—
—
—
—
$ 3,458,233
$ 3,423,510
996,609
$
3.03
$ 3,458,233
The following is a summary of information relating to stock options outstanding and exercisable by price range as of December 31, 2009:
—————————— OPTIONS OUTSTANDING ——————————
—-— OPTIONS ExERCISABLE ——
Range of
Outstanding
remaining contractual
Weighted average
Weighted
average
Exercisable as
Weighted
average
exercise prices
as of 12/31/09
life (years)
exercise price
of 12/31/09
exercise price
$0.00 - $0.99
$1.00 - $1.99
$2.00 - $2.99
$3.00 - $3.99
$4.00 - $4.99
$5.00 - $5.99
$6.00 - $6.99
$10.00 - $10.99
$12.00 - $12.99
50,000
231,911
333,148
158,110
74,301
59,456
47,914
27,500
14,269
996,609
2.1
3.1
3.2
3.7
8.3
6.3
5.7
8.5
8.4
4.1
$ 0.81
1.15
2.49
3.26
4.22
5.14
6.18
10.14
12.37
50,000
231,911
333,148
158,110
63,051
54,456
42,914
27,500
14,269
$ 0.81
1.15
2.49
3.26
4.22
5.14
6.14
10.14
12.37
$ 3.03
975,359
$ 2.99
28
During the years ended December 31, 2009, 2008, and 2007, the total intrinsic value of all options exercised (i.e., the difference between the market price
and the price paid by the employees to exercise the options) was $79,269, $929,281, and $357,426, respectively, and the total amount of consideration
received from the exercise of these options was $130,332, $333,026, and $272,214, respectively.
During the years ended December 31, 2009, 2008, and 2007, the Company recognized compensation expense related to stock options granted to directors
and employees of $150,482, $221,324, and $211,050, respectively.
On February 24, 2009, the Company’s Compensation Committee approved the issuance of 25,000 shares of unrestricted common stock to the Company’s
Chairman, Chief Executive Officer, and President under the 2003 Equity Incentive Plan. The shares were issued on December 31, 2009. The Company
has recorded compensation expense of $106,000 for the year ended December 31, 2009, based on the grant date price of $4.24 at February 24, 2009.
Stock compensation expense of $154,500 and $115,997 was recorded in 2008 and 2007, respectively, for similar awards.
It has been the Company’s practice to allow executive officers to take a portion of their earned bonuses in the form of the Company’s common stock. The
value of the stock received by executive officers, measured at the closing price of the stock on the date of grant, was $183,500, $343,880, and $256,076
for the years ended December 31, 2009, 2008, and 2007, respectively.
Beginning in 2006, RSUs have been granted under the 2003 Incentive Plan to the executive officers of the Company. The stock unit awards are subject to
various time-based vesting requirements, and certain portions of these awards are subject to performance criteria of the Company. Compensation expense
on these awards is recorded based on the fair value of the award at the date of grant, which is equal to the Company’s closing stock price, and is charged
to expense ratably during the service period. Upon vesting, RSUs are, in some instances, net-share settled to cover the required withholding tax, and the
remaining amount is converted into an equivalent number of common shares. No compensation expense is taken on awards that do not become vested,
and the amount of compensation expense recorded is adjusted based on management’s determination of the probability that these awards will become
vested. The following table summarizes information about stock unit award activity during the year ended December 31, 2009:
Restricted Stock Units
Weighted Average
Award Date Fair Value
Outstanding at December 31, 2008
Awarded
Shares distributed
Shares exchanged for cash
Forfeited/cancelled
Outstanding at December 31, 2009
352,000
95,124
(171,000)
—
—
276,124
$
5.79
4.24
5.83
—
—
$
5.19
The Company recorded $644,331, $929,965, and $364,977 in compensation expense related to these RSUs during the years ended
December 31, 2009, 2008, and 2007, respectively.
The following summarizes the future share-based compensation expense the Company will record as the equity securities granted through
December 31, 2009, vest:
Options
Common Stock
$
27,904
16,394
5,312
2,646
$ —
—
—
—
$
Restricted
Stock Units
431,451
265,509
118,715
16,805
Total
$
459,355
281,903
124,027
19,451
$
52,256
$ —
$
832,480
$
884,736
2010
2011
2012
2013
Total
(14) Preferred Stock
On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock,
par value $0.01 per share on March 20, 2009, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from
the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Share”), of the
Company, at a price of $25.00 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The rights
expire on March 19, 2019.
29
(15) Supplemental Retirement Benefit
The Company provides discretionary supplemental retirement benefits for certain retired officers, which will provide an annual benefit to these individuals
for various terms following separation from employment. The Company recorded an expense of approximately $35,000, $27,000, and $4,000 for the
years ended December 31, 2009, 2008, and 2007, respectively. The present value of the supplemental retirement obligation has been calculated using
an 8.5% discount rate, which is included in retirement and other liabilities. Total projected future cash payments for the years ending December 31,
2010 through 2013 are approximately $96,250, $75,000, $75,000, and $75,000, respectively, and approximately $170,833 thereafter.
(16) Commitments and Contingencies
(a) Leases – The Company has operating leases for certain facilities that expire through 2015. Certain of the leases contain escalation clauses that
require payments of additional rent, as well as increases in related operating costs.
Future minimum lease payments under non-cancelable operating leases as of December 31, 2009, are as follows:
Years Ending December 31
2010
2011
2012
2013
Thereafter
Operating Leases
$ 1,803,371
1,338,139
1,180,901
779,534
588,853
Total minimum lease payments
$ 5,690,798
Rent expense amounted to approximately $2,442,000, $2,214,000, and $2,464,000, in 2009, 2008, and 2007, respectively.
(b) Legal – The Company is a defendant in various administrative proceedings that are being handled in the ordinary course of business. In the
opinion of management of the Company, these suits and claims should not result in final judgments or settlements that, in the aggregate, would
have a material adverse effect on the Company’s financial condition or results of operations.
(17) Employee Benefits Plans
The Company maintains a profit-sharing plan for eligible employees. Contributions to the Plan are made in the form of matching contributions
to employee 401k deferrals, as well as discretionary amounts determined by the Board of Directors, and amounted to approximately $709,000,
$703,000, and $646,000 in 2009, 2008, and 2007, respectively.
The Company has a partially self-insured health insurance program that covers all eligible participating employees. The maximum liability is limited by
a stop loss of $100,000 per insured person, along with an aggregate stop loss determined by the number of participants.
During 2006, the Company established an Executive, Non-qualified “Excess” Plan (“the Plan”), which is a deferred compensation plan available
to certain executives. The Plan permits participants to defer receipt of part of their current compensation to a later date as part of their personal
retirement or financial planning. Participants have an unsecured contractual commitment by the Company to pay amounts due under the Plan. There
is currently no security mechanism to ensure that the Company will pay these obligations in the future.
The compensation withheld from Plan participants, together with investment income on the Plan, is reflected as a deferred compensation obligation to
participants, and is classified within retirement and other liabilities in the accompanying balance sheets. At December 31, 2009, the balance of the
deferred compensation liability totaled approximately $753,000. The related assets, which are held in the form of a Company-owned, variable life
insurance policy that names the Company as the beneficiary, are reported within other assets in the accompanying balance sheets, and are accounted
for based on the underlying cash surrender values of the policies, and totaled approximately $749,000 as of December 31, 2009.
30
(18) Fair Value of Financial Instruments
Financial instruments recorded at fair value in the balance sheets, or disclosed at fair value in the footnotes, are categorized below based upon the
level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820, Fair Value Measurements and
Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 – Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for
the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information
on an ongoing basis.
Level 2 – Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the
measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The Company’s assets and liabilities that are measured at fair value consist of money market funds and certificates of deposit, both considered
cash equivalents, which are categorized by the levels discussed above and in the table below:
Cash Equivalents
Level 1
Level 2
Level 3
Total
Money market funds
Certificates of deposits
$
100,000
$
—
$ —
$
100,000
—
3,000,000
—
3,000,000
Total
$ 100,000
$
3,000,000
$ —
$ 3,100,000
As of December 31, 2009, the Company does not have any significant non-recurring measurements of non-financial assets and non-financial
liabilities. The Company may have additional disclosure requirements in the event an impairment of the Company’s non-financial assets occurs
in a future period.
(19) Acquisition
On March 9, 2009, the Company acquired selected assets of the Hillsdale, Michigan, operations of Foamade. The Hillsdale operations of Foamade
specialized in the fabrication of technical urethane foams for a myriad of industries and bring to the Company further penetration into applications
using this family of foams, as well as incremental sales to fold into its operations. The Company has transitioned the acquired assets to its Grand
Rapids, Michigan, plant.
On July 7, 2009, the Company acquired substantially all of the assets of ENM, a Denver, Colorado-based foam fabricator, for $2,750,000. ENM
specialized in the fabrication of technical urethane foams primarily for the medical industry. This acquisition brings to the Company further access and
expertise in fabricating technical urethane foams and a seasoned management team. The Company has leased the former ENM Denver facilities for a
period of two years.
On August 24, 2009, the Company acquired selected assets of AMI for $620,000. Located in Rancho Dominguez, California, AMI specialized in
the fabrication of technical urethane foams primarily for the medical industry and brings to the Company further penetration into this market. The
Company has assumed the lease of the 56,000-square-foot Rancho Dominguez location that is due to expire in November 2010.
The Company recorded gains of approximately $81,000, $558,000, and $201,000 on the acquisitions of selected assets of Foamade, ENM, and
AMI, respectively, as it acquired the assets in bargain purchases. The Company believes that the bargain purchase gains resulted from opportunities
created by the overall weak economy.
31
The following table summarizes the consideration paid and the acquisition date fair value of the assets acquired and liabilities assumed relating
to each transaction:
Consideration
Cash
Foamade
ENM
AMI
March 9, 2009
July 7, 2009
August 24, 2009
$
375,000
$
2,750,000
$
620,000
Fair value of total consideration transferred
375,000
2,750,000
620,000
Acquisition costs (legal fees) included in SG&A
25,000
30,000
35,000
Recognized amounts of identifiable assets acquired
Cash
Accounts receivable
Inventory
Other assets
Fixed assets
Non-compete
Customer list
Total identifiable net assets
Payables and accrued expenses
Equipment loan
Deferred tax liabilities
—
—
182,864
—
189,100
30,000
103,000
504,964
—
—
(49,386)
1,309,466
832,054
922,497
37,708
812,000
120,000
490,000
4,523,725
(830,341)
(42,827)
(342,212)
—
289,540
252,528
—
345,750
—
56,000
943,818
—
—
(123,051)
Net assets acquired
$
455,578
$
3,308,345
$
820,767
With respect to the acquisition of selected assets of ENM, the Company acquired gross accounts receivable of $873,919, of which it deemed $41,865
to be uncollectible. It therefore recorded the accounts receivable at its fair market value of $832,054. With respect to the acquisition of selected
assets of AMI, the Company acquired gross accounts receivable of $324,540, of which it deemed $35,000 to be uncollectible. It therefore recorded
the accounts receivable at its fair market value of $289,540. With respect to the noncompete and customer list intangible assets acquired from
Foamade, ENM, and AMI, the weighted average amortization period is five years. No residual balance is anticipated for any of the intangible assets.
The following table contains an unaudited pro forma condensed consolidated statement of operations for the years ended December 31, 2009, and
2008, as if the ENM acquisition had occurred at the beginning of the respective periods:
Years Ended December 31
2009
2008
Sales
Net Income
Earnings per share
Basic
Diluted
$ 105,228,869
6,070,518
$ 123,049,000
5,615,326
$
$
1.04
0.96
$
$
1.01
0.90
32
It is impractical to determine the amount of sales and earnings that would have been recorded, had the Foamade and AMI acquisitions occurred on
January 1, 2009, or January 1, 2008, as records for these time periods are unavailable since the Company only acquired selected assets and not the
entire operations. The following table contains the 2009 sales and net income associated with ENM and AMI from the date of acquisition through
December 31, 2009:
ENM
AMI
Sales
Net Income
$ 6,396,000
381,000
$ 1,149,000
(74,000)
The amount of revenue included in the Company’s condensed consolidated statements of operations for the year ended December 31, 2009,
associated with the acquisition of Foamade is approximately $3,078,000. The Company is unable to break out the Foamade net income as these
products have been merged into its Grand Rapids, Michigan, facility (Component Products) and have become part of that reporting unit.
The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would
have actually occurred had the ENM acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in
such pro forma information.
(20) Plant Consolidation
On August 5, 2008, the Company committed to move forward with a plan to close its Macomb Township, Michigan, automotive plant and consolidate
operations into its newly acquired 250,000-square-foot building in Grand Rapids, Michigan. Through December 31, 2008, the Company recorded
restructuring charges of approximately $1.3 million in one-time, pre-tax expenses and, through December 31, 2009, invested approximately
$759,000 in building improvements in the Grand Rapids facility. The Company does not expect to incur additional costs.
Through the year ended December 31, 2009, the Company has recorded the following activity:
Ending Restructuring
Cash Payments in
Ending Restructuring
Accrual Balance
the 12 Months Ended
Accrual Balance
December 31, 2008
December 31, 2009
December 31, 2009
Earned severance
Moving and training
$
116,000
200,000
$
116,000
200,000
$
316,000
$
316,000
$ —
—
$ —
(21) Segment Data
The Company is organized based on the nature of the products and services that it offers. Under this structure, the Company produces products
within two distinct segments: Packaging and Component Products. Within the Packaging segment, the Company primarily uses polyethylene and
polyurethane foams, sheet plastics, and pulp fiber to provide customers with cushion packaging for their products. Within the Component Products
segment, the Company primarily uses cross-linked polyethylene foam to provide customers in the automotive, athletic, leisure and health and beauty
industries with engineered product for numerous purposes.
The accounting policies of the segments are the same as those described in Note 1. Income taxes and interest expense have been allocated based on
operating results and total assets employed in each segment.
Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The
totals of the reportable segments’ revenues, net profits, and assets agree with the Company’s consolidated amounts contained in the audited financial
statements. Revenues from customers outside of the United States are not material.
33
The top customer in the Company’s Component Products segment comprises 13% of that segment’s total sales and 8% of the Company’s total sales
for the year ended December 31, 2009. The top customer in the Company’s Packaging segment comprises 10.6% of that segment’s total sales and
4.1% of the Company’s total sales for the year ended December 31, 2009.
The results for the Packaging segment include the operations of United Development Company Limited.
Financial statement information by reportable segment is as follows:
2009
Sales
Operating Income
Total assets
Depreciation/Amortization
Capital expenditures
Interest expense
Goodwill
2008
Sales
Operating Income
Total assets
Depreciation/Amortization
Capital expenditures
Interest expense
Goodwill
2007
Sales
Operating Income
Total assets
Depreciation/Amortization
Capital expenditures
Interest expense
Goodwill
Component Products
Packaging
Total
$
60,973,325
$
38,258,009
$
99,231,334
5,806,122
25,409,608
1,658,290
989,027
90,121
4,463,246
2,374,288
34,042,188
1,236,772
867,810
142,626
2,017,791
8,180,410
59,451,796
2,895,062
1,856,837
232,747
6,481,037
Component Products
Packaging
Total
$
60,847,533
$
49,184,068
$
110,031,601
3,076,360
22,098,941
1,820,239
1,053,622
139,586
4,463,246
5,348,371
26,623,720
1,156,311
1,709,628
194,707
2,017,791
8,424,731
48,722,661
2,976,550
2,763,250
334,293
6,481,037
Component Products
Packaging
Total
$
53,782,483
$
39,812,657
$
93,595,140
4,767,544
18,665,208
1,875,488
309,600
174,171
4,463,246
2,479,810
26,887,566
939,533
1,790,984
305,000
2,017,791
7,247,354
45,552,774
2,815,021
2,100,584
479,171
6,481,037
(22) Quarterly Financial Information (unaudited)
Year Ended December 31, 2009
Q1
Q2
Q3
Q4
Net sales
Gross profit
Net income attributable
to UFP Technologies, Inc.
Basic net income per share
Diluted net income per share
Year Ended December 31, 2008
Net sales
Gross profit
Net income attributable
to UFP Technologies, Inc.
Basic net income per share
Diluted net income per share
$ 21,607,763
4,942,788
$ 20,959,033
5,370,964
$ 27,620,250
7,454,276
$ 29,044,288
8,951,387
344,961
0.06
0.06
Q1
566,198
0.10
0.09
Q2
2,112,742
0.36
0.34
2,905,524
0.49
0.45
Q3
Q4
$ 28,008,036
6,888,126
$ 28,456,090
7,627,616
$ 27,501,379
7,410,354
$ 26,066,096
6,636,966
1,148,141
0.21
0.19
1,574,222
0.29
0.25
1,247,285
0.22
0.20
1,146,352
0.20
0.19
34
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, but are not limited to, statements regarding: the Company’s
ability to outperform its competition and achieve growth targets; the Company’s beliefs about the advantages that its size, engineering capability and
high-quality manufacturing will help win new business; the Company’s growth strategies and growth potential, including by way of acquisition; and the
Company’s anticipated adaptability, Investors are cautioned that such forward-looking statements involve risks and uncertainties, including economic
conditions that affect sales of the products of the Company’s customers, the ability of the Company to execute and integrate favorable acquisitions, actions
by the Company’s competitors and the ability of the Company to respond to such actions, the ability of the Company to obtain new customers, the ability
of the Company to fulfill its obligations on long-term contracts and to retain current customers, the public’s perception of environmental issues related to
the Company’s business, the Company’s ability to adapt to changing market needs and other factors. Accordingly, actual results may differ materially from
those projected in the forward-looking statements as a result of changes in general economic conditions, interest rates and the assumptions used in making
such forward-looking statements. Readers are referred to the documents filed by the Company with the SEC, specifically the last reports on Forms 10-K
and 10-Q. The forward-looking statements contained herein speak only of the Company’s expectations as of the date of this financial report. The Company
expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in the Company’s
expectations or any change in events, conditions or circumstances on which any such statement is based.
35
SToCkholDer INForMaTIoN
TRANSFER AGENT AND REGISTRAR
American Stock Transfer
and Trust Company
6201 15th Avenue, 3rd Floor
Brooklyn, NY 11219
CORPORATE HEADQUARTERS
UFP Technologies, Inc.
172 East Main Street
Georgetown, MA 01833 USA
(978) 352-2200 phone
(978) 352-5616 fax
ANNUAL MEETING
The annual meeting of stockholders will be held
at 10:00 a.m., on June 9, 2010, at the Crowne
PLANT LOCATIONS
Alabama, California, Colorado,
Plaza Boston North Shore, 50 Ferncroft Road,
Florida, Georgia, Illinois, Iowa,
Danvers, MA 01923 USA.
COMMON STOCK LISTING
UFP Technologies’ common stock is traded on
NASDAQ under the symbol UFPT.
STOCKHOLDER SERVICES
Stockholders whose shares are held in street
names often experience delays in receiving
Massachusetts, Michigan,
New Jersey, Texas.
INDEPENDENT PUBLIC
ACCOUNTANTS
CCR LLP
1400 Computer Drive
Westborough, MA 01581
company communications forwarded through
brokerage firms or financial institutions. Any
CORPORATE COUNSELS
Lynch Brewer Hoffman & Fink, LLP
shareholder or other interested party who wishes
101 Federal Street, 22nd Floor
to receive information directly should call or
Boston, MA 02110
Brown Rudnick LLP
1 Financial Center
Boston, MA 02111
ABOUT THIS REPORT
The objective of this report is to provide
existing and prospective shareholders a tool
to understand our financial results, what we
do as a company, and where we are headed.
Pierce Aluminum Co.
We aim to achieve these goals with clarity,
simplicity, and efficiency. We welcome your
comments and suggestions.
WORLD WIDE WEB
In the interest of providing timely, cost-
effective information to shareholders, press
releases, SEC filings, and other investor-
oriented matters are available on the
Company’s website at www.ufpt.com
Mitchell C. Rock
Vice President
Sales and Marketing
Daniel J. Shaw, Jr.
Vice President
Engineering
David K. Stevenson
Director, Trustee,
and Consultant
d Directors
o Officers
write the Company. Please specify regular or
electronic mail:
UFP Technologies, Inc.
Attn.: Shareholder Services
172 East Main Street
Georgetown, MA 01833 USA
phone: (978) 352-2200
e-mail: investorinfo@ufpt.com
web: www.ufpt.com
FORM 10-K REPORT
A copy of the Annual Report on Form 10 K
for the fiscal year ended December 31, 2009,
as filed with the Securities and Exchange
Commission, may be obtained without charge
by writing to the Company, or on the Company’s
website at www.ufpt.com.
36
BOARD OF DIRECTORS
AND ExECUTIVE OFFICERS
R. Jeffrey Bailly
do
Chairman, CEO and President
Richard L. Bailly
Co-Founder, Retired
Kenneth L. Gestal
President & Managing Partner
Decision Capital, LLC
David B. Gould
President
Westfield, Inc.
Marc D. Kozin
President
L.E.K. Consulting, LLC
Ronald J. Lataille
Vice President, Treasurer,
and Chief Financial Officer
Richard S. LeSavoy
Vice President
Manufacturing
Thomas Oberdorf
Chief Financial Officer
infoGroup Inc.
Robert W. Pierce, Jr.
Chairman, CEO,
and Co-Owner
d
d
d
d
o
o
d
d
o
o
d
operating principles
customers
We believe the primary purpose of our company is to serve our customers.
We seek to “wow” our customers with responsiveness and great products.
We will conduct our business at all times and in all places with absolute integrity
with regard to employees, customers, suppliers, community, and the environment.
ethics
employees
We are dedicated to providing a positive, challenging,
rewarding work environment for all of our employees.
Quality
We are dedicated to continuously improving our quality of service,
quality of communications, quality of relationships,
and quality of commitments.
simplification
We seek to simplify our business process through the constant re-examination
of our methods and elimination of all non-value-added activities.
entrepreneurship
We strive to create an environment that encourages autonomous
decision-making and a sense of ownership at all levels of the company.
profit
Although profit is not the sole reason for our existence,
it is the lifeblood that allows us to exist.
UFP Technologies, inc. 172 East Main Street, Georgetown, MA 01833 USA
tel: 978.352.2200 • fax: 978.352.5616 • web: www.ufpt.com
Alabama California Colorado Florida Georgia Illinois Iowa Massachusetts Michigan New Jersey Texas