Our cOmpetitive advantages
helping customers win
2010 AnnuAl RepoRt
2010 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:
Medical & Scientific, Automotive, Computers & Electronics,
Aerospace & Defense, Consumer, and Industrial. Learn more about
us at www.ufpt.com.
Contents
2
4
President’s Letter
A Culture of Innovation
5 Diversity of Markets,
Materials and Capabilities
6
7
8
A Strong Competitive Platform
A Proven Strategy for Success
Selected Financial Data
10 Management’s Discussion
and Analysis of Financial
Condition and Results
of Operations
15 Financial Statements
36 Stockholder Information
SALES
OPERATING INCOME
NET INCOME
SHAREHOLDERS EQUITY
Dear Fellow ShareholDer,
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2
2010 was an exciting year that illustrated
and owners of our new partners acknowledge
us capitalize on these growth opportunities.
Also, because our solutions tend to be very
the effectiveness of our strategy and our
their positive experiences in joining forces
These include our technically skilled team
complex and precisely engineered, they are
team’s ability to execute. Our revenue
with UFP. As a result, acquisition candidates
of innovators, our diverse capabilities, our
difficult for competitors to replicate. And we
grew 22%; 10% was organic growth, and
are now contacting us to discuss potential
twelve well-equipped factories, our key
often use custom equipment, designed and
12% came from the three acquisitions we
transactions. It’s a clear win-win for all
vendor partnerships, and more. I hope you
built by our own engineers, to manufacture
completed during 2009. Our operating
parties. Each acquisition brings UFP new
take a few moments to review the attributes
a specific solution. This provides yet another
income grew an impressive 76%, as
products, new capabilities, new customers,
that will help us deliver even more value
barrier to entry for competitors.
greater economies of scale and improved
and greater economies of scale. This, in turn,
to the 3,000-plus customers we currently
plant efficiencies helped us to leverage our
enhances our ability to share best practices
serve, and attract many new customers
revenue increase into record profits for the
across the company and maximize the
as well.
year. We’ve seen a strong start to 2011
effectiveness and efficiency of our plants.
Our operating income
grew an impressive 76%,
as greater economies of
scale and improved plant
efficiencies helped us
to leverage our revenue
increase into record
profits for the year.
as well.
Looking ahead, we’re energized about
the many promising growth opportunities
we see for UFP. I believe we have three
key elements that will help ensure our
continued success.
1. Identified opportunities that are a
strong fit with our core competencies.
2. The resources and infrastructure to
capitalize on those opportunities.
3. The ability to defend and grow the
business, and the associated margins,
we’ve worked so hard to earn.
IdentIfIed opportunItIes
Acquisitions
We see many exciting acquisition
opportunities that can help us continue to
grow our business. We have a substantial
database of strong acquisition candidates,
and a reputation for smoothly integrating
Strategic market focus
We have identified six best-fit strategic
markets for UFP – medical & scientific,
automotive, computer & electronics,
aerospace & defense, consumer, and
GrowInG exIstInG busIness
At UFP, we have 28 active patents, more
new patent filings in process, and proprietary
positions on many important materials. We
also have a reputation for highly engineered
solutions and very efficient manufacturing.
industrial. Drilling down further, we have
These factors combine to explain why UFP
identified the most appropriate segments
has been so successful in maintaining and
within those markets, the most promising
growing the business our creative engineers
customers within those segments, and
have helped us earn. In fact, many of our
the best fit applications for those targeted
customers have been with us for decades.
Sincerely,
customers. The result is a very focused
“opportunity roadmap” that guides the
efforts of our sales and engineering teams
as they work to grow the business. By
concentrating on sophisticated applications
where we can add the most value, we have
been able to increase our margins, and
improve the quality and volume of our book
of business.
resources and Infrastructure
R. Jeffrey Bailly
Chairman and CEO
We seek to secure long-term contracts
from customers. In exchange, we commit
to make continuous improvements in the
production of their solutions. In this way,
we have been able to steadily grow market
share, and maintain or improve margins
by continuously taking costs out of our
operations. Full pricing in year 1 helps to
finance the engineering work, specialized
equipment, tooling, and other resources
needed to develop a superior solution. In
subsequent years, more competitive pricing
makes it difficult for competitors to take that
business away.
companies that contribute quickly to our
In the following pages, we will describe
bottom line. The customers, employees,
some of the key differentiators that will help
We are pleased with
our progress, and
very optimistic about
the opportunities
ahead and our
competitive position.
In conclusion, we are pleased with our
progress, and very optimistic about the
opportunities ahead and our competitive
position. With our strong balance sheet,
deep bench of talented professionals,
and proven strategy, we feel confident
in our ability to continue delivering value
to our cherished customers and to you,
our shareholders.
As always, we appreciate your support,
and thank you for your continued interest
in our Company.
2
3
a Culture oF innovation
DiverSity oF marketS, materialS anD CapabilitieS
Better. Stronger. Lighter. Simpler. More cost-effective. In today’s economy, customers
ENGINEERING BY THE NUMBERS
are always challenging us to make good solutions great and great solutions greater.
We take pride in our ability to meet these challenges, and solve complex packaging
and component issues with the highest levels of quality and precision.
It’s all part of our entrepreneurial culture, in which continuous improvement is simply
the norm. Our people are passionate about innovation. A more elegant design, a more
effective material, a more efficient process … these objectives are part of every project.
Our people understand that, and have the freedom and resources to innovate and deliver.
Our customers demand sophisticated designs and
efficient execution. Our sales growth is a direct
result of our ability to meet that demand.
To us, a culture of innovation isn’t just about great products. It’s also about integrity,
service, and putting customers first. We’ve doubled our sales over the last decade,
from just over $61 million in 2001 to just under $121 million in 2010 – and
quadrupled them in the last two decades. Our highly skilled, highly motivated people
are a big reason why. As we continue to grow, our customers can trust them to provide
the quality, creativity and commitment that will always set UFP apart.
8%
% oF UFP emPloyees
dediCaTed To engineering
46
ToTal nUmber oF
engineering emPloyees
12 years
average TenUre wiTh UFP
The talent and experience of our
engineering team give UFP a major
competitive edge. Customers know
we have deep resources on hand to
produce innovative solutions to their
product and packaging needs.
with our longstanding
relationships with many of the
world’s top material suppliers,
customers trust us to identify the
latest and best materials for their
applications, and keep them on
the leading edge of innovation.
Our diversity is another reason for our success and an important way we help customers
succeed. With our broad array of materials, products, and processes, we offer our
customers a vast range of solutions; we can approach every problem with a blank sheet
of paper, and identify the technologies and materials that will provide a strong solution.
We serve many leading companies across six main
target markets. These diverse opportunities help
insulate us from market downturns, and give us a
wide base of product knowledge and design expertise.
Often, we will create an innovative solution for one industry, then apply the lessons
learned to another. As we share that knowledge systematically across the company, it
helps us to utilize different materials in creative ways, and match the latest materials
to our customers’ most critical needs. This gives us a unique ability to provide an
impressive range of products and services, and constantly offer the latest material
innovations to our customers.
Our diversity and versatility also help us adapt easily to changing market conditions,
and shift resources to where they’re needed most at any given time. Because we do not
depend on any particular sector, customers can depend on UFP to be a solid, stable
partner whether the overall economy is healthy or struggling.
4
5
a Strong Competitive platForm
a proven Strategy For SuCCeSS
Twelve well-equipped plants across the United States give UFP excellent geographic
coverage and strong economies of scale. For example, our size helps us negotiate lower
raw material costs and keep our prices very competitive. And it helps us deliver more
solutions from locations near our customers, often reducing lead times and freight costs.
Of course, it’s the quality of those plants that matters most to customers. We’re always
looking to make smart investments that upgrade our capabilities, whether to increase
manufacturing output, incorporate new advanced materials, enhance quality systems,
or service new applications. UFP has fifteen quality certifications throughout our network
of facilities, including ISO 9001:2008, ISO 13485:2003, ISO/TS 16949:2009, and
ISO 14001:2004. We’ve also invested $11.5 million in capital equipment over the last
OUR PlaNT lOcaTIONS
five years to enhance our capabilities and improve efficiencies. These types of strategic
alabama, CaliFornia, Colorado,
improvements all serve to continually strengthen our overall platform.
We’re always working to improve the quality of
our products and services, enhance the efficiency
of our processes, and increase the value we bring
to customers.
One of our key strategic tenets is to leverage our size by sharing best practices from
plant to plant. If a team in one facility learns how to improve a process or provide a new
service, the rest of the company will learn about it too. In this way, we can continually
sharpen our competitive edge, plant by plant, year after year.
Florida, georgia, illinois, iowa,
massaChUseTTs, miChigan,
new Jersey, Texas
our medical manufacturing
infrastructure now includes
clean room and clean
environment manufacturing
in six of our twelve locations.
6
Our strategy that has delivered a 27% per year increase in shareholder equity over
the last five years has been very consistent. One key piece is acquisitions. More
specifically, it’s our ability to identify and purchase companies that are an excellent
cultural fit, and enhance our ability to serve customers. After three important 2009
acquisitions, 2010 was about integrating those companies, and reaping the benefits of
higher sales volume, cost-saving synergies, and best practice sharing. Together these
acquisitions have improved our bottom line, expanded our capabilities, and strengthened
our competitive position.
With our very strong balance sheet and
growing cash reserves, we are well positioned
to invest in additional acquisition opportunities
in the coming years.
Another key piece is marketing to our sweet spot – focusing on opportunities where our
products and services add the most value. We target our sales and marketing resources
to high-growth opportunities that are best suited to our engineering, materials, and
conversion skills. This helps us to attract new customers, increase the value we bring to
current ones – and further differentiate UFP from the competition.
whether new products, new
markets, new plants, new skills,
or new materials, all of our
acquisitions have brought
competitive advantages we
did not have before.
2000
2002
2008
2009
2009
2009
aCquiSition:
Simco Automotive
aCquiSition:
Excel Foam
aCquiSition:
Stephenson & Lawyer
aCquiSition:
Foamade Industries
aCquiSition:
EN Murray Co.
aCquiSition:
Advanced Materials Group
7
SeleCteD FinanCial Data
The following table summarizes our financial data for the periods presented. You should read the following financial information together with the information
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes to those financial
statements appearing elsewhere in this document. The selected statements of operations data for the fiscal years ended December 31, 2010, 2009, and 2008,
and the selected balance sheet data as of December 31, 2010, and 2009, are derived from the audited financial statements, which are included elsewhere in
this document. The selected statements of operations data for the years ended December 31, 2007, and 2006, and the balance sheet data at December 31,
2008, 2007, and 2006, are derived from our audited financial statements not included in this document.
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
2010
$ 120,766
34,616
2009
99,231
26,719
2008
110,032
28,563
14,380 8,180 8,4252
9,247
1.37
6,749
5,929
0.94
6,294
5,116
0.82
6,263
as of december 31
(in thousands)
consolidated balance sheet data
2010
2009
Working capital
Total assets
Short-term debt and capital lease obligations
$ 38,267
71,809
654
Long-term debt and capital lease obligations, excluding current portion
6,847
Total liabilities
Stockholders’ equity
21,583
50,226
27,702
59,452
623
7,502
20,446
39,005
2008
18,688
48,723
1,419
4,852
16,832
31,890
1 See Note 20 to the consolidated financial statements for segment information.
2 Amount includes restructuring charges of $1.3 million.
2007
93,595
22,810
7,247
4,159
0.71
5,861
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
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, 2009, to December 31, 2010:
fiscal Year ended december 31, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
fiscal Year ended december 31, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
6.10
5.20
6.46
7.10
High
$ 11.06
11.59
12.03
13.28
low
$
3.47
4.03
4.09
5.91
low
$
6.50
8.26
8.51
10.50
nuMber of stockHolders
As of February 15, 2011, there were 93 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 2009 or 2010. 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 up to 1,250,000 shares of 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, 2010, is as follows:
number of shares of
weighted average
ufpt common stock
ufpt common stock
to be issued1
exercise price of
remaining available
outstanding options
for future issuance
number of shares of
1993 Employee Plan2
1998 Director Plan
total option plans
2003 Incentive Plan Options
2003 Incentive Plan RSU
total 2003 Incentive plan
443,750
270,746
714,496
50,000
251,694
301,694
total all stock plans
1,016,190
1 Will be issued upon exercise of outstanding options or vesting of stock unit awards.
2 The plan expired on April 12, 2010.
$ 2.31
6.14
$ 3.76
$ 9.29
—
—
$ —
302,293
237,240
539,533
—
—
134,057
673,590
8
9
ManaGeMent’s dIscussIon and analYsIs of fInancIal condItIon and results of operatIons
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, computer 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 brought 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.
In 2010, the Company experienced revenue growth from its 2009 acquired businesses (which are primarily focused on the medical market) as well as increased
demand for automotive interior trim parts, overlaid on a streamlined organization. As a result, the Company achieved 2010 sales and operating income growth of
22% and 76%, respectively.
The Company’s strategy includes further organic growth and growth through strategic acquisitions.
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 taxes
Income tax expense
2010
100.0%
71.3
28.7
16.8
0.0
11.9
0.0
11.9
4.1
net income attributable to consolidated operations 7.8%
net income attributable to non-controlling interests 0.1%
net income attributable to ufp technologies, Inc. 7.7%
2009
100.0%
73.1
26.9
18.7
0.0
8.2
-0.7
8.9
2.9
6.0%
0.0%
6.0%
2008
100.0%
74.0
26.0
17.1
1.2
7.7
0.3
7.4
2.7
4.7%
0.0%
4.7%
2010 coMpared to 2009
Net sales increased 21.7% to $120.8 million for the year ended December 31, 2010, from net sales of $99.2 million in the same period of 2009, driven primarily
by the 2009 acquisitions of Foamade, ENM, and AMI (all within the Component Products segment). Without sales from these acquisitions for the portion of 2010
in which they were not owned in 2009, sales would have increased 10.0% to $109.1 million. The increase in sales excluding these acquisitions was largely due to
increased demand for interior trim parts from the automotive industry of approximately $6.6 million (Component Products segment), as well as an increase in sales in
the Packaging segment of approximately $2.3 million, due largely to the impact of the improved economy on demand for our customers’ parts.
Gross profit as a percentage of sales (“Gross Margin”) increased to 28.7% for the year ended December 31, 2010, from 26.9% in 2009. The increase in gross margin
is primarily attributable to the Company’s ability to leverage sales growth against the fixed component of cost of sales (overhead), partially offset by lower-than-average
margins from the increased sales of automotive trim parts (Component Products segment). Overhead as a percentage of sales decreased by 2.2% while material and
direct labor collectively increased by 0.4%.
Selling, General, and Administrative Expenses (“SG&A”) increased 9.2% to $20.2 million for the year ended December 31, 2010, from $18.5 million in 2009. As
a percentage of sales, SG&A was 16.8% and 18.7%, respectively, for the years ended December 31, 2010, and 2009. The increase in SG&A for the year ended
December 31, 2010, is primarily due to increased SG&A associated with newly acquired companies of approximately $1.2 million (Component Products segment)
and increased variable-based compensation of approximately $500,000 (primarily Component Products segment). The decrease in SG&A as a percentage of sales is
primarily a result of the fixed-cost components of SG&A being measured against higher sales.
Interest expense net of interest income decreased to approximately $116,000 for the year ended December 31, 2010, from interest expense of approximately
$233,000 in 2009. The decrease in interest expense is primarily attributable to higher interest earned on excess cash balances, as well as lower interest paid on
declining term debt balances.
The Company recorded income tax expense as a percentage of pre-tax income of 34.8% and 32.0% for the year ended December 31, 2010 and 2009, respectively.
The increase in effective tax rate for 2010 is primarily due to the non-taxable gains recorded on the acquisitions of Foamade, ENM, and AMI in 2009. 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, 2010. The
Company will continue to assess the realizability of deferred tax assets 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.
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, ENM, 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 Products 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.
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 Company-wide 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 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 36.9% 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.
10
11
lIquIdItY and capItal resources
The Company funds its operating expenses, capital requirements, and growth plan through internally-generated cash.
As of December 31, 2010, and 2009, working capital was approximately $38.3 million and $27.7 million, respectively. The increase in working capital is
primarily attributable to an increase in cash of approximately $9.4 million due to cash generated from operations and increased refundable income taxes of
approximately $1.4 million, due to state tax planning opportunities and overpayment of estimated taxes, partially offset by an increase in accounts payable of
approximately $900,000 due to the timing of year-end cash disbursements.
Cash provided from operations was approximately $12.6 million and $10.7 million in 2010 and 2009, respectively. The primary reasons for the increase in cash
generated from operations in 2010 were an increase in profits of approximately $3.4 million, an increase in accrued taxes and other expenses of approximately
$527,000 during the fiscal year ended December 31, 2010, partially offset by an increase in inventory of approximately $396,000 during the fiscal year ended
December 31, 2010, and an increase in deferred and refundable income taxes of approximately $1.1 million during the fiscal year ended December 31, 2010.
Net cash used in investing activities in 2010 was approximately $3.3 million and was used primarily for the acquisition of new manufacturing equipment of
approximately $2.0 million and the acquisition of previously leased commercial real estate in Denver, Colorado, relating to ENM’s operations of approximately
$1.2 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, 2010, the
Company had availability of approximately $15.7 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, 2010, the interest rate on these facilities was 1.29%, and there were no borrowings outstanding on the line of credit.
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, 2010:
payments due in:
leases
Mortgage
loans
loans
Mortgage Mortgage
Interest
retirement
total
operating
Grand rapids
equipment
term Massachusetts
udt
debt supplemental
2011
2012
2013
2014
$ 1,693,943
$ 200,000
$ 34,424
$ 288,361
$ 92,300
$ 39,246
$ 209,361
$ 75,000
$ 2,632,635
1,327,901
200,000
920,534
200,000
605,718
200,000
—
—
—
—
288,358
92,300
41,899
192,107
75,000
2,217,565
288,360
92,300
45,147
174,265
75,000
1,795,606
288,360
92,300
48,213
156,378
45,833
1,436,802
336,424
1,307,583
492,370
468,540
125,000
5,593,385
2015 and thereafter
30,135
2,833,333
total
$ 4,578,231
$ 3,633,333
$ 34,424
$ 1,489,863
$ 1,676,783 $ 666,875 $ 1,200,651
$ 395,833
$ 13,675,993
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, 2010,
it cannot guarantee that its operations will generate cash in future periods.
The Company does not believe inflation has had a material impact on its results of operations in the last three years.
The Company bases its estimates on historical experience and on various other assumptions 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 judgment. 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 carrying amounts may not be recoverable.
• 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, 2010. 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 18 to the consolidated financial statements).
• 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 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 Inventories include material, labor, and manufacturing overhead and 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 reserves for inventory
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.
• 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
The Company had no off-balance-sheet arrangements in 2010, other than operating leases.
materially from those projected in the forward-looking statements.
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.
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, 2010, 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 the market risk of the debt is minimal.
12
13
report oF inDepenDent regiStereD publiC aCCounting Firm
ConSoliDateD balanCe SheetS
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, 2010 and 2009, 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, 2010. Our audits also included the financial statement schedule for each of the years
in the three year period ended December 31, 2010 as listed in the index at Item 15(a)(2). UFP
Technologies, Inc.’s management is responsible for these consolidated financial statements and
schedule. 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, 2010 and 2009, and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 2010 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 16, 2011
assets
Current assets:
december 31
2010
2009
Cash and cash equivalents (UDT: $277,698 and $166,940, respectively)
$
24,433,761
$
14,998,514
Receivables, net
Inventories, net
Prepaid expenses
Refundable income taxes
Deferred income taxes
total current assets
14,633,375
8,044,336
1,035,301
1,414,026
1,208,848
50,769,647
Property, plant, and equipment (UDT: $2,756,792 and $2,731,792, respectively)
45,457,275
Less accumulated depreciation and amortization
(UDT: $1,640,818 and $1,543,826, respectively)
Net property, plant, and equipment
Goodwill
Intangible Assets
Other assets
(32,882,135)
12,575,140
6,481,037
593,829
1,389,375
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
total assets
$ 71,809,028
$ 59,451,796
lIabIlItIes and stockHolders’ equItY
Current liabilities:
Accounts payable
$
5,168,589
$
4,273,625
Accrued taxes and other expenses (UDT: $12,900 and $12,900, respectively)
6,679,381
Current installments of long-term debt (UDT: $39,246 and $36,591, respectively)
654,331
total current liabilities
Long-term debt, excluding current installments
(UDT: $627,629 and $666,750, respectively)
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 6,338,829 shares in 2010 and 5,945,357 shares in 2009
Additional paid-in capital
Retained earnings
total ufp technologies, Inc. stockholders’ equity
Non-controlling interests
total stockholders’ equity
12,502,301
6,846,947
880,775
1,352,529
21,582,552
—
63,388
16,924,197
32,712,904
49,700,489
525,987
50,226,476
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
total liabilities and stockholders’ equity
$ 71,809,028
$
59,451,796
The accompanying notes are an integral part of these consolidated financial statements.
14
15
ConSoliDateD StatementS oF operationS
ConSoliDateD StatementS oF StoCkholDerS’ equity
Years ended December 31, 2010, 2009, and 2008
Net sales
Cost of sales
Gross profit
Years ended december 31
2010
2009
2008
$ 120,766,450
$
99,231,334
$ 110,031,601
86,150,720
72,511,919
34,615,730
26,719,415
81,468,539
28,563,062
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)
Selling, general, and administrative expenses
20,235,540
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
—
14,380,190
(115,537)
—
162,000
—
46,463
Income before income tax provision
14,426,653
Income tax expense
Net income from consolidated operations
Net income attributable to non-controlling interests
5,019,136
9,407,517
(160,425)
net income attributable
18,539,005
—
8,180,410
(232,747)
—
11,206
839,690
618,149
8,798,559
2,816,575
5,981,984
(52,559)
to ufp technologies, Inc.
$
9,247,092
$
5,929,425
$
5,116,000
Net income per share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
$
$
1.50
1.37
$
$
1.02
0.94
$
$
0.92
0.82
6,157,310
6,749,062
5,829,580
6,293,964
5,549,830
6,262,666
The accompanying notes are an integral part of these consolidated financial statements.
common stock
shares
amount
additional
paid-in
capital
retained
earnings
non-
controlling
Interests
total
stockholders’
equity
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
Stock issued in lieu of compensation
10,291
103
79,145
Share-based compensation
108,421
1,084
962,626
Exercise of stock options, net
of shares presented for exercise
Net share settlement of restricted stock
unit and stock option tax withholding
Excess tax benefits on
share-based compensation
Net income
Distribution to non-contolling interests
274,760
2,747
504,309
—
—
—
—
—
—
—
—
(485,511)
854,015
—
—
—
—
—
—
—
—
—
—
—
—
79,248
963,710
507,056
(485,511)
854,015
9,247,092
160,425
9,407,517
—
(105,000)
(105,000)
balance at december 31, 2010
6,338,829
$ 63,388
$ 16,924,197
$ 32,712,904
$ 525,987
$ 50,226,476
The accompanying notes are an integral part of these consolidated financial statements.
16
17
ConSoliDateD StatementS oF CaSh FlowS
noteS to ConSoliDateD FinanCial StatementS
Years ended december 31
December 31, 2010, and 2009
2010
2009
2008
$
9,407,517
$
5,981,984
$
5,160,465
UFP Technologies, Inc. (“the Company”) is an innovative designer and custom converter of foams, plastics, and natural fiber products principally serving the
medical, automotive, aerospace and defense, computer and electronics, consumer, and industrial markets. The Company was incorporated in the State of
(1) summary of significant accounting policies
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, net
Prepaid expenses
Refundable income taxes
Accounts payable
Accrued taxes and other expenses
Retirement and other liabilities
Other assets
3,152,193
2,895,062
2,976,550
—
—
(12,000)
—
963,710
79,248
305,830
(415,370)
(396,819)
(558,920)
(1,414,026)
894,964
526,555
234,332
(205,445)
—
—
(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)
net cash provided by operating activities
12,561,769
10,688,753
6,669,751
Cash flows from investing activities:
Additions to property, plant, and equipment
(3,285,530)
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
12,000
(1,856,837)
—
(375,000)
(1,440,534)
(620,000)
—
13,364
(2,763,250)
(5,181,066)
—
—
—
7,218
101,020
net cash used in investing activities
(3,273,530)
(4,279,007)
(7,836,078)
Cash flows from financing activities:
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
Payment of statutory withholdings for stock options exercised
and restricted stock units vested
Proceeds from long-term borrowings
net cash provided by (used in) financing activities
(105,000)
854,015
—
507,056
(623,552)
—
(485,511)
—
147,008
Net change in cash
Cash and cash equivalents at beginning of year
9,435,247
14,998,514
(105,000)
23,421
—
130,332
(576,690)
(1,612,665)
—
4,000,000
1,859,398
8,269,144
6,729,370
(104,995)
211,234
20,563
333,026
(714,027)
(704,407)
(206,044)
—
(1,164,650)
(2,330,977)
9,060,347
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 Industries, Inc. and its wholly-owned subsidiary Simco Automotive Trim, 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) 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, 2010.
(c)
Inventories
Inventories include material, labor, and manufacturing overhead and 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 reserves for inventory
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, 2010.
(d) 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 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.
(e)
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
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
cash and cash equivalents at end of year
$ 24,433,761
$ 14,998,514
$ 6,729,370
deferred tax assets would be charged to income in the period such determination was made.
The accompanying notes are an integral part of these consolidated financial statements.
18
19
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
Share-based compensation cost that has been charged against income for stock compensation plans is as follows:
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.
(f) 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 judgment.
(g)
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, 2010, and 2009, respectively.
(h) 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, 2010. 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 (see Note 18). There was no goodwill impairment in 2010, 2009, or 2008.
(i)
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 5 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
carrying values may not be recoverable.
(j) Cash and Cash Equivalents
Selling, general, and administrative expense
$
963,710
$
900,813
$ 1,305,789
Year ended december 31
2010
2009
2008
The compensation expense for stock options granted during the three-year period ended December 31, 2010, 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
2010
2009
Year ended december 31
65.8% to 83.4%
68.8% to 84.6%
None
2.0% to 3.2%
Closing price on
date of grant
None
3.6%
Closing price on
date of grant
Closing price on
date of grant
2008
88.0%
None
4.0%
Imputed life
4.1 to 7.9 years (output in
4.1 to 7.9 years (output in
7.9 years (output in
lattice-based model) lattice-based model) lattice-based model)
The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the
Company’s common stock over the expected option term, and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant
for periods corresponding with the expected life of the option.
The weighted average grant date fair value of options granted during 2010, 2009, and 2008 was $3.89, $1.83, and $2.87, respectively. Tax benefits
totaling $854,015, $23,421, and $211,234 were recognized as additional paid-in capital during the years ended December 31, 2010, 2009, and
2008, respectively, since the Company’s tax deductions exceeded the share-based compensation change recognized for stock options exercised.
The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was approximately $316,600,
$291,000, and $458,000 for the years ended December 31, 2010, 2009, and 2008, respectively.
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2010,
(n) Deferred Rent
and 2009, cash equivalents primarily consisted of money market accounts and certificates of deposit that are readily convertible 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, 2010, and 2009, the amount reclassified was approximately $2.3 million and $1.6 million, respectively.
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
custodial credit risk on cash.
(k) 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
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.
(l) Segments and Related Information
The Company follows the provisions of ASC 280, Segment Reporting, which establish standards for the way public business enterprises report
information and operating segments in annual financial statements, and requires reporting of selected information in interim financial reports
(see Note 20).
(m) 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).
20
The Company accounts for escalating rental payments on a straight-line basis over the term of the lease.
(o) 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.
(p) Research and Development
On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as incurred. Approximately $0.9
million, $0.8 million, and $1.4 million were expensed in the years ended December 31, 2010, 2009, and 2008, respectively.
(q) 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.
(r) Fair Value Measurement
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.
21
(2) new accounting pronouncements
(5) Inventories
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance to change financial reporting of enterprises with variable interest entities
Inventories consist of the following:
(“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 was effective for the Company as of January 1, 2010, and did not have a significant
impact on the Company’s financial position or results of operations.
In January 2010, the FASB amended previously released guidance on fair value measurements and disclosures. The amendment requires disclosure of
transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value
measurements. The required disclosures regarding transfers into and out of Level 1 and Level 2 fair value measurements were effective for the Company
as of January 1, 2010, and did not have a significant impact on the Company’s disclosures. The amendment’s requirements related to Level 3 disclosures
are effective for the Company as of January 1, 2011. This guidance affects new disclosures only and will have no impact on the Company’s consolidated
financial statements.
In December 2010, the FASB released ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for
Business Combinations. ASU 2010-29 specifies that when a public company completes a business combination, the company should disclose revenue
and earnings of the combined entity as though the business combination occurred as of the beginning of the comparable prior annual reporting period. The
update also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, non-recurring
pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. The requirements in ASU 2010-29
are effective for business combinations that occur on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.
We will apply the provisions of ASU 2010-29 on a prospective basis.
(3) supplemental cash flow Information
Cash paid for interest and income taxes is as follows:
Interest
Income taxes, net of refunds
$
$
127,378
5,522,702
$
205,828
$ 1,648,764
$
$
355,221
3,817,383
Year ended december 31
2010
2009
2008
During the year ended December 31, 2010, the Company permitted the exercise of stock options with exercise proceeds paid with the Company’s stock
(“cashless” exercises) totaling $343,750.
Raw materials
Work in process
Finished goods
Less reserve for obsolescence
december 31
2010
2009
$
5,214,268
$
4,924,228
695,421
2,570,135
(435,488)
699,102
2,574,813
(550,626)
$ 8,044,336
$
7,647,517
(6) other Intangible assets
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2010, and 2009, are as follows:
patents
non-compete
customer list
total
Gross amount December 31, 2010
$
428,806
$ 200,000
$ 769,436
$ 1,398,242
Accumulated amortization at December 31, 2010
(400,885)
(93,168)
(310,360)
(804,413)
net balance at december 31, 2010
$
27,921
$ 106,832
$ 459,076
$ 593,829
Gross amount December 31, 2009
Accumulated amortization at December 31, 2009
448,306
(385,933)
200,000
(53,240)
769,436
(160,832)
$ 1,417,742
(600,005)
net balance at december 31, 2009
$
62,373
$ 146,760
$ 608,604
$ 817,737
Amortization expense related to intangible assets was $223,908, $157,104, and $69,072 for the years ended December 31, 2010, 2009, and 2008,
respectively. Future amortization for the years ending December 31 will be approximately:
2011
2012
2013
2014
2015 and thereafter
199,081
159,800
159,800
75,148
—
total
$ 593,829
(4) receivables and net sales
Receivables consist of the following:
(7) property, plant, and equipment
Property, plant, and equipment consist of the following:
Accounts receivable-trade
Less allowance for doubtful receivables
2010
$ 14,976,057
(342,682)
december 31
2009
$ 14,691,917
(473,912)
$ 14,633,375
$ 14,218,005
The Company’s accounts receivable balance is comprised of many accounts. The highest receivable account balance as of December 31, 2010,
represented 8% 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, but does not generally require collateral.
Sales to the top customer in the Company’s Component Products segment comprises 13.9% of that segment’s total sales and 9.3% of the Company’s total
sales for the year ended December 31, 2010. Sales to the top customer in the Company’s Packaging segment comprises 5.7% of that segment’s total sales
and 1.9% of the Company’s total sales for the year ended December 31, 2010.
december 31
2010
2009
Land and improvements
Buildings and improvements
Leasehold improvements
Equipment
Furniture and fixtures
Construction in progress—equipment/buildings
$
944,906
7,499,855
2,884,463
31,695,304
2,153,943
278,804
$
589,906
6,579,670
2,778,894
31,133,446
2,480,510
20,152
$ 45,457,275
$ 43,582,578
Depreciation and amortization expense for the years ended December 31, 2010, 2009, and 2008, was $2,928,285, $2,737,958,
and $2,907,478, respectively.
22
23
(8) Investment in and advances to affiliated partnership
(10) accrued taxes and other expenses
The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). The Company has
Accrued taxes and other expenses consist of the following:
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. UDT owns two buildings, which are leased to the Company. The lease payments from the Company account for 100% of UDT’s revenue.
Therefore, the Company believes it has the power to direct the activities of UDT that most significantly impact the entity’s economic performance, and
the obligation to absorb losses of UDT or the right to receive benefits from UDT that could potentially be significant to UDT. In addition to the lease
arrangement, the Company’s management provides management services to UDT in certain situations. The creditors of UDT have no recourse to the
general credit of the Company.
Included in the December 31 consolidated balance sheets are the following amounts related to UDT:
Cash
Net property, plant, and equipment
Accrued expenses
Current and long-term debt
december 31
$
2010
277,698
1,115,974
12,900
666,875
2009
166,940
$
1,187,966
12,900
703,341
(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, 2010,
the Company had availability of approximately $15.7 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, 2010, the interest rate on these facilities was 1.29%, and there were no borrowings
outstanding on the line of credit.
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%.
Long-term debt consists of the following:
Mortgage notes
Note payable
UDT mortgage
Equipment loan
total long-term debt
Current Installments
december 31
2010
2009
$
5,310,116
$
5,602,415
1,489,863
666,875
34,424
7,501,278
(654,331)
1,778,224
703,341
40,850
8,124,830
(623,007)
long-term debt, excluding current installments
$ 6,846,947
$
7,501,823
Aggregate maturities of long-term debt are as follows:
Year ending December 31:
2011
2012
2013
2014
2015 and thereafter
$
654,331
622,557
625,807
628,873
4,969,710
$
7,501,278
Compensation
Benefits/self-insurance reserve
Paid time off
Commissions payable
Income taxes payable
Unrecognized tax benefits
Other
december 31
2010
2009
$
2,855,331
$
2,116,597
762,515
780,109
416,326
—
685,000
1,180,100
648,791
764,576
334,356
389,384
545,000
1,354,122
$
6,679,381
$
6,152,826
(11) Income taxes
The Company’s income tax provision (benefit) for the years ended December 31, 2010, 2009, and 2008, consists of the following:
Current:
Federal
State
Deferred:
Federal
State
Years ended december 31
2010
2009
2008
$
4,259,000
$
2,100,000
$
2,270,000
454,000
490,000
709,000
4,713,000
2,590,000
2,979,000
191,000
115,000
306,000
263,000
(36,000)
227,000
41,000
(25,000)
16,000
total income tax provision
$
5,019,000
$ 2,817,000
$
2,995,000
At December 31, 2010, the Company has net operating loss carryforwards for federal income tax purposes of approximately $1,896,000, 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
2010
$
314,000
556,000
88,000
644,000
196,000
359,000
70,000
Excess of book over tax basis of fixed assets
(1,065,000)
Goodwill
Intangible assets
Inventory method change
(627,000)
(207,000)
—
december 31
2009
401,000
474,000
95,000
806,000
230,000
489,000
49,000
(930,000)
(563,000)
(270,000)
(147,000)
net deferred tax assets
$ 328,000
$
634,000
24
25
The amount recorded as net deferred tax assets as of December 31, 2010, and 2009 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 the net deferred tax asset of $328,000 at December 31, 2010, is more likely than not to be realized in the carryforward
period. 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:
Years ended december 31
2010
2009
Computed “expected” tax rate
34.0%
34.0%
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
2.0
0.1
(0.3)
(1.8)
0.1
3.4
0.2
(0.9)
(1.7)
0.2
2008
34.0%
5.6
0.2
(1.2)
(2.1)
0.4
Acquisition gains —
(3.3) —
Tax benefits not recorded
Other
1.0 — —
(0.3)
0.1
effective tax rate
34.8%
32.0%
(0.2)
36.7%
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is in the process of being audited by the
Internal Revenue Service for 2008 in connection with income taxes. The Company has not been audited by any state for 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, and Florida for
2007, 2008, and 2009 (which are currently being audited). The tax returns for the years 2007 through 2009, and certain items carried forward from
earlier years and utilized in those returns, remain open to examination by the IRS and various state jurisdictions.
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
2010
2009
Gross UTB balance at beginning of fiscal year
$
545,000
$
560,000
Increases for tax position for prior years
140,000
—
Reductions for tax position for prior years
— (15,000)
Gross utb balance at december 31
$
685,000
$ 545,000
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2010, and 2009, are $685,000
and $545,000, respectively, for each year.
At December 31, 2010, and 2009, accrued interest and penalties on a gross basis, which are included above in the gross UTB balance, were $145,000
and $115,000, respectively, for each year.
Approximately $255,000 of the unrecognized tax benefits relate to tax returns of a specific state jurisdiction that are currently under examination.
Accordingly, the Company expects a reduction of this amount during 2011.
(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
2010
2009
2008
6,157,310
5,829,580
5,549,830
591,752
464,384
712,836
6,749,062
6,293,964
6,262,666
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, 2010, 2009, and
2008, the number of stock awards excluded from the computation was 101,769, 190,484, and 41,769, 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 5- to 10-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, 2010,
there were 443,750 options outstanding under the Employee Stock Option Plan, and there were 302,293 shares available to be issued. The plan expired
on April 12, 2010.
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, non-qualified stock 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, 2010, 814,249 shares of common stock have been issued under the 2003 Incentive Plan, none of which have been restricted. An
additional 251,694 shares are being reserved for outstanding grants of RSUs and other share-based compensation that are subject to various performance
and time-vesting contingencies. The Company has also granted awards in the form of stock options under this Plan. Through December 31, 2010, 50,000
options have been granted and are all outstanding.
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, 2010, there were 270,746 options outstanding under the 1998 Director Plan and 237,240 available to be
26
27
issued. 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-
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
Employee Director Stock Incentive Plan.
The following is a summary of stock option activity under all plans:
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, 2010:
outstanding december 31, 2009
Granted
Exercised
Cancelled or expired
outstanding december 31, 2010
exercisable at december 31, 2010
vested and expected to vest at
december 31, 2010
shares
weighted average
under options
exercise price
aggregate
Intrinsic value
996,609
104,849
(336,962)
—
764,496
693,246
$
3.03
9.35
2.53
—
$
$
4.12
3.65
—
—
—
—
$ 6,169,074
$ 5,923,462
restricted stock units
award date fair value
weighted average
outstanding at december 31, 2009
Awarded
Shares distributed
Shares exchanged for cash
Forfeited/cancelled
outstanding at december 31, 2010
276,124
78,570
(83,421)
(19,579)
—
251,694
$
5.19
7.70
5.62
5.62
—
$
5.80
746,496
$
4.12
$ 6,169,074
The Company recorded $557,494, $644,331, and $929,965, in compensation expense related to these RSUs during the years ended December 31,
2010, 2009, and 2008, respectively.
The following is a summary of information relating to stock options outstanding and exercisable by price range as of December 31, 2010:
—————————— optIons outstandI nG ——————————
—-— optIons exercIsable ——
range of
outstanding
remaining contractual
weighted average
weighted
average
exercisable as
weighted
average
exercise prices
as of 12/31/10
life (years)
exercise price
of 12/31/10
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
$9.00 - $9.99
$10.00 - $10.99
$11.00 - $12.99
50,000
106,000
200,000
118,984
58,724
47,719
36,451
89,849
37,500
19,269
764,496
1.1
2.2
4.1
2.7
7.4
5.6
5.0
7.0
6.6
6.7
4.4
$ 0.81
1.01
2.32
3.28
4.18
5.14
6.14
9.13
10.23
12.04
50,000
106,000
200,000
118,984
51,224
46,469
33,951
44,849
27,500
14,269
$ 0.81
1.01
2.32
3.28
4.19
5.14
6.10
9.18
10.14
12.37
Upon vesting, RSUs are in some instances net-share settled to cover the required withholding tax, and the remaining amount is converted into the
equivalent number of common shares. During the year ended December 31, 2010, 19,579 shares were redeemed for this purpose at a market price of
$9.25. During the year ended December 31, 2008, 20,320 shares were redeemed for this purpose at a market price of $10.14.
The following summarizes the future share-based compensation expense the Company will record as the equity securities granted through December 31,
2010, vest:
options
common stock
$
79,440
68,358
65,694
33,058
$ —
—
—
—
restricted
stock units
$
416,757
269,963
168,053
25,208
total
$
496,197
338,321
233,747
58,266
$ 246,550
$ —
$
879,981
$ 1,126,531
2011
2012
2013
2014
total
$ 4.12
693,246
$ 3.65
(14) preferred stock
During the years ended December 31, 2010, 2009, and 2008, the total intrinsic value of all options exercised (i.e., the difference between the market price
On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock,
and the price paid by the employees to exercise the options) was $2,711,864, $79,269, and $929,281, respectively, and the total amount of consideration
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
received from the exercise of these options was $850,806, $130,332, and $333,026, respectively. At its discretion, the Company allows option holders to
surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During the year ended December 31, 2010, 62,202
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
shares were surrendered at a market price of $10.42. No shares were surrendered during the years ended December 31, 2009, and 2008.
expire on March 19, 2019.
During the years ended December 31, 2010, 2009, and 2008, the Company recognized compensation expense related to stock options granted to directors
(15) supplemental retirement benefit
and employees of $213,716, $150,482, and $221,324, respectively.
On February 19, 2010, 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, 2010. The Company has
recorded compensation expense of $192,500 for the year ended December 31, 2010, based on the grant date price of $7.70 at February 19, 2010. Stock
compensation expense of $106,000 and $154,500 was recorded in 2009 and 2008, 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 $79,248, $183,500, and $343,880,
respectively, for the years ended December 31, 2010, 2009, and 2008.
The Company grants RSUs to its executive officers. 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,
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 $30,000, $35,000, and $27,000, for the
years ended December 31, 2010, 2009, and 2008, respectively. The present value of the supplemental retirement obligation has been calculated using
an 8.5% discount rate, and is included in retirement and other liabilities. Total projected future cash payments for the years ending December 31, 2011,
through 2014 are approximately $75,000, $75,000, $75,000, and $45,833, respectively, and approximately $125,000 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.
28
29
Future minimum lease payments under non-cancelable operating leases as of December 31, 2010, are as follows:
cash equivalents 12/31/10
level 1
level 2
level 3
total
Years ending december 31
operating leases
2011
2012
2013
2014
Thereafter
$ 1,693,943
1,327,901
920,534
605,718
30,135
total minimum lease payments
$ 4,578,231
Money market funds
Certificates of deposits
$ 9,500,000
$
—
$ —
$ 9,500,000
—
4,500,000
—
4,500,000
total
$ 9,500,000
$ 4,500,000
$ —
$ 14,000,000
cash equivalents 12/31/09
level 1
level 2
level 3
total
Money market funds
Certificates of deposits
$
100,000
$
—
$ —
$
100,000
—
3,000,000
—
3,000,000
Rent expense amounted to approximately $2,616,000, $2,442,000, and $2,214,000, in 2010, 2009, and 2008, respectively.
total
$ 100,000
$ 3,000,000
$ —
$ 3,100,000
(b) Legal – The Company is not a party to any material pending legal proceedings.
As of December 31, 2010, 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
(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 $785,000,
$709,000, and $703,000, in 2010, 2009, and 2008, respectively.
future period.
(19) acquisition
On March 9, 2009, the Company acquired selected assets of the Hillsdale, Michigan, operations of Foamade Industries, Inc. (“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
The Company has a partially self-insured health insurance program that covers all eligible participating employees. The maximum liability is limited by
penetration into applications using this family of foams, as well as incremental sales to fold into its operations. The Company has transitioned the
a stop loss of $100,000 per insured person, along with an aggregate stop loss determined by the number of participants.
acquired assets to its Grand Rapids, Michigan, plant.
During 2006, the Company established an Executive, Non-qualified “Excess” Plan (“the Plan”), which is a deferred compensation plan available to
On July 7, 2009, the Company acquired substantially all of the assets of E.N. Murray Co. (“ENM”), a Denver, Colorado-based foam fabricator, for
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
$2,750,000. ENM specialized in the fabrication of technical urethane foams primarily for the medical industry. This acquisition brings to the Company
or financial planning. Participants have an unsecured contractual commitment by the Company to pay amounts due under the Plan. There is currently
further access and expertise in fabricating technical urethane foams and a seasoned management team. The Company had leased the former ENM
no security mechanism to ensure that the Company will pay these obligations in the future.
Denver facilities for a period of two years. The Company purchased these properties on December 22, 2010, for $1,200,000.
The compensation withheld from Plan participants, together with investment income on the Plan, is reflected as a deferred compensation obligation
On August 24, 2009, the Company acquired selected assets of Advanced Materials, Inc. (“AMI”) for $620,000. Located in Rancho Dominguez,
to participants, and is classified within retirement and other liabilities in the accompanying balance sheets. At December 31, 2010, the balance of the
California, AMI specialized in the fabrication of technical urethane foams primarily for the medical industry and brings to the Company further
deferred compensation liability totaled approximately $1,054,000. The related assets, which are held in the form of a Company-owned, variable life
penetration into this market. The Company assumed the lease of the 56,000-square-foot Rancho Dominguez location, which expires in
insurance policy that names the Company as the beneficiary, are reported within other assets in the accompanying balance sheets, and are accounted
November 2011.
for based on the underlying cash surrender values of the policies, and totaled approximately $1,060,000 as of December 31, 2010.
(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:
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 the bargain purchase gains resulted from opportunities
created by the overall weak economy.
The following table summarizes the consideration paid and the acquisition date fair value of the assets acquired and liabilities assumed relating to
each transaction:
30
31
Consideration
Cash
$
375,000
$
2,750,000
$
620,000
of the reportable segments’ revenues, net profits, and assets agree with the Company’s consolidated amounts contained in the audited financial
Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals
foamade
enM
aMI
March 9, 2009
July 7, 2009
august 24, 2009
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.
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 non-compete 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
$ 123,049,859
5,615,326
$
$
1.04
0.96
$
$
1.01
0.90
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) 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 products for numerous purposes.
statements. Revenues from customers outside of the United States are not material.
Sales to the top customer in the Company’s Component Products segment comprises 13.9% of that segment’s total sales and 9.3% of the Company’s
total sales for the year ended December 31, 2010. Sales to the top customer in the Company’s Packaging segment comprises 5.7% of that segment’s
total sales and 1.9% of the Company’s total sales for the year ended December 31, 2010.
The results for the Packaging segment include the operations of United Development Company Limited.
The Company has revised its allocation of corporate assets to the two segments to present cash and cash equivalents as unallocated assets. Prior year
numbers have been adjusted to conform to the same allocation method.
Financial statement information by reportable segment is as follows:
2010
Sales
Operating Income
Total assets
Depreciation/Amortization
Capital expenditures
Interest expense, net
Goodwill
2009
Sales
Operating Income
Total assets
Depreciation/Amortization
Capital expenditures
Interest expense, net
Goodwill
Bargain purchase gains
2008
Sales
Operating Income
Total assets
Depreciation/Amortization
Capital expenditures
Interest expense, net
Goodwill
component products
packaging
unallocated assets
total
$ 80,373,062
11,104,306
26,579,654
1,802,085
1,814,874
61,668
4,463,246
$ 40,393,388
3,275,884
20,795,613
1,350,108
1,470,656
53,869
2,017,791
$
—
—
24,433,761
—
—
—
—
$ 120,766,450
14,380,190
71,809,028
3,152,193
3,285,530
115,537
6,481,037
component products
packaging
unallocated assets
total
$ 60,973,325
$ 38,258,009
$
5,806,122
25,409,608
1,658,290
989,027
126,363
4,463,246
839,690
2,374,288
19,043,674
1,236,772
867,810
106,384
2,017,791
—
—
—
14,998,514
—
—
—
—
—
$ 99,231,334
8,180,410
59,451,796
2,895,062
1,856,837
232,747
6,481,037
839,690
component products
packaging
unallocated assets
total
$ 60,847,533
3,076,360
22,098,941
1,820,239
1,053,622
166,013
4,463,246
$ 49,184,068
5,348,371
19,894,350
1,156,311
1,709,628
168,280
2,017,791
$
—
$ 110,031,601
—
6,729,370
—
—
—
—
8,424,731
48,722,661
2,976,550
2,763,250
334,293
6,481,037
(21) assets Held for sale
On January 13, 2011, United Development Company Limited (“UDT”) sold its Alabama facility (Packaging segment) for $1,250,000. The net book
value of the asset at December 31, 2010, is approximately $384,000. In addition, the buyer of the building has agreed to allow the Company to
occupy the building rent-free for a period not to exceed nine months.
32
33
(22) quarterly financial Information (unaudited)
Year ended december 31, 2010
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
$ 28,700,466
7,457,254
$
29,957,495
9,046,836
$ 30,467,998
8,905,976
$
31,640,491
9,205,664
1,511,382
0.25
0.23
2,281,616
0.37
0.34
2,364,840
0.38
0.35
3,089,254
0.49
0.45
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
$ 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
566,198
0.10
0.09
2,112,742
0.36
0.34
2,905,524
0.49
0.45
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 about the Company’s prospects,
anticipated advantages the Company expects to realize from its acquisition strategies, the Company’s participation and growth in multiple markets, the
Company’s business opportunities, the Company’s growth potential and strategies for growth, and any indication that the Company may be able to sustain
its sales and earnings, or its sales and earnings growth rates. 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 identify suitable acquisition
candidates and successfully, efficiently execute acquisition transactions and integrate such acquisition candidates, 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 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.
34
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 8, 2011, 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
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
Consultant
Robert W. Pierce, Jr.
Chairman, CEO,
and Co-Owner
d
d
d
d
o
o
d
d
o
o
d
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
Pierce Aluminum Co.
do as a company, and where we are headed
in the future. 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, 2010,
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
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
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