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Beyond Meat2011 Annual Report SHAPING INNOVATION 2011 annual report UFP Technologies, Inc. (Nasdaq: UFPT) is a producer of innovative custom-engineered components, products, and specialty packaging. Using foams, plastics, composites, and natural fiber materials, we design and manufacture a vast range of solutions primarily for the medical, automotive, aerospace and defense, electronics, consumer, and industrial markets. Our team acts as an extension of customers’ in-house research, engineering, and manufacturing groups, working closely with them to solve their most complex product and packaging challenges. For our customers, innovation takes many shapes. But each solution is shaped by the design, materials, and process expertise that sets our Company apart. Learn more about us at www.ufpt.com. Contents 2 President’s Letter 4 Shaping Innovation 8 Selected Financial Data 10 Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Financial Statements 36 Stockholder Information 1 DEAR FEllOW ShAREhOlDER, 2011 was another year of record results for UFP Technologies, as we increased sales by 5.4% and net income by 11.9% over 2010. It was also a year in which we made a series of important strategic investments to position our Company for future success. In this letter, I’ll highlight some of these investments, and outline steps we are taking to capitalize on the many exciting opportunities before us. A key focus of our management team is to constantly review and prioritize our allocation of resources. We analyze everything from our capital equipment to our cherished engineering talent, and deploy them where our skills fit best with market needs—those opportunities where we can add the most value and therefore can enjoy the strongest margins. Each of our major 2011 investments was designed to serve this overall goal and help us achieve long-term profitable growth. Some are aimed directly at growing revenue. Others are aimed at improving customer service or increasing our operating efficiency. We believe some investments will accomplish all three. 2 two new clean rooms and a dedicated medical team To meet growing demands in the medical market, we invested in two new clean rooms, one in Illinois and another in Texas. These facilities will help us continue to build revenues in areas where we’re already very strong, such as orthopedics and infection prevention, and expand into new segments, such as negative pressure wound therapy. In fact, we’ve formed a dedicated medical team to identify the most promising growth opportunities, and keep us on the leading edge of medical industry innovation. In addition, we will continue to develop our own patented products. For example, in 2011 we began the patent process on two key products: BioShell® Suspension Packs (see page 7), and new jacketed T-Tubes®, an innovative clean room insulation product. new molded fiber equipment Molded Fiber is another area where market trends are strongly in our favor, and we are investing accordingly. Revenue from our environmentally friendly Molded Fiber solutions grew 25% in 2011, as we attracted many new customers and created new product and packaging applications. With patent protection on our unique manufacturing process and highly effective packaging designs, we are poised to expand this business even further. We’ve invested in new state- of-the-art equipment for our Iowa facility, and are investigating opening an East Coast Molded Fiber plant to increase production capacity and better serve customers in the region. building on successful programs in military and automotive markets It’s worth noting that we achieved record sales and profits while beginning the phase-out of the largest contract in our history, a natural fiber molded door program for Mercedes vehicles. To help utilize the equipment capacity that’s being freed up, we’re launching a new natural fiber door panel program in June for a major Tier One automotive supplier. And we’re constantly exploring new ways to help our customers make vehicles lighter, quieter, safer, and more comfortable. In the military market, we’re also converting previous successes into new opportunities. In 2011, we won a new contract to supply backpack components for the U.S. Marines, similar to our long-running U.S. Army program (see page 5). We also added two engineering technology centers, strategically located near key customers in Georgia and Alabama, that will help us respond more quickly to new opportunities as they arise. SALES OPERATING INCOME NET INCOME SHAREHOLDERS EQUITY , 9 4 7 3 9 $ 6 0 0 2 , 5 9 5 3 9 $ 7 0 0 2 , 2 3 0 0 1 1 $ 8 0 0 2 , 1 3 2 9 9 $ 9 0 0 2 , 6 6 7 0 2 1 $ 0 1 0 2 , 4 4 2 7 2 1 $ 1 1 0 2 4 5 0 5 $ , 6 0 0 2 7 4 2 7 $ , 7 0 0 2 5 2 4 8 $ , 8 0 0 2 2 9 1 , 8 $ 9 0 0 2 2 9 3 4 1 $ , 0 1 0 2 , 6 1 7 5 1 $ 1 1 0 2 5 1 5 2 $ , 6 0 0 2 9 5 1 , 4 $ 7 0 0 2 6 1 1 , 5 $ 8 0 0 2 9 2 9 5 $ , 9 0 0 2 7 4 2 9 $ , 0 1 0 2 6 4 3 0 1 $ , 1 1 0 2 , 1 4 2 9 1 $ 6 0 0 2 , 7 2 8 4 2 $ 7 0 0 2 0 9 8 , 1 3 $ 8 0 0 2 5 0 0 9 3 $ , 9 0 0 2 , 6 2 2 0 5 $ 0 1 0 2 5 8 9 , 1 6 $ 1 1 0 2 In closing, I want to thank all our employees who work incredibly hard to exceed our customers’ expectations every day. Their dedication has enabled us to achieve record earnings for six consecutive years despite challenging economic times. I also want to thank you, our shareholders, for your support and continued interest in UFP. We will all keep working very hard to grow and improve your Company. Sincerely, R. Jeffrey Bailly Chairman and CEO optimizing our facility footprint The engineering technology centers are part of a larger initiative to improve customer service while optimizing our plant footprint. Overall, we are moving toward a vision of fewer, larger, more efficient manufacturing locations supported by strategically located technology centers. They will typically function as sales, engineering, and small- run production facilities to service specific customers or markets. To increase efficiency and reduce costs, we also may look to consolidate facilities that are located near each other. In addition, we will continue to seek out strategic acquisitions that can complement our existing capabilities and help increase the value we bring to our customers. leveraging our size and breadth Our size gives us many competitive advantages and economies of scale, and leveraging them will always be a key strategic tenet. having facilities throughout the country helps us attract large customers that value our convenient shipping locations and ability to provide redundant manufacturing sites. We also share best practices systematically across our Company; as we identify creative solutions in one location, we ensure other plants adopt them as well. And because the selling price of our products is so dependent on raw material costs, our strong purchasing power helps us manage those costs and keep our pricing very competitive. investing in our technology and our brand We’re investing in new technology to increase efficiency and improve customer service. For example, we are installing a new Enterprise Resource Planning system to help us centralize certain functions, reduce operating costs, analyze and manage our business more efficiently, and respond much faster to customer requests. We’ve also completed an initiative to unify our various brands and product lines under the UFP Technologies brand. This single master brand name will provide a common identity across all markets, help clarify the relationships among our diverse business units, and most importantly should make it easier for customers to do business with us. As you may have noticed on the cover, we’ve also updated our logo and introduced a new tagline: Shaping Innovation™. In the following pages, you’ll see several examples of how we do exactly that. 3 ShAPING INNOVATION IV PORT INFECTION PREVENTION FOR C.R. BARD, INC. a great example of how we’re enhancing patient health and safety across the medical industry As an alternative to alcohol pads, C.R. Bard, Inc. designed a friction scrub device to disinfect IV injection ports more efficiently. Our engineers researched and identified the optimal material to disperse the alcohol cleaning solution without tearing or breaking down during storage or use. We also designed and built our own high-speed fabrication equipment to ensure quality. The result is a more thorough cleaning process that minimizes infection and enhances patient safety. For medical device makers, our industry expertise, engineering skills, and access to advanced materials make UFP Technologies a valuable partner. They also know that, with our ability to manufacture in clean rooms across multiple plants, we can ramp up quickly and accelerate their time to market. We create a broad range of infection prevention solutions using advanced foams and specialty films that provide protection from microbial organisms. 4 BACkPACk COMPONENTS FOR U.S. MARINES continuing a tradition that began with the u.s. army to improve safety and comfort in the field We’ve been supplying backpack components for use by the United States Army, continually evolving the materials and designs. Building on this expertise, we’re now supplying molded foam and fabric waist-belts and other components for the new family of backpacks used by all United States Marines. Our ability to combine advanced fabrics and foams brings many key benefits. Our solutions enhance fit by contouring better to the body. And they improve support by distributing weight more evenly. With our rapid prototyping and fabrication skills, we created these solutions on a tight schedule to help provide the best possible gear for our brave Marines around the world. Combining lightweight foams and abrasion-resistant fabrics, our back- pack components deliver better fit and support for Marines working in all types of harsh conditions. 5 ShAPING INNOVATION MOlDED FIBER STAND-UP WINE PACkAGING SySTEM made from 100% recycled paper, wine shippers that deliver a range of solid benefits Developed in partnership with our customer, the Bottoms Up® Wine Packaging System combines Molded Fiber with a corrugated divider and carton to provide a whole new level of protection. It’s an ingenious system that keeps bottles in a vertical position. The unique marriage of molded pulp trays and a horizontal corrugated partition improves cushioning and keeps the package safe through the entire distribution cycle. The system offers many benefits. It saves space because it’s nestable. It allows for faster packing and quality control checks, which increases productivity and reduces labor costs. It reduces damage claims, which leads to fewer returns and lower transportation costs. And the entire system is easily recycled, eliminating the hassles of petroleum-based materials. The Bottoms Up® Wine Packaging System won the prestigious Ameristar 2012 Packaging Award in the beverage category. Customers use it to safely ship numerous wine bottle configurations. . 6 BIOShEll® SUSPENSION PACk FOR BIOPhARM MANUFACTURERS our latest innovation for enhancing biopharmaceutical drug production The new BioShell® Suspension Pack is a revolutionary container system that protects biopharmaceutical bags throughout the supply chain. Bags are enveloped in a proprietary durable film that suspends products within a polycarbonate shell. The film absorbs shocks during impact, preventing damage by allowing the bags to move within a cushion of air. With this unique suspension design, different-sized bags can be loaded into the same shell without compromising security. The stackable design also increases efficiency and saves space. As a standard product that does not require costly tooling for each customer, the Suspension Pack is also very cost-effective, which expands our base of potential customers. The versatile, patent-pending BioShell Suspension Pack joins the original BioShell® that was launched in 2008 and continues to gain market share across the BioPharm industry. 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, 2011, 2010, and 2009, and the selected balance sheet data as of December 31, 2011, and 2010, 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, 2008, and 2007, and the balance sheet data at December 31, 2009, 2008, and 2007, are derived from our audited financial statements not included in this document. selected consolidated financial 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 consolidated balance sheet data Working capital Total assets Short-term debt and capital lease obligations 2011 $ 127,244 36,245 15,716 10,346 1.48 6,999 2011 $ 48,575 79,721 581 Long-term debt and capital lease obligations, excluding current portion 5,639 Total liabilities Stockholders’ equity 17,736 61,985 1 See Note 20 to the consolidated financial statements for segment information. 2 Amount includes restructuring charges of $1.3 million. years ended december 31 (in thousands, except per share data) 2010 120,766 34,616 14,392 9,247 1.37 6,749 2009 99,231 26,719 8,192 5,929 0.94 6,294 as of december 31 (in thousands) 2010 38,267 69,478 654 6,847 19,251 50,226 2009 27,702 57,855 623 7,502 18,849 39,005 2008 110,032 28,563 8,4252 5,116 0.82 6,263 2008 18,688 47,133 1,419 4,852 16,289 31,890 2007 93,595 22,810 7,247 4,159 0.71 5,861 2007 14,952 43,336 1,419 6,271 18,510 24,827 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, 2010, to December 31, 2011: fiscal year ended december 31, 2010 First Quarter Second Quarter Third Quarter Fourth Quarter fiscal year ended december 31, 2011 First Quarter Second Quarter Third Quarter Fourth Quarter high $11.06 11.59 12.03 13.28 high $21.59 19.64 19.68 15.90 low $6.50 8.26 8.51 10.50 low $12.19 14.86 14.20 12.65 8 number of stockholders As of March 7, 2012, there were 86 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 2010 or 2011. 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 incentive plans to provide long-term rewards and incentives to the Company’s key employees, officers, employee directors, non-employee directors, and advisors. 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. The Company also maintains the 2003 Incentive Plan, which provides the Company with the ability to offer up to 2,250,000 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. Additional details of these plans are discussed in Note 13 to the consolidated financial statements. Each of these plans and their amendments has been approved by the Company’s stockholders. Summary plan information as of December 31, 2011, 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 1993 Employee Plan2 1999 Director Plan total option plans 2003 Incentive Plan Options 2003 Incentive Plan RSU total 2003 incentive plan total all stock plans 331,620 250,651 582,271 56,250 176,209 232,459 814,730 $ 2.65 6.83 $ 4.45 $ 10.50 — — — $ 0 220,226 220,226 0 1,087,8363 1,087,836 1,308,062 1 Will be issued upon exercise of outstanding options or vesting of stock unit awards. 2 The plan expired on April 12, 2010. 3 Represents the total of both Options and RSUs available in the 2003 Incentive Plan. 9 MANAGEMENT’S DISCUSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESUlTS OF OPERATIONS overview UFP Technologies is a producer of innovative custom-engineered components, products, and specialty packaging. The Company serves a myriad of markets, but specifically targets opportunities in the medical, automotive, aerospace and defense, computer and electronics, industrial, and consumer markets. In 2011 the Company experienced organic sales growth of 5.4%, reflecting increased demand for products from the automotive and defense and aerospace markets. The ability of the Company to leverage this sales growth as well as one-time gains and moving allowances associated with the sale of real estate in Alabama by UDT allowed the Company to generate a 9.2% increase in operating income. On January 13, 2011, United Development Company Limited (“UDT”) sold its Alabama facility (Packaging segment) for approximately $1,250,000. The net book value of the asset at December 31, 2010, was approximately $384,000. Selling expenses of approximately $38,000 were incurred. Due to a redesigned model vehicle, a substantial portion of a large automotive door panel program ended on June 30, 2011, although the Company is still supplying door panels to the customer for other model vehicles. Sales of door panels for the discontinued model vehicle were approximately $3.8 million and $4.0 million for the six-month periods ended December 31, 2010, and June 30, 2011, 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 Gain on sale of fixed assets operating income Total other expenses (income), net income before taxes Income tax expense net income attribute to consolidated operations net income attribute to non-controlling interests 2011 2010 2009 100.0% 100.0% 100.0% 71.5 28.5 16.8 -0.6 12.3 0.0 12.3 3.9 8.4 0.3 71.3 28.7 16.8 0.0 11.9 0.0 11.9 4.1 7.8 0.1 73.1 26.9 18.7 0.0 8.2 -0.7 8.9 2.9 6.0 0.0 net income attribute to ufp technologies, inc. 8.1% 7.7% 6.0% 2011 compared to 2010 Net sales increased 5.4% to $127.2 million for the year ended December 31, 2011, from net sales of $120.8 million in the same period of 2010. The $6.4 million increase in sales was largely attributable to increased sales into the aerospace and defense industries of approximately $3.1 million fueled by a new contract for the U.S. Marines to supply backpack components (Component Products segment) as well as demand for interior trim parts from the automotive industry of approximately $1.8 million (Component Products segment). Gross profit as a percentage of sales (“Gross Margin”) decreased slightly to 28.5% for the year ended December 31, 2011, from 28.7% in 2010. The slight decrease in gross margin is primarily attributable to costs of approximately $350,000 incurred as a result of the closure of the Company’s manufacturing facility in Alabama as well as approximately $300,000 incurred in additional health insurance claims (overhead) partially offset by manufacturing efficiencies achieved in the Company’s plants (as a percentage of sales material and direct labor collectively decreased by 0.2% in 2011). 10 Selling, General, and Administrative Expenses (“SG&A”) increased 5.6% to $21.4 million for the year ended December 31, 2011, from $20.2 million in 2010. As a percentage of sales, SG&A was 16.8% for both the years ended December 31, 2011, and 2010. The $1.2 million increase in SG&A for the year ended December 31, 2011, is primarily due to an increase in professional fees of approximately $400,000 associated with the development of enhanced internal operating and information systems and a re-branding and marketing project; approximately $400,000 in additional administrative salaries, wages, and benefits; and approximately $200,000 in additional health insurance claims. Interest expense net of interest income decreased to approximately $27,000 for the year ended December 31, 2011, from net interest expense of approximately $116,000 in 2010. 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 gain on sale of assets of approximately $834,000 was derived primarily from the sale of real estate in Alabama by UDT. Of this $834,000 gain, approximately $428,000 relates to non-controlling interests that have been deducted to determine net income attributable to UFP Technologies, Inc., and $250,000 represents a one-time fee paid to the Company for managing the transaction. The Company recorded income tax expense as a percentage of income before income tax expense excluding net income attributable to non-controlling interests of 31.3% and 34.8% for the year ended December 31, 2011, and 2010, respectively. The decrease in the effective tax rate for the year ended December 31, 2011, is primarily attributable to the reversal in 2011 of approximately $385,000 in reserves previously established for uncertain tax benefits due to a favorable outcome on a concluded Federal Internal Revenue Service audit and the statute of limitations expiring on certain other federal income tax filings, as well as increased deductions associated with domestic manufacturing. The non-controlling interest in UDT is not subject to corporate income tax. 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 are more likely than not to be realized, and has not recorded a tax valuation allowance at December 31, 2011. The Company will continue to assess whether the deferred tax assets will be realizable 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 carry-forward period are reduced. 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 whether the deferred tax assets will be realizable and, when appropriate, will record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced. 11 liquidity and capital resources The Company funds its operating expenses, capital requirements, and growth plan through internally generated cash. As of December 31, 2011, and 2010, working capital was approximately $48.6 million and $38.3 million, respectively. The increase in working capital is primarily attributable to an increase in cash of approximately $7.7 million due to cash generated from operations and increased inventories of approximately $1.7 million due largely to the build-up of finished goods associated with a project for the U.S. Marines. Cash provided from operations was approximately $11.7 million and $11.8 million in 2011 and 2010, respectively. The primary reasons for the slight decrease in cash generated from operations in 2011 were (i) an increase in inventory in 2011 of approximately $1.7 million compared to an increase in inventory in 2010 of approximately $400,000 due largely to an increase in inventory associated with a military program, (ii) a decrease in accrued taxes and other expenses of approximately $440,000 in 2011 compared to an increase in 2010 of approximately $1.4 million due mostly to higher income tax payments made in 2011, partially offset by (iii) an increase in profits in 2011 of approximately $1.4 million. Net cash used in investing activities in 2011 was approximately $2.5 million and was used primarily for the acquisition of new manufacturing equipment of approximately $3.7 million, partially offset by cash provided from the sale of real estate 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 composed 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, 2011, the Company had availability of approximately $16.9 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, 2011, the interest rate on these facilities was 1.28%, and there were no borrowings outstanding on the line of credit. commitments, contractual obligations, and off-balance sheet arrangements The following table summarizes the Company’s contractual obligations at December 31, 2011: payments due in: operating leases grand rapids mortgage term massachusetts mortgage loans debt interest new molded fiber supplemental equipment purchase commitment retirement total 2012 2013 2014 2015 $ 1,762,408 $ 200,001 $ 288,360 $ 92,300 $ 148,225 $ 75,000 $ 4,793,000 $ 7,359,294 1,127,907 200,001 288,360 92,300 133,708 75,000 — 1,917,276 820,134 200,001 288,360 92,300 119,192 45,833 — 1,565,820 251,036 200,001 288,360 92,300 104,675 25,000 — 961,372 2016 and thereafter 211,752 2,633,329 48,062 1,215,283 255,913 100,000 — 4,464,339 total $ 4,173,237 $ 3,433,333 $ 1,201,502 $ 1,584,483 $ 761,713 $ 320,833 $ 4,793,000 $ 16,268,101 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, 2011, it cannot guarantee that its operations will generate cash in future periods. Subject to the Risk Factors set forth in Part I, Item 1A of this Report and the general disclaimers set forth in our Special Note Regarding Forward-Looking Statements at the outset of this Report, we believe that cash flow from operations will provide us with sufficient funds in order to fund our expected operations over the next 12 months. The Company does not believe inflation has had a material impact on its results of operations in the last three years. The Company had no off-balance-sheet arrangements in 2011, other than operating leases. 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. 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. 12 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 assessed qualitative factors as of December 31, 2011, and determined that it was more likely than not that the fair value of both reporting units exceeded their respective carrying amounts. Factors considered for each reporting unit included financial performance, forecasts and trends, market cap, regulatory and environmental issues, foreign currency, market analysis, recent transactions, macro-economic conditions, industry and market considerations, raw material costs, management stability, and the degree by which the fair value of each reporting unit exceeded its carrying value in 2010 (approximately $37 million or 161% and $7 million or 190% for the Component Products and Molded Fiber reporting units, respectively). As a result, no goodwill impairment test was performed in 2011. Based upon tests performed in 2010 and 2009, there was no goodwill impairment as of December 31, 2010, and 2009 • 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 materially from those projected in the forward-looking statements. Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices. At December 31, 2011, 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. 13 REPORT OF INDEPENDENT REGISTERED PUBlIC ACCOUNTING FIRM to the board of directors and stockholders of ufp technologies, inc., georgetown, ma We have audited the accompanying consolidated balance sheet of UFP Technologies, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. Our audit of the basic consolidated financial statements included the financial statement schedules listed in the index appearing under Item 15 (a) (2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. The consolidated financial statements of the Company as of December 31, 2010 and for each of the years in the two year period ended December 31, 2010 were audited by CCR LLP. We have since succeeded the practice of such firm. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UFP Technologies, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2011, 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. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2012 expressed an unqualified opinion. grant thornton llp boston, ma march 15, 2012 14 REPORT OF INDEPENDENT REGISTERED PUBlIC ACCOUNTING FIRM to the board of directors and stockholders of ufp technologies, inc., georgetown, ma We have audited UFP Technologies, Inc.’s (a Delaware Corporation) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). UFP Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on UFP Technologies, Inc.’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, UFP Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of UFP Technologies, Inc. and subsidiaries and our report dated March 15, 2012 expressed an unqualified opinion. grant thornton llp boston, ma march 15, 2012 15 CONSOlIDATED BAlANCE ShEETS assets Current assets: december 31 2011 2010 Cash and cash equivalents (UDT: $278,475 and $277,698, respectively) $ 29,848,798 $ 22,102,634 Receivables, net Inventories, net Prepaid expenses Refundable income taxes Deferred income taxes 15,618,717 9,758,623 558,875 1,086,632 1,168,749 total current assets 58,040,394 Property, plant, and equipment (UDT: $2,099,960 and $2,756,792, respectively) 47,635,907 Less accumulated depreciation and amortization (UDT: $(1,448,928) and $(1,640,818), respectively) Net property, plant, and equipment Goodwill Intangible assets Other assets (34,289,450) 13,346,457 6,481,037 398,499 1,454,867 14,633,375 8,044,336 1,035,301 1,414,026 1,208,848 48,438,520 45,457,275 (32,882,135) 12,575,140 6,481,037 593,829 1,389,375 total assets $ 79,721,254 $ 69,477,901 liabilities and stockholders’ equity Current liabilities: Accounts payable Accrued expenses (UDT: $14,400 and $12,900, respectively) Current installments of long-term debt (UDT: $0 and $39,246, respectively) total current liabilities Long-term debt, excluding current installments (UDT: $0 and $627,629, 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 6,554,746 shares in 2011 and 6,338,829 shares in 2010 Additional paid-in capital Retained earnings total ufp technologies, inc. stockholders’ equity Non-controlling interests total stockholders’ equity $ 3,344,480 $ 2,837,462 5,540,163 580,661 9,465,304 5,638,658 1,292,378 1,340,131 17,736,471 — 65,547 18,185,912 43,059,074 61,310,533 674,250 61,984,783 6,679,381 654,331 10,171,174 6,846,947 880,775 1,352,529 19,251,425 — 63,388 16,924,197 32,712,904 49,700,489 525,987 50,226,476 total liabilities and stockholders’ equity $ 79,721,254 $ 69,477,901 The accompanying notes are an integral part of these consolidated financial statements. 16 CONSOlIDATED STATEMENTS OF OPERATIONS years ended december 31 2011 2010 2009 $ 127,243,846 $ 120,766,450 $ 99,231,334 Net sales Cost of sales gross profit Selling, general, and administrative expenses Gain on sales of property, plant, and equipment operating income Other (expenses) income: Interest expense, net Other, net Gains on acquisitions Total other (expense) income income before income tax provision Income tax expense Net income from consolidated operations 90,999,327 36,244,519 21,366,913 (838,592) 15,716,198 (26,874) — — (26,874) 15,689,324 4,905,708 10,783,616 86,150,720 34,615,730 20,235,540 (12,000) 14,392,190 (115,537) 150,000 — 34,463 14,426,653 5,019,136 9,407,517 (160,425) 72,511,919 26,719,415 18,539,005 (11,206) 8,191,616 (232,747) — 839,690 606,943 8,798,559 2,816,575 5,981,984 (52,559) Net income attributable to non-controlling interests (437,446) net income attributable to ufp technologies, inc. $ 10,346,170 $ 9,247,092 $ 5,929,425 Net income per share: Basic Diluted Weighted average common shares: Basic Diluted $ $ 1.60 1.48 $ $ 1.50 1.37 6,475,540 6,999,300 6,157,310 6,749,062 $ $ 1.02 0.94 5,829,580 6,293,964 The accompanying notes are an integral part of these consolidated financial statements. 17 CONSOlIDATED STATEMENTS OF STOCkhOlDERS’ EQUITy Years ended December 31, 2011, 2010, and 2009 common stock shares amount additional paid-in capital retained earnings non- controlling total stockholders’ interests equity 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 196,000 Exercise of stock options 39,375 Excess tax benefits on share-based compensation Net income Distribution to non-contolling interests — — — 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 274,760 2,747 504,309 — — — — — — Net share settlement of restricted stock units and stock option tax withholding (485,511) 79,248 963,710 507,056 (485,511) Excess tax benefits on share-based compensation Net income Distribution to non-contolling interests — — — — — — 854,015 — — 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 Stock issued in lieu of compensation 2,735 Share-based compensation 69,324 27 693 54,973 1,087,979 Exercise of stock options, net of shares presented for exercise 143,858 1,439 249,099 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 — — — — — — — — (829,995) 699,659 — — — — — — — — — — — — 55,000 1,088,672 250,538 (829,995) 699,659 10,346,170 437,446 10,783,616 — (289,183) (289,183) balance at december 31, 2011 6,554,746 $ 65,547 $ 18,185,912 $43,059,074 $ 674,250 $ 61,984,783 The accompanying notes are an integral part of these consolidated financial statements. 18 CONSOlIDATED STATEMENTS OF CASh FlOWS Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Gain on sales of property, plant, and equipment Gain on acquisitions Share-based compensation Stock issued in lieu of compensation Deferred income taxes Excess tax benefits on share-based compensation Changes in operating assets and liabilities, net of effects from acquisition: Receivables, net Inventories, net Prepaid expenses Refundable income taxes Accounts payable Accrued expenses Retirement and other liabilities Other assets years ended december 31 2011 2010 2009 $ 10,783,616 $ 9,407,517 $ 5,981,984 2,781,002 (838,592) — 1,088,672 55,000 451,702 (699,659) (985,342) (1,714,287) 476,426 327,394 507,018 (439,559) (12,398) (65,492) 3,152,193 (12,000) — 963,710 79,248 305,830 (854,015) (415,370) (396,819) (558,920) (1,414,026) 160,922 1,380,570 234,332 (205,445) 2,895,062 (11,206) (839,690) 900,813 183,500 226,950 (23,421) (341,536) 1,863,118 72,715 — 384,928 (307,305) 204,553 (509,425) net cash provided by operating activities 11,715,501 11,827,727 10,681,040 Cash flows from investing activities: Additions to property, plant, and equipment (3,740,891) (3,285,530) Acquisition of Foamade Industries, Inc.’s assets Acquisition of E.N. Murray Co. net of cash acquired Acquisition of Advanced Materials Group assets — — — — — — Proceeds from sale of property, plant, and equipment 1,222,494 12,000 (1,856,837) (375,000) (1,440,534) (620,000) 13,364 net cash used in investing activities (2,518,397) (3,273,530) (4,279,007) Cash flows from financing activities: Distribution to United Development Company Partners (non-controlling interest) Excess tax benefits on share-based compensation Proceeds from the exercise of stock options net of attestations 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 (289,183) 699,659 250,538 (1,281,959) — (829,995) — (105,000) 854,015 507,056 (623,552) — (485,511) — (105,000) 23,421 130,332 (576,690) (1,612,665) — 4,000,000 net cash (used in) provided by financing activities (1,450,940) 147,008 1,859,398 Net change in cash and cash equivalents 7,746,164 8,701,205 Cash and cash equivalents at beginning of year 22,102,634 13,401,429 8,261,431 5,139,998 cash and cash equivalents at end of year $ 29,848,798 $ 22,102,634 $ 13,401,429 The accompanying notes are an integral part of these consolidated financial statements. 19 NOTES TO CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011, and 2010 (1) summary of significant accounting policies UFP Technologies, Inc. (“the Company”) is an innovative designer and custom converter of foams, plastics, and natural fiber products principally serving the medical, automotive, aerospace and defense, computer and electronics, consumer, and industrial markets. The Company was incorporated in the State of Delaware in 1993. (a) principles of consolidation The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc., its wholly owned subsidiaries, Moulded Fibre Technology, Inc., Simco 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) 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, including allowance for doubtful accounts and the net realizable value of inventory, 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. (c) 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. (d) 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. (e) cash and cash equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2011, and 2010, 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 recorded as reductions in cash. Prior to 2011 the Company recorded book overdrafts caused by outstanding checks as an increase to both cash and accounts payable. Because the Company had sufficient cash on hand at the end of each fiscal year to fund the outstanding checks as they cleared, prior year book overdrafts have been reclassified as a reduction in cash to be consistent with the 2011 presentation. The outstanding checks at December 31, 2011, 2010, and 2009, were $2,016,839, $2,331,117, and $1,597,085, 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. (f) 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, 2011. 20 (g) 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 the net realizable value of inventory 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 reserved balances as of December 31, 2011. (h) 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, in some cases, 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. (i) goodwill Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. The Company’s reporting units include its Component Products segment, Packaging segment (excluding its Molded Fiber operation), and its Molded Fiber operation. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company assessed qualitative factors as of December 31, 2011, and determined that it was more likely than not that the fair value of both reporting units exceeded their respective carrying amounts. Factors considered for each reporting unit included financial performance, forecasts and trends, market cap, regulatory and environmental issues, foreign currency, market analysis, recent transactions, macro-economic conditions, industry and market considerations, raw material costs, management stability, and the degree by which the fair value of each reporting unit exceeded its carrying value in 2010 (approximately $37 million or 161% and $7 million or 190% for the Component Products and Molded Fiber reporting units, respectively). As a result, no goodwill impairment test was performed in 2011. Based upon tests performed in 2010 and 2009, there was no goodwill impairment as of December 31, 2010, and 2009. (j) 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. (k) 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. (l) 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). 21 Share-based compensation cost that has been charged against income for stock compensation plans is as follows: Selling, general, and administrative expenses $ 1,088,672 $ 963,710 $ 900,813 year ended december 31 2011 2010 2009 The compensation expense for stock options granted during the three-year period ended December 31, 2011, was determined as the intrinsic fair market value of the options, using a lattice-based option valuation model with the assumptions noted as follows: 2011 2010 2009 year ended december 31 Expected volatility 54.8% to 73.3% 65.8% to 83.4% 68.8% to 84.6% Expected dividends None None Risk-free interest rate 0.9% to 2.9% 2.0% to 3.2% None 3.6% Exercise price Closing price on date of grant Closing price on date of grant Closing price on date of grant Imputed life 4.6 to 7.7 years (output in 4.1 to 7.9 years (output in 4.1 to 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 2011, 2010, and 2009, was $5.75, $3.89, and $1.83, respectively. Tax benefits totaling $699,659, $854,015, and $23,421 were recognized as additional paid-in capital during the years ended December 31, 2011, 2010, and 2009, 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 $359,000, $316,600, and $291,000 for the years ended December 31, 2011, 2010, and 2009, respectively. (m) deferred rent The Company accounts for escalating rental payments on a straight-line basis over the term of the lease. (n) 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 in net sales. (o) 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, $0.9 million, and $0.8 million were expensed in the years ended December 31, 2011, 2010, and 2009, respectively. (p) 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 carry forwards. 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 deferred tax assets would be charged to income in the period such determination was made. 22 The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. (q) 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 (see Note 20). (2) new accounting pronouncements In May 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS (“ASU 2011-04”), which amends Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. ASU 2011-04 improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements. Although ASU 2011-04 is not expected to have a significant effect on practice, it changes some fair value measurement principles and disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and must be applied prospectively. Early application is not permitted. We do not anticipate that the adoption of ASU 2011-04 will have a material impact on our financial position or the results of our operations. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), which amends ASC 350, Intangibles – Goodwill and Other. Previous guidance under ASC 350 required an entity to test goodwill for impairment on at least an annual basis by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step 1). The amendments of ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The amendments of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 in December 2011 with no impact on the company’s financial position or results of operations. (3) supplemental cash flow information Cash paid for interest and income taxes is as follows: Interest Income taxes, net of refunds $ $ 126,999 3,793,454 127,378 $ $ 5,522,702 $ $ 205,828 1,648,764 year ended december 31 2011 2010 2009 During the years ended December 31, 2011, and 2010, the Company permitted the exercise of stock options with exercise proceeds paid with the Company’s stock (“cashless” exercises) totaling $93,879 and $343,750, respectively. (4) receivables and net sales Receivables consist of the following: Accounts receivable—trade Less allowance for doubtful receivables $ 15,997,576 (378,859) 2011 december 31 2010 $ 14,976,057 (342,682) $ 15,618,717 $ 14,633,375 23 Receivables are written off against these reserves in the period they are determined to be uncollectible, and payments subsequently received on previously written-off receivables are recorded as a reversal of the bad debt provision. 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. The Company recorded a provision for doubtful accounts of $55,209 and $8,466 for the years ended December 31, 2011, and 2010, respectively. Sales to the top customer in the Company’s Component Products segment comprised 10.9% of that segment’s total sales and 7.2% of the Company’s total sales for the year ended December 31, 2011. Sales to the top customer in the Company’s Packaging segment comprised 6.9% of that segment’s total sales and 2.3% of the Company’s total sales for the year ended December 31, 2011. (5) inventories Inventories consist of the following: Raw materials Work in process Finished goods $ 2011 5,425,773 1,513,794 2,819,056 december 31 $ 2010 4,778,780 695,421 2,570,135 $ 9,758,623 $ 8,044,336 (6) other intangible assets The carrying values of the Company’s definite-lived intangible assets as of December 31, 2011, and 2010, are as follows: Gross amount at December 31, 2011 Accumulated amortization at December 31, 2011 $ 428,806 (425,052) $ 200,000 (126,500) $ 769,436 (448,191) $ 1,398,242 (999,743) patents non-compete customer list total net balance at december 31, 2011 $ 3,754 $ 73,500 $ 321,245 $ 398,499 Gross amount at December 31, 2010 Accumulated amortization at December 31, 2010 428,806 (400,885) $ 200,000 (93,168) $ 769,436 (310,360) $ 1,398,242 (804,413) net balance at december 31, 2010 $ 27,921 $ 106,832 $ 459,076 $ 593,829 Amortization expense related to intangible assets was $195,330, $223,908, and $157,104 for the years ended December 31, 2011, 2010, and 2009, respectively. Future amortization for the years ending December 31 will be approximately: 2012 2013 2014 total $ 163,554 159,800 75,145 $ 398,499 (7) property, plant, and equipment Property, plant, and equipment consist of the following: december 31 2011 Land and improvements Buildings and improvements Leasehold improvements Equipment Furniture and fixtures Construction in progress—equipment/buildings $ 839,906 6,959,641 3,071,096 32,612,522 2,540,055 1,612,687 $ 2010 944,906 7,499,855 2,884,463 31,695,304 2,153,943 278,804 $ 47,635,907 $ 45,457,275 24 Depreciation and amortization expense for the years ended December 31, 2011, 2010, and 2009, was $2,585,672, $2,928,285, and $2,737,958, respectively (8) investment in and advances to affiliated partnership The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). The Company has consolidated the financial statements of UDT for all periods presented because it has determined that UDT is a VIE, and the Company is the primary beneficiary. UDT owns one building, which is 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 (see Note 23). 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 $ 2011 278,475 651,032 14,400 — $ 2010 277,698 1,115,974 12,900 666,875 (9) indebtedness On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is composed 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 mortgage loan of $1.8 million with a 20-year straight-line amortization; and (iv) a mortgage 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, 2011, the Company had availability of approximately $16.9 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, which the Company was in compliance with as of December 31, 2011. 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, 2011, the interest rate on these facilities was 1.28%, and there were no borrowings outstanding on the line of credit. Long-term debt consists of the following: Mortgage notes Note payable UDT mortgage Equipment loan total long-term debt Current Installments december 31 2011 2010 $ 5,017,817 $ 5,310,116 1,201,502 — — 6,219,319 (580,661) 1,489,863 666,875 34,424 7,501,278 (654,331) long-term debt, excluding current installments $ 5,638,658 $ 6,846,947 Aggregate maturities of long-term debt are as follows: Year ending December 31: 2012 2013 2014 2015 2016 580,661 580,661 580,661 580,661 3,896,675 $ 6,219,319 25 (10) accrued expenses Accrued expenses consist of the following: Compensation Benefits/self-insurance reserve Paid time off Commissions payable Unrecognized tax benefits (See Note 11) Other $ 2011 2,221,730 621,931 841,357 393,028 320,000 1,142,117 december 31 $ 2010 2,855,331 762,515 780,109 416,326 685,000 1,180,100 $ 5,540,163 $ 6,679,381 (11) income taxes The Company’s income tax provision (benefit) for the years ended December 31, 2011, 2010, and 2009, consists of the following: Current: Federal State Deferred: Federal State years ended december 31 2011 2010 2009 $ 3,752,000 702,000 $ 4,259,000 454,000 $ 2,100,000 490,000 4,454,000 4,713,000 2,590,000 396,000 56,000 191,000 115,000 452,000 306,000 263,000 (36,000) 227,000 total income tax provision $ 4,906,000 $ 5,019,000 $ 2,817,000 At December 31, 2011, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,599,000, 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 approximate tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows: Current defferred tax assets: Reserves Inventory capitalization Compensation programs Retirement liability Equity-based compensation december 31 2011 2010 $ 377,000 230,000 262,000 72,000 228,000 $ 359,000 196,000 252,000 88,000 314,0000 total current defferred tax assets: $ 1,169,000 $ 1,209,000 Long-term deferred tax assets/(liabilities): Excess of book over tax basis of fixed assets $ (1,421,000) (691,000) Goodwill (146,000) Intangible assets 544,000 Net operating loss carryforwards 64,000 Deferred rent 358,000 Compensation programs $ (1,065,000) (627,000) (207,000) 644,000 57,000 317,000 total long-term deferred tax (liabilities) $ (1,292,000) $ (881,000) 26 The amounts recorded as deferred tax assets as of December 31, 2011, and 2010, represent 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 has total deferred tax assets of $2,134,000 at December 31, 2011, that it believes are 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 Computed “expected” tax rate Increase (decrease) in income taxes resulting from: State taxes, net of federal tax benefit Meals and entertainment R&D credits Domestic production deduction Non-deductible ISO stock option expense Acquisition gains Unrecognized tax benefits Income of non-controlling interests Other 2011 34.0% 3.4 0.1 (0.4) (2.8) 0.1 — (2.4) (1.0) 0.3 2010 34.0% 2.0 0.1 (0.3) (1.8) 0.1 — 1.0 (0.4) 0.1 2009 34.0% 3.4 0.2 (0.9) (1.7) 0.2 (3.3) — (0.2) 0.3 effective tax rate 31.3% 34.8% 32.0% The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. 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 Company’s federal tax return for 2008 has been audited. Federal tax returns for the years 2009 through 2010 and state tax returns for the years 2008 through 2010 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 2011 2010 Gross UTB balance at beginning of fiscal year Increases for tax positions of prior years Reductions for tax positions of prior years $ 685,000 40,000 (405,000) $ 545,000 140,000 — gross utb balance at december 31 $ 320,000 $ 685,000 The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2011, and 2010, are $320,000 and $685,000, respectively, for each year. At December 31, 2011, and 2010, accrued interest and penalties on a gross basis, which are included above in the gross UTB balance, were $145,000 both years. At December 31, 2011, 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 2012. (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: 27 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 2011 2010 2009 6,475,540 6,157,310 5,829,580 523,760 591,752 464,384 6,999,300 6,749,062 6,293,964 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, 2011, 2010, and 2009, the number of stock awards excluded from the computation was 23,205, 101,769, and 190,484, 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, 2011, there were 331,620 options outstanding under the Employee Stock Option Plan. 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 Plan was further amended on June 8, 2011, to increase the maximum number of shares of common stock in the aggregate to be issued to 2,250,000. 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, incentive and 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. Through December 31, 2011, 925,955 shares of common stock have been issued under the 2003 Incentive Plan, none of which have been restricted. An additional 176,209 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, 2011, 60,000 options have been granted and 56,250 options are outstanding. At December 31, 2011, 1,087,836 shares or options are available for future issuance in the 2003 Incentive Plan. director plan Effective July 15, 1998, the Company adopted the 1998 Director Plan. The Plan was amended and renamed, on June 3, 2009, the 2009 Non-Employee Director Stock Incentive Plan. The Plan, as amended, provides for the issuance of stock options and other equity-based securities up to 975,000 shares. At December 31, 2011, there were 250,651 options outstanding, and 3,809 shares of common stock were issued in the year ended December 31, 2011, 220,226 shares remained available to be issued under the Plan. 28 The following is a summary of stock option activity under all plans: outstanding december 31, 2010 Granted Exercised Cancelled or expired outstanding december 31, 2011 exercisable at december 31, 2011 vested and expected to vest at december 31, 2011 shares weighted average aggregate under options exercise price intrinsic value 764,496 23,205 (149,180) — 638,521 578,521 $ 4.12 16.10 2.31 — $ $ 4.98 4.45 — — — — $ 6,279,933 $ 5,988,946 638,521 $ 4.98 $ 6,279,933 The following is a summary of information relating to stock options outstanding and exercisable by price range as of December 31, 2011: —————————— options outstanding —————————— —-— options exercisable —— range of outstanding remaining contractual average exercisable as weighted average weighted weighted average exercise prices as of 12/31/11 life (years) exercise price of 12/31/11 exercise price $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 - $16.99 46,620 200,000 111,984 51,174 41,719 27,951 82,599 34,000 42,474 638,521 1.2 3.1 1.6 6.5 4.9 4.5 6.0 5.5 6.6 3.9 $ 1.00 2.32 3.28 4.16 5.12 6.07 9.13 10.23 14.26 46,620 200,000 111,984 46,174 41,719 27,951 48,849 26,500 28,724 $ 1.00 2.32 3.28 4.17 5.12 6.07 9.16 10.17 14.06 $ 4.98 578,521 $ 4.45 During the years ended December 31, 2011, 2010, and 2009, the total intrinsic value of all options exercised (i.e., the difference between the market price and the price paid by the employees to exercise the options) was $2,204,962, $2,711,864, and $79,269, respectively, and the total amount of consideration received from the exercise of these options was $344,417, $850,806, and $130,332, 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 years ended December 31, 2011, and 2010, 20,492 shares were surrendered at a market price of $17.64 and 62,202 shares were surrendered at a market price of $10.42, respectively. No shares were surrendered during the year ended December 31, 2009. During the years ended December 31, 2011, 2010, and 2009, the Company recognized compensation expense related to stock options granted to directors and employees of $141,499, $213,716, and $150,482, respectively. On March 2, 2011, 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 22, 2011. The Company has recorded compensation expense of $423,250 for the year ended December 31, 2011, based on the grant date price of $16.93 at March 2, 2011. Stock compensation expense of $192,500 and $106,000 was recorded in 2010 and 2009, respectively, for similar awards. On June 8, 2011, the Company issued 3,708 shares of unrestricted common stock to the non-employee members of the Company’s Board of Directors as part of their annual retainer for serving on the Board. Based upon the closing price of $16.17 on June 8, 2011, the Company recorded compensation expense of $60,000 associated with the stock issuance for the year ended December 31, 2011. 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 $55,000, $79,248, and $183,500, respectively, for the years ended December 31, 2011, 2010, and 2009. 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 29 to expense ratably during the service period. 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, 2011: restricted stock units award date fair value weighted average outstanding at december 31, 2010 Awarded Shares distributed Forfeited/Cancelled outstanding at december 31, 2011 251,694 11,221 (86,706) — 176,209 $ 5.80 18.27 5.02 — $ 6.98 The Company recorded $463,923, $557,494, and $644,331 in compensation expense related to these RSUs during the years ended December 31, 2011, 2010, and 2009, respectively. At the Company’s discretion, RSU holders are given the option to net-share settle to cover the required minimum withholding tax, and the remaining amount is converted into the equivalent number of common shares. During the year ended December 31, 2011, 30,920 shares were redeemed for this purpose at a market price of $18.19. During the year ended December 31, 2010, 19,579 shares were redeemed for this purpose at a market price of $9.25. The following summarizes the future share-based compensation expense the Company will record as the equity securities granted through December 31, 2011, vest: options common stock $ 72,744 70,080 43,892 12,962 — — — — restricted stock units $ 321,210 219,300 76,456 8,541 total $ 393,954 289,380 120,348 21,503 $ 199,678 $ — $ 625,507 $ 825,185 2012 2013 2014 2015 total (14) preferred stock On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share on March 20, 2009, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Share”), of the Company, at a price of $25.00 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The rights expire on March 19, 2019. (15) supplemental retirement benefits 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 $6,000, $30,000, and $35,000 for the years ended December 31, 2011, 2010, and 2009, 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, 2012, through 2016, are approximately $75,000, $75,000, $46,000, $25,000, and $25,000, respectively, and approximately $75,000 thereafter. (16) commitments and contingencies (a) Leases – The Company has operating leases for certain facilities that expire through 2016. Certain of the leases contain escalation clauses that require payments of additional rent, as well as increases in related operating costs. 30 Future minimum lease payments under non-cancelable operating leases as of December 31, 2011, are as follows: years ending december 31 operating leases 2012 2013 2014 2015 2016 $ 1,762,408 1,127,907 820,134 251,036 211,752 total minimum lease payments $ 4,173,237 Rent expense amounted to approximately $2,305,000, $2,616,000, and $2,442,000 in 2011, 2010, and 2009, respectively. (b) Legal – The Company is a defendant in various administrative proceedings that are being handled in the ordinary course of business. In the opinion of management of the Company, these suits and claims should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the company’s financial condition or results of operations. (17) employee benefits plans The Company maintains a profit sharing plan for eligible employees. Contributions to the Plan are made in the form of matching contributions to employee 401k deferrals, as well as discretionary amounts determined by the Board of Directors, and amounted to approximately $715,000, $785,000, and $709,000 in 2011, 2010, and 2009, respectively. The Company has a partially self-insured health insurance program that covers all eligible participating employees. The maximum liability is limited by a stop loss of $125,000 per insured person, along with an aggregate stop loss determined by the number of participants. The Company has an Executive, Non-qualified “Excess” Plan (“the Plan”), which is a deferred compensation plan available to certain executives. The Plan permits participants to defer receipt of part of their current compensation to a later date as part of their personal retirement or financial planning. Participants have an unsecured contractual commitment by the Company to pay amounts due under the Plan. There is currently no security mechanism to ensure that the Company will pay these obligations in the future. The compensation withheld from Plan participants, together with investment income on the Plan, is reflected as a deferred compensation obligation to participants, and is classified within retirement and other liabilities in the accompanying balance sheets. At December 31, 2011, the balance of the deferred compensation liability totaled approximately $1,105,000. The related assets, which are held in the form of a Company-owned, variable life insurance policy that names the Company as the beneficiary, are reported within other assets in the accompanying balance sheets, and are accounted for based on the underlying cash surrender values of the policies, and totaled approximately $1,096,000 as of December 31, 2011. (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 has no assets and liabilities that are measured at fair value. 31 (19) acquisitions 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 penetration into applications using this family of foams, as well as incremental sales to fold into its operations. The Company has transitioned the acquired assets to its Grand Rapids, Michigan, plant. On July 7, 2009, the Company acquired substantially all of the assets of E.N. Murray Co. (“ENM”), a Denver, Colorado-based foam fabricator, for $2,750,000. ENM specialized in the fabrication of technical urethane foams primarily for the medical industry. This acquisition brings to the Company further access and expertise in fabricating technical urethane foams and a seasoned management team. The Company had leased the former ENM Denver facilities for a period of two years. The Company purchased these properties on December 22, 2010, for $1,200,000. On August 24, 2009, the Company acquired selected assets of Advanced Materials, Inc. (“AMI”) for $620,000. Located in Rancho Dominguez, California, AMI specialized in the fabrication of technical urethane foams primarily for the medical industry and brings to the Company further penetration into this market. The Company assumed the lease of the 56,000-square-foot Rancho Dominguez location, which expires in November 2011. 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: foamade enm ami march 9, 2009 July 7, 2009 august 24, 2009 Consideration Cash $ 375,000 $ 2,750,000 $ 620,000 fair value of total consideration transferred 375,000 2,750,000 620,000 acquisition costs (legal fees) included in sg&a 25,000 30,000 35,000 Recognized amounts of identifiable assets acquired: Cash Accounts receivable Inventory Other assets Fixed assets Non-compete Customer list — — 182,864 — 189,100 30,000 103,000 1,309,466 832,054 922,497 37,708 812,000 120,000 490,000 — 289,540 252,528 — 345,750 — 56,000 total identifiable net assets 504,964 4,523,725 943,818 Payables and accrued expenses Equipment loan Deferred tax liabilities — — (49,386) (830,341) (42,827) (342,212) — — (123,051) net assets acquired $ 455,578 $ 3,308,345 $ 820,767 32 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 year ended December 31, 2009, as if the ENM acquisition had occurred at the beginning of the period: Sales Net Income Earnings per share: Basic Diluted year ended december 31, 2009 $ 105,228,869 6,070,518 $ 1.04 0.96 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. The accounting policies of the segments are the same as those described in Note 1. Income taxes and interest expense have been allocated based on operating results and total assets employed in each segment. Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals of the reportable segments’ revenues, net profits, and assets agree with the Company’s consolidated amounts contained in the audited financial statements. Revenues from customers outside of the United States are not material. Sales to the top customer in the Company’s Component Products segment comprises 10.9% of that segment’s total sales and 7.2% of the Company’s total sales for the year ended December 31, 2011. Sales to the top customer in the Company’s Packaging segment comprise 6.9% of that segment’s total sales and 2.3% of the Company’s total sales for the year ended December 31, 2011. 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. 33 Financial statement information by reportable segment is as follows: 2011 Sales 2010 Sales 2009 Sales component products packaging unallocated assets total Operating income Total assets Depreciation/Amortization Capital expenditures Interest expense, net Goodwill $ 84,652,237 13,036,101 27,169,529 1,544,377 1,029,046 (14,640) 4,463,246 $ 42,591,609 2,680,097 22,702,927 1,236,625 2,711,845 (12,234) 2,017,791 $ — — 29,848,798 — — — — $ 127,243,846 15,716,198 79,721,254 2,781,002 3,740,891 (26,874) 6,481,037 component products packaging unallocated assets total $ 80,373,062 $ 40,393,388 $ Operating income Total assets Depreciation/Amortization Capital expenditures Interest expense, net Goodwill 11,104,306 26,579,654 1,802,085 1,814,874 (61,668) 4,463,246 3,287,884 20,795,613 1,350,108 1,470,656 (53,869) 2,017,791 — — 22,102,634 — — — — $ 120,766,450 14,392,190 69,477,901 3,152,193 3,285,530 (115,537) 6,481,037 component products packaging unallocated assets total Operating income Total assets Depreciation/Amortization Capital expenditures Interest expense, net Goodwill Bargain purchase gains $ 60,973,325 5,806,122 25,409,608 1,658,290 989,027 (126,363) 4,463,246 839,690 $ 38,258,009 2,385,494 19,043,675 1,236,772 867,810 (106,384) 2,017,791 — $ — — 13,401,429 — — — — — $ 99,231,334 8,191,616 57,854,712 2,895,062 1,856,837 (232,747) 6,481,037 839,690 (21) building 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, was approximately $384,000. Selling expenses of approximately $38,000 were incurred. (22) quarterly financial information (unaudited) year ended december 31, 2011 q1 q2 q3 q4 Net sales Gross profit Net income attributable $ 31,503,588 $ 33,500,994 $ 30,761,959 $ 31,477,305 8,801,548 10,003,484 8,484,298 8,955,189 to UFP Technologies, Inc. 2,204,883 2,701,792 2,435,188 3,004,307 Basic net income per share Diluted net income per share year ended december 31, 2010 0.34 0.32 q1 0.42 0.39 q2 0.37 0.35 q3 0.46 0.43 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 $ 29,957,495 $ 30,467,998 $ 31,640,491 7,457,254 9,046,836 8,905,976 9,205,664 1,511,382 0.25 0.23 2,281,616 2,364,840 3,089,254 0.37 0.34 0.38 0.35 0.49 0.45 34 (23) subsequent events On February 29, 2012, The Company purchased the manufacturing building that it leased from UDT for $1,350,000. The purchase price approximates fair market value based upon appraisals done by independent professional firms. As this was the only real estate owned by UDT, the realty limited partnership will be dissolved during 2012. 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 and capital expenditures, including reduced costs, the Company’s participation and growth in multiple markets, the Company’s business opportunities, the Company’s growth potential and strategies for growth, the Company’s planned new facility, and any indication that the Company may be able to sustain or increase 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. 35 STOCkhOlDER INFORMATION transfer agent and registrar American Stock Transfer corporate headquarters UFP Technologies, Inc. board of directors and executive officers and Trust Company 172 East Main Street 6201 15th Avenue, 3rd Floor Georgetown, MA 01833 USA R. Jeffrey Bailly do Brooklyn, NY 11219 (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 14, 2012, plant locations California, Colorado, Florida, at the Black Swan Country Club, 258 Georgia, Illinois, Iowa, Massachusetts, Andover Street, Georgetown, MA 01833, Michigan, New Jersey, Texas USA. common stock listing UFP Technologies’ common stock is traded on NASDAQ under the symbol UFPT. independent registered public accountants Grant Thornton LLP 125 High Street, 21st Floor Boston, MA 02110 stockholder services Stockholders whose shares are held in corporate counsels Lynch Brewer Hoffman & Fink, LLP street names often experience delays 75 Federal Street, 7th Floor in receiving company communications Boston, MA 02110 Chairman, CEO and President Kenneth L. Gestal President & Managing Partner Decision Capital, LLC David B. Gould President Westfield, Inc. Marc Kozin Senior Advisor L.E.K. Consulting, LLC Ronald J. Lataille Vice President, Treasurer, Secretary and Chief Financial Officer Richard S. LeSavoy Vice President Manufacturing Thomas Oberdorf Chief Financial Officer SIRVA, Inc 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 Robert W. Pierce, Jr. our financial results, what we do as a company, and where we are headed Chairman, CEO, and Co-Owner in the future. We aim to achieve Pierce Aluminum Co. 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/investors/filings.html 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 forwarded through brokerage firms or financial institutions. Any shareholder or other interested party who wishes to receive information directly should call or 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, 2011, 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/investors/filings.html 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. ETHICS 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. 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 profi t is not the sole reason for our existence, it is the lifeblood that allows us to exist. 172 East Main Street Georgetown, MA 01833 800 372 3172 ufpt.com
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