2011 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
,
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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