investing for
groWth
2 0 1 4 A n n u Al R e p oRt
2014
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.
Learn more about us at www.ufpt.com.
COntents
CeO’s Letter
2
selected Financial Data
8
9
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
17
Financial statements
36
stockholder Information
1
DeAR FeLLOW sHAReHOLDeR,
For UFp technologies, 2014 was a year of solid accomplishment. We made great
progress on a number of strategic initiatives designed to strengthen our operating
platform, accelerate sales growth, and position your Company for long-term success.
As expected, these investments had a direct impact on our year-end results.
After eight straight years of record earnings, our net income in 2014 was $7.6
million, compared to $11.3 million in 2013. However, going forward we believe these
investments will improve UFp’s ability to compete in many important ways.
A stronger fActory footprint several years ago, we made a strategic
decision to create a more focused and efficient factory footprint. Rather than
maintain multiple small plants in any one region, we resolved to create a tighter
network of larger, strategically located, very well-equipped facilities.
In each one, we wanted to assemble a critical mass of technical expertise, including
engineering, quality, and manufacturing resources. By concentrating these problem-
solving resources under one roof, we knew they could collaborate more easily, feed
off each other’s ideas, and provide even better service to our customers. to execute
this strategy, we began a series of factory moves in 2014.
plAnt consolidAtions in MichigAn And cAliforniA First, we
consolidated our Illinois operation into our 250,000-square-foot Grand Rapids,
Michigan facility. We then completed a similar project in California, bringing our Costa
Mesa operation into our nearby Rancho Dominguez facility. In each case, we took
advantage of an expiring lease to lower operating costs and improve manufacturing
efficiency. Both consolidations were completed on time and on budget. Both will
bring significant cost savings for many years to come. And both will help us deliver
more value to customers in those regions.
A new fAcility in texAs—And Another coMing soon in
MAssAchusetts We also invested $3 million to purchase a 128,000-square-foot
facility in el paso, texas. In this new plant, we improved the efficiency of our foam
fabricating operation and added new state-of-the-art molded fiber production lines
to meet the growing demand in the southwest for our environmentally-friendly
packaging. previously, we had to ship products to local customers from our Iowa plant
more than 1,000 miles away. this new facility expands our capacity and allows us to
respond more efficiently to customer requests.
“We believe these
investments will
improve UFP’s ability
to compete in many
important ways.”
COMPARISON OF 5-YEAR
CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
DECEMBER 2014
450
400
350
300
250
200
150
100
50
2
9
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1
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1
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2
UFP Technologies, Inc.
SIC Codes 3080-3089
Miscellaneous Plastic Products
NASDAQ Stock Market
(US Companies)
GICS 15103020 Paper Packaging
In total, we invested about $6.5 million to optimize our footprint in 2014, and another
$7.7 million to purchase new capital equipment. We believe it’s an excellent use of a
portion of the cash reserves we’ve built up over the years, and we estimate that these
investments will pay for themselves in three years or less.
REVENUE
NET INCOME
SHAREHOLDERS’ EQUITY
And we’re not done yet. In January 2015, we purchased a 137,000-square-foot
factory in newburyport, Massachusetts, in which we plan to combine our northeast
operations. As with all our regional consolidations, we expect to gain major operating
efficiencies once this effort is complete. At that point, we will have greatly improved
our facilities in four regions—Midwest, West Coast, southwest, and northeast.
progress on other key initiAtives In some of the year’s other
main accomplishments:
• We converted four more plants to our new enterprise Resource planning system.
• We invested in a new Customer Relationship Management system to help us
forecast, analyze trends, and serve customers better.
• We enhanced production capabilities and quality systems for our medical
REVENUE
customers in several plants.
• We added new talent across the organization, including senior leadership in
engineering and sales.
We will discuss each of these important initiatives in the following pages.
6
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in short, your coMpAny is strong And getting stronger While
certain target markets such as defense remain challenging, we anticipate double-
,
,
,
,
,
digit growth in our medical business, coupled with strong demand for our molded
fiber packaging products. We also expect steadily improving results in our new
texas operation as we quickly ramp up sales.
Looking ahead, we will continue to invest in market opportunities that best fit our
industry-leading engineering and materials expertise. For customers with complex
NET INCOME
REVENUE
needs, no one offers greater problem-solving skills or a longer track record of
success. We will also continue to explore strategic acquisitions that can increase
the value we bring to customers. As we identify opportunities, our experienced
management team and strong balance sheet will enable us to act quickly.
For all of the changes in 2014, our most important attributes remain the same. Our
commitment to customers’ success. Our culture of integrity, innovation, and excellent
,
,
,
,
,
customer service. these traits have served us well for decades, and I believe our best
years are yet to come. I hope you agree, and I thank you for your support of UFp
6
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technologies.
sincerely,
R. Jeffrey Bailly
Chairman and CeO
,
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NET INCOME
SHAREHOLDERS’ EQUITY
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InvestInG In
teCHnOLOGy
New systems and equipment help us
operate more effectively and meet new
market challenges.
In 2014, we continued to upgrade our technologies and production
resources. We added four plants to our new enterprise Resource
planning system, and will complete our Company-wide implementation
in 2015. this system enables us to centralize many functions and respond
more quickly to customer requests. It also provides insights to help us make
more informed decisions on everything from resource allocation to product
development. And it helps us share best practices among plants more easily.
In 2014, we also invested in a new Customer Relationship Management
system, which will provide a new level of visibility into customer information.
this will make account planning and forecasting easier, and help us serve
customers better.
In addition, we invested in new production resources for our fastest growing
markets. For example, our $7 million investment in new molded fiber
equipment in texas will help us meet the rising demand for eco-friendly
packaging solutions. We also
expanded clean room capacity and
added new high-speed die cutting
and thermoforming equipment
for our medical and biotech
customers. these initiatives
are all aimed at accelerating
growth, enhancing efficiency,
and improving our long-term
profitability.
We’ve expanded
production
resources for
the fast-growing
medical/biotech
market.
We added four plants to our Enterprise
Resource Planning system, and will
complete the implementation in 2015.
4
Our strategy
is to create a
network of larger,
well-equipped
facilities in key
locations.
Bringing more team
members under
one roof enhances
communication and
collaboration.
5
OptIMIzInG OUR
FOOtpRInt
Consolidating plants around the country
strengthens our platform and increases efficiency.
In the Midwest, southwest, and West Coast regions, we have taken
action to consolidate several small local facilities into one larger plant.
soon, we will do the same in the northeast. Why? In one sense, it’s
part of our Company’s natural evolution. We’ve made many strategic
acquisitions over the years, and some of these have left us with multiple,
often redundant, plants in the same area. As leases have expired and
business has grown, we have taken the opportunity to optimize our
network. And we believe a more focused footprint offers critical advantages.
First, having fewer larger plants in strategic locations, and providing more
solutions from each one, reduces operating costs in a number of ways and
enables us to centralize many functions. It also helps us focus resources
where they’re needed most, and bring more value to customers where
demand is greatest.
second, bringing more team members under one roof enhances
communication and collaboration. When it comes to sharing knowledge and
rapidly solving our customers’ toughest problems, it’s hard to beat regular
face-to-face interactions among talented people. For all these reasons, we
expect our new platform to provide significant benefits going forward.
stRenGtHenInG
OUR teAM
Adding new engineering and sales
talent improves our ability to capture
new opportunities.
talent, very simply, is the principal driver of our success.
Much more than any new equipment or technology, it is our
people who truly set us apart and provide an advantage no
competitor can match.
For example, over the years we have built a uniquely skilled and experienced
engineering team. their ability to design effective solutions to complex
problems is well-known in the industry and highly valued by our customers.
And it’s often the main reason customers trust us to meet their most critical
product and packaging needs. superior engineering is a cherished asset that
will always be a central focus of our Company. In 2014, we added a stellar
group of talented professionals to help take our Company to the next level.
We also expanded other teams to support quality initiatives, improve
customer service and drive revenue growth. By increasing our team’s strength
Our team is
known for solving
customers’ most
complex product
and packaging
challenges.
and bandwidth, we’re in a
better position to capture more
opportunities that best fit our
unique skills. Great people make
the difference; we continuously
search for talented, motivated
professionals who can thrive in
our culture of innovation.
Our culture of innovation
continues to help attract
the industry’s top talent.
6
InCReAsInG
CUstOMeR
vALUe
Expanding our capabilities allows us to solve
more customer problems.
We expect continued
strong demand for our
medical/biotech products.
Our customer list includes thousands of companies, many of them leaders in their respective
markets. some of these relationships go back decades, for several key reasons. First and
foremost, they place a very high value on our problem-solving skills. they also appreciate our
broad range of capabilities, which allows them to address many issues with one phone call. And
they benefit from our strong supplier relationships, which provides them access to the industry’s
broadest range of strategic materials. We will continue to work on building our competitive
advantages in each of these areas.
the diversity of our customer base is very important to us. With six strategic target markets, we
can respond to market changes by allocating resources where opportunities are greatest at any
given time. For example, over the past few years we have seen the strongest growth among our
medical/biotech and molded fiber packaging customers. so we have focused on enhancing our
capabilities and concentrating our sales and engineering resources in these areas.
When you get right down to it, all of our 2014 investments—in
facilities, technologies, equipment and personnel—have one
overriding goal: increasing the value we bring to customers.
that’s the driving force behind each of these decisions, and
the key to our future growth.
Our solutions bring important benefits
to customers and end users, such as
automotive components that can make
cars lighter, quieter, and safer.
7
SElECTEd FINANCIAl dATA
the following table summarizes our consolidated 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 consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.
the selected statements of operations data for the fiscal years ended December 31, 2014, 2013 and 2012, and the selected balance
sheet data as of December 31, 2014 and 2013, are derived from our audited consolidated financial statements, which are included
elsewhere in this Report. the selected statements of operations data for the years ended December 31, 2011 and 2010, and the balance
sheet data at December 31, 2011 and 2010 are derived from our audited consolidated financial statements not included in this Report.
SeLected conSoLidated FinanciaL data
consolidated statement of operations data
2014
2013
2012
2011
2010
Years ended december 31
(in thousands, except per share data)
net sales
Gross profit
Operating income
net income
Diluted earnings per share
Weighted average number of diluted shares outstanding
$ 139,307
$ 139,223
$ 130,962
$ 127,244
$ 120,766
36,880
11,561
7,559
1.05
7,175
41,014
17,398
11,276
1.59
7,105
38,319
16,666
10,895
1.55
7,028
36,245
15,716
10,346
1.48
6,999
34,616
14,392
9,247
1.37
6,749
as of december 31
(in thousands)
consolidated balance sheet data
2014
2013
2012
2011
2010
Working capital
total assets
short-term debt obligations
Long-term debt, excluding current portion
total liabilities
stockholders’ equity
Market Price
$ 56,800
$ 56,398
$ 51,263
$ 48,575
$ 38,267
113,690
104,908
98,617
79,721
69,478
993
1,873
976
2,867
1,550
8,314
18,698
19,318
25,357
581
5,639
17,736
654
6,847
19,251
94,992
85,590
73,260
61,985
50,226
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,
2013 to December 31, 2014:
Fiscal Year ended december 31, 2013
First Quarter
second Quarter
third Quarter
Fourth Quarter
Fiscal Year ended december 31, 2014
First Quarter
second Quarter
third Quarter
Fourth Quarter
High
$ 20.00
20.49
22.97
26.18
High
$ 26.60
27.43
25.92
25.45
Low
$ 18.00
18.06
19.38
21.86
Low
$ 23.27
23.12
21.05
20.55
8
nuMber oF StockHoLderS
As of March 6, 2015, there were 77 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 2013 or 2014. the Company presently intends to retain all of its earnings to provide
funds for the operation of its business and strategic acquisitions, although it would consider paying cash dividends in the future.
Any decision to pay dividends will be at the discretion of the Company’s board of directors and will depend upon the Company’s
operating results, strategic plans, capital requirements, financial condition, provisions of the Company’s borrowing arrangements,
applicable law and other factors the Company’s board of directors considers relevant.
MANAgEMENT’S dISCUSSIoN ANd ANAlySIS oF FINANCIAl
CoNdITIoN ANd RESUlTS oF oPERATIoNS
overview
UFp technologies is an innovative designer and custom converter of foams, plastics, composites and natural fiber materials,
providing solutions to customers primarily within the medical, automotive, consumer, electronics, industrial and aerospace and
defense markets.
During the third quarter of 2014, in conjunction with the consolidation of operations in Michigan and the consolidation of the
Company’s sales force, the Company determined that the existing segment aggregation of Component products and packaging
was no longer consistent with how the business is structured and reviewed by the Chief Operating Decision Maker (the “CODM”).
this is primarily because the Company has numerous manufacturing processes that are duplicated through its plants allowing it to
move workload based on available capacity and proximity to customers. the CODM evaluates consolidated financial information to
manage the business. As a result, the Company has determined that it consists of a single operating and reportable segment.
In 2014, the Company undertook several initiatives to streamline operations that had a material impact on operating results. It
consolidated plants in the Midwest and in California and relocated its operations in el paso, texas to a newly acquired building.
In addition to one-time costs to physically relocate equipment, pay severance to employees choosing not to relocate and restore
vacated buildings to their original condition, the Company had manufacturing inefficiencies associated with requalifying parts for
customers and training new employees. the company estimates these costs collectively to be slightly in excess of $2.6 million.
In January 2015, the Company acquired a 137,000 square foot commercial building on 27 acres in newburyport, Massachusetts
for approximately $6.8 million. the Company anticipates that it will further expand the property and consolidate portions of its
northeast operations into its new property in multiple phases between 2015 and 2017. It expects to incur further costs with the
consolidation but also expects the efficiency savings to be significant. It has not yet estimated either the one-time costs or efficiency
gains in a potential consolidation of operations.
the Company’s strategy includes further organic growth and growth through strategic acquisitions.
reSuLtS oF oPerationS
the following table sets forth, for the years indicated, the percentage of revenues represented by the items as shown in the
Company’s consolidated statements of operations:
net sales
Cost of sales
Gross profit
selling, general, and administrative expenses
Restructuring costs
(Gain) loss on sale of fixed assets
operating income
total other (income) expenses, net
income before taxes
Income tax expense
net income from consolidated operations
2014
2013
2012
100.0%
100.0%
100.0%
73.5%
26.5%
17.1%
1.1%
0.0%
8.3%
-0.1%
8.4%
3.0%
5.4%
70.5%
29.5%
17.0%
0.0%
0.0%
12.5%
0.2%
12.3%
4.2%
8.1%
70.7%
29.3%
16.5%
0.0%
0.0%
12.8%
0.1%
12.7%
4.4%
8.3%
9
2014 coMPared to 2013
Sales
net sales increased 0.1% to $139.3 million for the year ended December 31, 2014, from net sales of $139.2 million in 2013, primarily due
to increases in sales in the aerospace and defense and medical markets of approximately 10% and 2%, respectively, partially offset by
sales decline in the automotive market of approximately 6%. the increase in sales to the aerospace and defense market was largely
due to an increase in sales of approximately $2.1 million for a low-margin contract manufacturing program. Absent this increase,
sales to the aerospace and defense market declined approximately 6% due primarily to cuts in government spending. the decline in
sales to the automotive market was primarily due to the phase-out of an interior trim program coupled with soft demand for parts for
a specific model of car that has had weak demand from consumers.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) declined to 26.5% for the year ended December 31, 2014, from 29.5% in
2013. As a percentage of sales, material and direct labor collectively increased approximately 1.5% and overhead as a percentage
of sales increased approximately 1.5% or approximately $2 million in 2014. the increase in material and direct labor was a result of
manufacturing inefficiencies incurred as a result of plant moves in the Midwest, California and texas as well as an increase in sales
for a low-margin contract manufacturing military program. the increase in overhead was primarily due to increased employee
health care costs of approximately $600,000 due to a higher than typical frequency of large claims, increased compensation and
benefits of approximately $450,000 due to normal inflationary increases as well as higher overtime incurred as a result of the plant
moves, increased plant and equipment maintenance costs of approximately $290,000 due to the various plant moves and higher
depreciation of approximately $220,000 due largely to new molded fiber equipment.
Selling, General and Administrative Expenses
selling, General, and Administrative expenses (“sG&A”) increased 1.0% to $23.8 million for the year ended December 31, 2014 from
$23.6 million in 2013. the increase in sG&A for the year ended December 31, 2014, is primarily due to higher depreciation costs of
$160,000, largely associated with the Company’s new enterprise Resource planning (“eRp”) software system, increased bad debt
expense of approximately $140,000 due largely to a one-time write-off and increased employee health care costs of approximately
$184,000 due largely to a higher than typical frequency of large claims, partially offset by lower sales commissions of approximately
$100,000 due to soft sales compared to the Company’s budgeted sales, lower advertising costs incurred of approximately $70,000
and lower intangibles amortization of approximately $85,000.
Restructuring Costs
On January 7, 2014, the Company committed to move forward with a plan to cease operations at its Glendale Heights, Illinois plant
and consolidate operations into its Grand Rapids, Michigan, facility. the Company’s decision was in response to a pending significant
increase in lease cost, declining sales at the Illinois facility, and significant anticipated savings as a result of the consolidation. the
consolidation into the Michigan facility is complete and the actual costs incurred are included in the table below.
On July 16, 2014, the Company committed to move forward with a plan to cease operations at its Costa Mesa, California, plant
and consolidate operations into its Rancho Dominguez, California, facility and other UFp facilities. the Company’s decision was in
response to the upcoming December 31, 2014, expiration of the lease on the Costa Mesa facility as well as the close proximity of the
two properties. this consolidation is substantially complete and the actual costs incurred through December 31, 2014 are included in
the table below.
the Company has recorded the following restructuring costs associated with the plant consolidations discussed above for the year
ended December 31, 2014 (in thousands):
restructuring costs
Michigan
california total
employee severance payments
$ 237
$ 10
$ 247
Relocation costs
Workforce training costs
plant infrastructure costs
356
373
79
501
-
-
857
373
79
total restructuring costs
$ 1,045
$ 511
$ 1,556
these costs were reclassified in the 2014 Consolidated statement of Operations as “Restructuring Costs” as follows: $1,385,000 from
Cost of sales, $82,000 from selling, General and Administrative expenses and $89,000 from Gain on sales of property, plant and
equipment. the Company also incurred approximately $373,000 and $38,000, in related capital improvements at its Michigan and
California facilities, respectively, for the year ended December 31, 2014.
10
Interest Expense
Interest expense net of interest income decreased to approximately $108,000 for the year ended December 31, 2014 from net
interest expense of approximately $205,000 in 2013. the decrease in interest expense is primarily due to a lower average debt
balance as a result of the Company’s repayment of term loans in conjunction with the execution of a new revolving credit facility in
the fourth quarter of 2013.
Income Taxes
the Company recorded income tax expense as a percentage of income before income tax expense, of 35.8% and 34.4% for the
years ended December 31, 2014 and 2013, respectively. the increase in the effective tax rate for the year ended December 31,
2014 is primarily attributable to permanent differences measured against lower pre-tax income as well as additional reserves of
approximately $150,000 for uncertain tax positions. 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,
2014. 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.
2013 coMPared to 2012
Sales
net sales increased 6.3% to $139.2 million for the year ended December 31, 2013, from net sales of $131.0 million in 2012 (including
sales from packaging Alternatives Corporation (“pAC”), which the Company acquired in 2012). the increase in net sales was
primarily due to an additional $10.3 million in sales from pAC—which were primarily to the medical market—as well as a 21.3% increase
in sales of our molded fiber packaging product due to increased demand for environmentally friendly packaging solutions. excluding
sales at pAC, net sales decreased 1.5% largely due to a 28% decline in sales to the aerospace and defense market due to government
cuts in defense spending.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) increased 0.2% to 29.5% for the year ended December 31, 2013, from 29.3% in
2012. As a percentage of sales, material and direct labor collectively decreased by 0.6% in 2013, due primarily to an improved book
of business. this decrease was partially offset by an increase in overhead as a percentage of sales of 0.4% due largely to increased
depreciation expense associated with new machinery.
Selling, General and Administrative Expenses
selling, General, and Administrative expenses (“sG&A”) increased 9.0% to $23.6 million for the year ended December 31, 2013,
from $21.7 million in 2012. the increase in sG&A for the year ended December 31, 2013, is primarily due to increased sG&A at pAC.
excluding pAC, sG&A declined approximately $100,000, or 0.5% from 2012, primarily due to a reduction in incentive compensation
of approximately $700,000 partially offset by an increase in professional fees of approximately $390,000 due to higher audit and
compliance fees as well as increased expenses associated with the implementation of eRp software and an increase in net selling
expenses of approximately $300,000 due largely to the investment in additional sales resources. As a percentage of sales, sG&A
increased slightly to 17.0% for the year ended December 31, 2013, from 16.5% for the same period in 2012. the slight increase in sG&A
as a percentage of sales is primarily due to relatively fixed sG&A expenses measured against lower organic sales.
Interest Expense
Interest expense net of interest income increased to approximately $205,000 for the year ended December 31, 2013, from net
interest expense of approximately $90,000 in 2012. the increase in interest expense is primarily attributable to increased debt levels
during the year associated with financing molded fiber equipment.
Income Taxes
the Company recorded income tax expense as a percentage of income before income tax expense, of 34.4% and 34.3% for the
years ended December 31, 2013 and 2012, respectively. the slight increase in the effective tax rate for the year ended December 31,
2013, is primarily attributable to higher anticipated state taxes. 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, 2013. 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.
11
LiquiditY and caPitaL reSourceS
the Company generally funds its operating expenses, capital requirements, and growth plan through internally generated cash and
bank credit facilities.
Cash Flows
net cash provided by operations for the year ended December 31, 2014, was approximately $11.2 million and was primarily a result
of net income generated of approximately $7.5 million and an increase in accounts payable of approximately $2.3 million due to the
timing of vendor payments in the ordinary course of business. these cash inflows were partially offset by an increase in inventory of
approximately $1.8 million due to the timing of raw materials purchases and customer shipments and a decrease in accrued expenses
of approximately $2.2 million due to reduced payroll related accruals and reduced customer deposits.
net cash used in investing activities during the year ended December 31, 2014, was approximately $13.3 million and was primarily
the result of additions of manufacturing machinery and equipment, including a new molded fiber line in texas and the purchase of
commercial real estate in texas.
net cash used in financing activities was approximately $1.1 million for the year ended December 31, 2014, representing cash used
to service term debt of approximately $1.0 million, to pay a contingent note payable related to the pAC acquisition of approximately
$800,000 and to pay statutory withholding for stock options exercised and restricted stock units vested of approximately $831,000,
partially offset by excess tax benefits on share-based compensation of approximately $1.2 million, and net proceeds received upon
stock option exercises of approximately $336,000.
Outstanding and Available Debt
the Company maintains an unsecured $40 million revolving credit facility with Bank of America, n.A. 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. Under the credit
facility, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to
eBItDA financial covenant. the Company’s $40 million credit facility matures on november 30, 2018.
As of December 31, 2014, the Company had no borrowings outstanding under the credit facility and the Company was in compliance
with all covenants under the credit facility.
In 2012, the Company financed the purchase of two molded fiber machines through five-year term loans that mature in september
2017. the annual interest rate is fixed at 1.83% and the loans are secured by the related molded fiber machines. As of December 31,
2014, the outstanding balance of the term loan facility was approximately $2.9 million.
Future Liquidity
the Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations.
the Company’s principal sources of funds are its operations and its revolving credit facility. the Company generated cash of
approximately $11.2 million in operations during the year ended December 31, 2014, and cannot guarantee that its operations will
generate cash in future periods. the Company’s longer-term liquidity is contingent upon future operating performance.
In January 2015, the Company acquired a 137,000 square foot commercial building on 27 acres in newburyport, Massachusetts
for approximately $6.8 million. the Company anticipates that it will further expand the property and consolidate portions of its
northeast operations into its new property in multiple phases between 2015 and 2017. It expects to incur further costs with the
consolidation but also expects the efficiency savings to be significant. It has not yet estimated either the one-time costs or efficiency
gains in a potential consolidation of operations.
throughout fiscal 2015, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing
plants. the Company may consider additional acquisitions of companies, technologies, or products that are complementary to its
business. the Company believes that its existing resources, including its revolving credit facility, together with cash expected to be
generated from operations and funds expected to be available to it through any necessary equipment financings and additional bank
borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.
coMMitMentS and contractuaL obLiGationS
the following table summarizes the Company’s contractual obligations at December 31, 2014 (in thousands):
equipment loans
Operating leases
Debt interest
supplemental retirement
Payment due by Period
total
$ 2,866
3,796
75
125
Less than
1 Year
$ 994
1,443
43
25
1-3
Years
$ 1,872
2,262
32
50
3-5
Years
$ -
91
-
50
More than
5 Years
$ -
-
-
-
total
$ 6,862
$ 2,505
$ 4,216
$ 141
$ -
12
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, 2014, 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 the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2014 (the “10-K”) and the general disclaimers set forth in our special note Regarding Forward-Looking statements at
the outset of the 10-K (and at the end 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 twelve months.
the Company does not believe inflation has had a material impact on its results of operations in the last three years.
oFF-baLance-SHeet arranGeMentS
the Company had no off-balance-sheet arrangements in 2014, 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 and component product
industries, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
the Company’s significant accounting policies are described in note 1 to the consolidated financial statements included in this
Report. 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.
• 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 characteris-tics. 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. As of september 30, 2014, the Company consists of a single reporting unit. In conjunction with
a reassessment of our reportable segments (see note 19 to the consolidated financial statements), we performed step 1 of
the goodwill impairment test as of september 30, 2014. We utilized the guideline public company (“GpC”) method under
the market approach and the discounted cash flows method (“DCF”) under the income approach to determine the fair
value of the reporting unit for purposes of testing the reporting unit’s carrying value of goodwill for impairment. the GpC
method derives a value by generating a multiple of eBItDA through the comparison of the Company to similar publicly
traded companies. the DCF approach derives a value based on the present value of a series of estimated future cash
flows at the valuation date by the application of a discount rate, one that a prudent investor would require before making
an investment in our equity securities. the key assumptions used in our approach included:
• the reporting unit’s 2014 estimated financials and five-year projections of financial results, which were based
on our strategic plans and long-range forecasts. sales growth rates represent estimates based on current and
forecasted sales mix and market conditions. the profit margins were projected based on historical margins,
projected sales mix, current expense structure and anticipated expense modifications.
• the projected terminal value which reflects the total present value of projected cash flows beyond the last period
in the DCF. this value reflects a growth rate for the reporting unit, which is approximately the same growth rate
of expected inflation into perpetuity.
• the discount rate determined using a Weighted Average Cost of Capital method (“WACC”), which considered
market and industry data as well as Company-specific risk factors.
•selection of guideline public companies which are similar to each other and to the Company.
13
As of september 30, 2014, based on our calculations under the above noted approach, the fair value of the reporting unit
exceeded its carrying value by approximately $69.0 million or 74%. In performing these calculations, management used
its most reasonable estimates of the key assumptions discussed above. Based on management’s review, if any of these
individual key assumptions were to change, or if a combination of these key assumptions were to change, the fair value
of the reporting unit could be reduced below the carrying value. As a result, if our actual operating results and/or the key
assumptions utilized in management’s calculations differ from our expectations, it is possible that a future impairment
charge may be necessary.
As the Company has elected our fiscal year-end as the annual impairment testing date, the Company assessed qualitative
factors as of December 31, 2014, and determined that as there were no material changes in the results of operations or
financial condition from the september 30, 2014 impairment test, it was more likely than not that the fair value of its
reporting unit exceeded its carrying amount at December 31, 2014. Factors considered included financial performance,
forecasts and trends, market cap, regulatory and environmental issues, macro-economic conditions, industry and market
considerations, raw material costs and management stability
• 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, 2014.
•
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 Company’s current estimates as of
December 31, 2014.
• recent accounting Pronouncements Refer to note 1, “summary of significant Accounting policies,” in the accompanying
notes to the consolidated financial statements for a discussion of recent accounting pronouncements.
there were no new accounting pronouncements adopted during 2014 that had a material effect on our consolidated
financial statements.
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, 2014, 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. Interest under the Company’s credit facility with Bank of America, n.A. is
based upon either the prime rate or LIBOR and, therefore, future operations could be affected by interest rate changes. However, as
of December 31, 2014, the Company had no borrowings outstanding under the revolving credit facility, and the Company believes the
market risk associated with the facility is minimal.
14
REPoRT oF INdEPENdENT REgISTEREd
PUblIC ACCoUNTINg FIRM
to the board of directors and Stockholders
of uFP technologies, inc.
We have audited the accompanying consolidated balance sheets of UFp technologies,
Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014
and 2013, and the related consolidated statements of operations, changes in stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2014.
Our audits of the basic consolidated financial statements included the financial statement
schedule 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.
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, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2014 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, 2014, based on criteria established in the 2013 Internal
Control—Integrated Framework issued by the Committee of sponsoring Organizations
of the treadway Commission (COsO), and our report dated March 13, 2015 expressed an
unqualified opinion.
Grant tHornton LLP
boston, Massachusetts
March 13, 2015
15
REPoRT oF INdEPENdENT REgISTEREd
PUblIC ACCoUNTINg FIRM
to the board of directors and Stockholders
of uFP technologies, inc.
We have audited the internal control over financial reporting of UFp technologies, Inc.
(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014,
based on criteria established in the 2013 Internal Control—Integrated Framework issued
by the Committee of sponsoring Organizations of the treadway Commission (COsO).
the Company’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 the
Company’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, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2014, based on criteria established in the 2013
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 the
Company as of and for the year ended December 31, 2014, and our report dated March 13,
2015 expressed an unqualified opinion on those financial statements.
Grant tHornton LLP
boston, Massachusetts
March 13, 2015
16
CoNSolIdATEd bAlANCE ShEETS
(IN ThoUSANdS, ExCEPT ShARE dATA)
aSSetS
Current assets:
deceMber 31
2014
2013
Cash and cash equivalents
$ 34,052
$ 37,303
Receivables, net
Inventories
prepaid expenses
Refundable income taxes
Deferred income taxes
total current assets
property, plant, and equipment
Less accumulated depreciation and amortization
net property, plant, and equipment
Goodwill
Intangible assets, net
Other assets
total assets
LiabiLitieS and StockHoLderS’ equitY
Current liabilities:
Accounts payable
Accrued expenses
Current installments of long-term debt
total current liabilities
Long-term debt, excluding current installments
Deferred income taxes
Retirement and other liabilities
total liabilities
Commitments and contingencies (note 15)
stockholders’ equity:
preferred stock, $.01 par value. Authorized 1,000,000 shares;
zero shares issued or outstanding
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 7,068,815 shares in 2014 and 6,900,683 in 2013
Additional paid-in capital
Retained earnings
total stockholders’ equity
16,470
12,893
664
3,192
1,142
68,413
75,823
(40,980)
34,843
7,322
953
2,159
17,032
11,048
690
1,537
1,110
68,720
64,574
(39,067)
25,507
7,322
1,346
2,013
$ 113,690
$ 104,908
$ 5,398
$ 3,081
5,222
993
11,613
1,873
3,588
1,624
18,698
—
71
22,132
72,789
94,992
8,265
976
12,322
2,867
2,324
1,805
19,318
—
69
20,291
65,230
85,590
total liabilities and stockholders’ equity
$ 113,690
$ 104,908
the accompanying notes are an integral part of these consolidated financial statements.
17
CoNSolIdATEd STATEMENTS oF oPERATIoNS
(IN ThoUSANdS, ExCEPT PER ShARE dATA)
net sales
Cost of sales
Gross profit
selling, general, and administrative expenses
Restructuring costs
(Gain) loss on sales of property, plant, and equipment
operating income
Other expenses:
Interest expense, net
Other, net
total other (income) expense
income before income tax provision
Income tax expense
net income from consolidated operations
net income per share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
Years ended december 31
2014
2013
$ 139,307
102,427
36,880
$ 139,223
98,209
41,014
23,847
1,556
(84)
11,561
108
(312)
(204)
11,765
4,206
7,559
$ 1.08
$ 1.05
7,028
7,175
23,605
—
11
17,398
205
—
205
17,193
5,917
11,276
$ 1.65
$ 1.59
6,824
7,105
2012
$ 130,962
92,643
38,319
21,665
—
(12)
16,666
90
2
92
16,574
5,679
10,895
$ 1.63
$ 1.55
6,679
7,028
the accompanying notes are an integral part of these consolidated financial statements.
18
CoNSolIdATEd STATEMENTS oF SToCkholdERS’ EQUITy
(IN ThoUSANdS)
years ended December 31, 2014, 2013 and 2012
common Stock
additional
Paid-in
Shares
amount
capital
retained
earnings
non-
controlling
total
Stockholders’
interests
equity
balance at december 31, 2011
6,555
$ 66
$ 18,186
$ 43,059
$ 674
$ 61,985
share-based compensation
exercise of stock options net
of shares presented for exercise
net share settlement of restricted stock
units and stock option tax withholding
excess tax benefits on
share-based compensation
net income
Distribution to non-controlling interests
Investment in United Development
Company Limited (note 7)
62
133
—
—
—
—
—
—
1
—
—
—
—
—
860
364
(672)
831
—
—
(330)
—
—
—
—
10,895
—
—
—
—
—
—
—
860
365
(672)
831
10,895
(674)
(674)
—
(330)
balance at december 31, 2012
6,750
$ 67
$ 19,239
$ 53,954
$ —
$ 73,260
share-based compensation
exercise of stock options net
of shares presented for exercise
net share settlement of restricted stock
unit and stock option tax withholding
excess tax benefits on
share-based compensation
net income
38
113
—
—
—
1
1
—
—
—
923
190
(879)
818
—
—
—
—
—
11,276
—
—
—
—
—
924
191
(879)
818
11,276
balance at december 31, 2013
6,901
$ 69
$ 20,291
$ 65,230
$ —
$ 85,590
share-based compensation
exercise of stock options net
of shares presented for exercise
net share settlement of restricted stock
unit and stock option tax withholding
excess tax benefits on
share-based compensation
net income
20
148
—
—
—
1
1
—
—
—
1,118
335
(831)
1,219
—
—
—
—
—
7,559
—
—
—
—
—
1,119
336
(831)
1,219
7,559
balance at december 31, 2014
7,069
$ 71
$ 22,132
$ 72,789
$ —
$ 94,992
the accompanying notes are an integral part of these consolidated financial statements.
19
CoNSolIdATEd STATEMENTS oF CASh FlowS
(IN ThoUSANdS)
Cash flows from operating activities:
net income from consolidated operations
$ 7,559
$ 11,276
$ 10,895
Years ended december 31
2014
2013
2012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Loss (gain) on sales of property, plant, and equipment
share-based 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
prepaid expenses
Refundable income taxes
Accounts payable
Accrued expenses
Retirement and other liabilities
Other assets
net cash provided by operating activities
Cash flows from investing activities:
4,376
5
1,119
1,232
(1,219)
562
(1,845)
26
(436)
2,317
(2,243)
(181)
(146)
11,126
4,084
11
924
740
(818)
804
(1,353)
(36)
994
(1,007)
1,272
(417)
(368)
2,928
(12)
860
610
(832)
(842)
801
(65)
(695)
384
2,143
190
(203)
16,106
16,162
Additions to property, plant, and equipment
(13,436)
(5,830)
(11,994)
Holdback payment related to the acquisition of
packaging Alternatives Corporation (pAC)
Redemption of cash value life insurance
Acquisition of pAC net of cash acquired
proceeds from sale of property, plant, and equipment
—
—
—
112
(600)
37
—
1
—
—
(3,596)
86
net cash used in investing activities
(13,324)
(6,392)
(15,504)
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
payment of statutory withholding for stock options exercised
and restricted stock units vested
payment of contingent note payable
proceeds from long-term borrowings
—
1,219
336
(977)
(831)
(800)
—
—
818
191
(6,601)
(879)
—
580
net cash (used in) provided by financing activities
(1,053)
(5,891)
net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
(3,251)
37,303
3,823
33,480
(1,196)
832
365
(740)
(672)
—
4,384
2,973
3,631
29,849
cash and cash equivalents at end of year
$ 34,052
$ 37,303
$ 33,480
the accompanying notes are an integral part of these consolidated financial statements.
20
NoTES To CoNSolIdATEd FINANCIAl STATEMENTS
(1) Summary of Significant accounting Policies
UFp technologies, Inc. (“the Company”) is an innovative designer and custom converter of foams, plastics, composites and
natural fiber products principally serving the medical, automotive, consumer, electronics, industrial and aerospace and defense
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 stephenson & Lawyer, Inc. and its wholly-
owned subsidiary, patterson properties Corporation. All significant intercompany 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 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.
(d) Fair value of Financial instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued taxes and other liabilities 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.
(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, 2014 and 2013, cash equivalents primarily consisted of money market accounts and certificates of deposit
that are readily convertible into cash.
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. the Company’s main operating account
with Bank of America exceeds federal depository insurance limit by approximately $23.2 million.
(f) accounts receivable
the Company periodically reviews the collectability of its accounts receivable. provisions are recorded for accounts that
are potentially uncollectable. 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, 2014.
(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 Company’s current estimates as of
December 31, 2014.
21
(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.
estimated useful lives of property, plant, and equipment are as follows:
Leasehold improvements
Buildings and improvements
Machinery & equipment
Furniture, fixtures, computers & software
shorter of estimated useful life or remaining lease term
20 years
7-10 years
3-7 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. 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. As of september 30, 2014, the Company consists of a single reporting unit. In conjunction with a reassessment of our
reportable segments (see note 19), we performed step 1 of the goodwill impairment test as of september 30, 2014. We
utilized the guideline public company (“GpC”) method under the market approach and the discounted cash flows method
(“DCF”) under the income approach to determine the fair value of the reporting unit for purposes of testing the reporting
unit’s carrying value of goodwill for impairment. the GpC method derives a value by generating a multiple of eBItDA
through the comparison of the Company to similar publicly traded companies. the DCF approach derives a value based on
the present value of a series of estimated future cash flows at the valuation date by the application of a discount rate, one
that a prudent investor would require before making an investment in our equity securities. the key assumptions used in
our approach included:
• the reporting unit’s 2014 estimated financials and five-year projections of financial results, which were based
on our strategic plans and long-range forecasts. sales growth rates represent estimates based on current and
forecasted sales mix and market conditions. the profit margins were projected based on historical margins,
projected sales mix, current expense structure and anticipated expense modifications.
• the projected terminal value, which reflects the total present value of projected cash flows beyond the last
period in the DCF. this value reflects a growth rate for the reporting unit, which is approximately the same
growth rate of expected inflation into perpetuity.
• the discount rate determined using a Weighted Average Cost of Capital method (“WACC”), which considered
market and industry data as well as Company-specific risk factors.
• selection of guideline public companies which are similar to each other and to the Company.
As of september 30, 2014, based on our calculations under the above noted approach, the fair value of the reporting unit
exceeded its carrying value by approximately $69.0 million or 74%. In performing these calculations, management used
its most reasonable estimates of the key assumptions discussed above. Based on management’s review, if any of these
individual key assumptions were to change, or if a combination of these key assumptions were to change, the fair value
of the reporting unit could be reduced below the carrying value. As a result, if our actual operating results and/or the key
assumptions utilized in management’s calculations differ from our expectations, it is possible that a future impairment
charge may be necessary.
As the Company has elected our fiscal year-end as the annual impairment testing date, the Company assessed qualitative
factors as of December 31, 2014, and determined that as there were no material changes in the results of operations or
financial condition from the september 30, 2014 impairment test, it was more likely than not that the fair value of its
reporting unit exceeded its carrying amount at December 31, 2014. Factors considered included financial performance,
forecasts and trends, market cap, regulatory and environmental issues, macro-economic conditions, industry and market
considerations, raw material costs and management stability.
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(j)
intangible assets
Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from 5 to 14
years. 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).
the Company issues share-based awards through several plans that are described in detail in note 12. the compensation
cost charged against income for those plans is included in selling, general & administrative expenses as follows (in
thousands):
share-based compensation expense
Year ended december 31
2014
$ 1,119
2013
$ 924
2012
$ 860
the compensation expense for stock options granted during the three-year period ended December 31, 2014, was
determined as the fair value of the options using the Black scholes valuation model. the 2013 compensation expense for
stock options granted prior to January 1, 2012, was determined as the fair value of the options using a lattice-based option
valuation model. the assumptions are noted as follows:
2014
2013
Year ended december 31
expected volatility
32.8% to 37.9%
34.0% to 50.0%
expected dividends
none
none
Risk-free interest rate
0.7% to 0.9%
0.4% to 0.7%
2012
56.9%
none
0.39%
exercise price
Closing price on
date of grant
Closing price on
Closing price on
date of grant
date of grant
expected term
3.8 to 5.0 years
3.3 to 5.0 years
Weighted-average grant-date fair value
$ 7.24
$ 5.84
5 years
$ 7.72
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 interest rate is based
on the U.s. treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the
option. the expected term is calculated based on the simplified method.
the total income tax benefit recognized in the statement of operations for share-based compensation arrangements was
approximately $320,000, $280,000 and $270,000, for the years ended December 31, 2014, 2013 and 2012, 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 $1.2 million, $1.2 million and $1.3 million were expensed in the years ended December 31, 2014, 2013
and 2012, respectively.
23
(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 carryforwards. Deferred tax expense (benefit) results from the net change during the year in
deferred tax assets and liabilities. the effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
the Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. the Company has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance. should the Company determine that it would not be
able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged
to income in the period such determination was made.
the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. the tax benefits
recognized in the consolidated financial statements from such positions are then measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon settlement. the Company recognizes interest and penalties
accrued related to unrecognized tax benefits in tax expense.
(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 19).
Revisions
Certain revisions have been made to the 2013 Consolidated Balance sheet to conform to the current year presentation relating to
the current and long-term classification of deferred taxes. the impact on the 2013 Consolidated Balance sheet was a decrease
in the amount of $112,000 to both current deferred income taxes (asset) and long-term deferred income taxes (liability). In
addition, certain revisions have been made to the 2013 and 2012 Consolidated statements of Operations to conform to the current
year presentation relating to classification of certain rent and indirect labor items. the impact on the Consolidated statements
of Operations was a decrease to costs of sales and an increase to selling, general and administrative expenses in the amounts of
$365,000 and $134,000 for the years 2013 and 2012, respectively. these revisions had no impact on previously reported net income
or cash flows and are deemed immaterial to the previously issued financial statements.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting standards Board (FAsB) issued Accounting standards Update (AsU) no. 2014-09,
Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers. this standard will replace most existing revenue recognition
guidance when it becomes effective January 1, 2017. early application is not permitted. the standard permits the use of either the
retrospective or cumulative effect transition methods. the Company is evaluating the effect that AsU 2014-09 will have on our
consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the
effect of the standard on our consolidated financial position and results of operations.
there were no new accounting pronouncements adopted during 2014 that had a material effect on our consolidated financial
statements.
(2) Supplemental cash Flow information
Cash paid for interest and income taxes is as follows (in thousands):
Interest
Income taxes, net of refunds
Year ended december 31
2014
$ 112
$ 3,259
2013
$ 210
$ 4,199
2012
$ 58
$ 4,960
During the years ended December 31, 2014 and 2013, the Company permitted the exercise of stock options with exercise
proceeds paid with the Company’s stock (“cashless” exercises) totaling approximately $372,000 and $225,000, respectively.
the purchase of substantially all of the assets of packaging Alternatives Corporation in 2012 included consideration in the form
of a holdback of $600,000 and a long-term note valued at $692,000.
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(3) receivables
Receivables consist of the following (in thousands):
Accounts receivable—trade
Less allowance for doubtful receivables
2014
$ 16,972
(502)
$ 16,470
december 31
2013
$ 17,544
(512)
$ 17,032
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 approximately $171,000 and $32,000
for the years ended December 31, 2014 and 2013, respectively.
(4) inventories
Inventories consist of the following (in thousands):
Raw materials
Work in process
Finished goods
2014
$ 7,145
1,142
4,606
$ 12,893
december 31
2013
$ 6,627
1,056
3,365
$ 11,048
(5) other intangible assets
the carrying values of the Company’s definite-lived intangible assets as of December 31, 2014 and 2013, are as follows (in thousands):
estimated useful life
Gross amount at December 31, 2014
Accumulated amortization at December 31, 2014
14 years
$ 429
(429)
5 years
$ 512
(325)
5 years
$ 2,046
(1,280)
$ 2,987
(2,034)
Patents
non-compete
customer List
total
net balance at december 31, 2014
$ —
$ 187
$ 766
$ 953
Gross amount at December 31, 2013
Accumulated amortization at December 31, 2013
$ 429
(429)
$ 512
(249)
$ 2,046
(963)
$ 2,987
(1,641)
net balance at december 31, 2013
$ —
$ 263
$ 1,083
$ 1,346
Amortization expense related to intangible assets was approximately $393,000, $478,000 and $164,000, respectively, for the years
ended December 31, 2014, 2013 and 2012. Future amortization for the years ending December 31 will be approximately (in thousands):
2015
2016
2017
total
$ 318
318
317
$ 953
(6) Property, Plant, and equipment
property, plant, and equipment consist of the following (in thousands):
Land and improvements
Buildings and improvements
Leasehold improvements
Machinery & equipment
Furniture, fixtures, computers & software
Construction in progress–equipment
2014
$ 1,613
15,988
2,897
47,756
5,291
2,278
$ 75,823
december 31
2013
$ 840
12,576
2,918
41,964
4,903
1,373
$ 64,574
Depreciation and amortization expense for the years ended December 31, 2014, 2013 and 2012, were approximately $4.0 million, $3.6
million and $2.8 million, respectively.
25
(7) investment in and advances to affiliated Partnership
In prior periods the Company had a 26.32% ownership interest in a realty limited partnership, United Development Company
Limited (“UDt”). the Company had consolidated the financial statements of UDt for prior periods because it determined
that UDt was a variable Interest entity (“vIe”) of which the Company was the primary beneficiary. On February 29, 2012, the
Company purchased the manufacturing building that it leased from UDt for $1,350,000. since this transaction took place
among commonly controlled companies, the building was recorded by the Company at UDt’s carrying value. subsequently,
UDt was dissolved and its assets were distributed. thus, in effect, the Company has acquired the remaining 73.68% ownership
interest in UDt, eliminating the vIe. the non-controlling interests’ portion of the excess of the amount paid for the building
over UDt’s carrying value, totaling $329,972, which is net of the tax effect of the difference in the Company’s book basis versus
tax basis in the acquired building attributable to the non-controlling interest, has been recorded in stockholders’ equity as a
reduction to additional paid-in capital. the transaction did not impact the consolidated results of operations.
(8) indebtedness
On December 2, 2013, the Company entered into an unsecured $40 million revolving credit facility with Bank of America, n.A.
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. Under the credit facility, the Company is subject to a minimum fixed-charge coverage financial covenant
as well as a maximum total funded debt to eBItDA financial covenant. the credit facility was amended effective December 31,
2014, to modify the definition of “consolidated fixed-charge coverage ratio”. the Company was in compliance with all covenants
at December 31, 2014. the Company’s $40 million credit facility matures on november 30, 2018.
In conjunction with the execution of the credit facility, the Company fully paid approximately $5.1 million in debt previously
outstanding under the Company’s prior credit facility with Bank of America, n.A., which was terminated on December 2, 2013.
As of December 31, 2014, the Company had no borrowings outstanding under the credit facility.
On October 11, 2012, the Company entered into a loan agreement to finance the purchase of two new molded fiber machines.
the annual interest rate is fixed at 1.83%. As of December 31, 2014, approximately $5.0 million had been advanced on the loan
and the outstanding balance was approximately $2.9 million. the loan will be repaid over a five-year term. the loan is secured
by the related molded fiber machines.
Long-term debt consists of the following (in thousands):
equipment loans
total long-term debt
Current Installments
december 31
2014
$ 2,866
2,866
(993)
Long-term debt, excluding current installments
$ 1,873
Aggregate maturities of long-term debt are as follows (in thousands):
year ending December 31:
2015
2016
2017
(9) accrued expenses
Accrued expenses consist of the following (in thousands):
Compensation
Benefits/self-insurance reserve
paid time off
Commissions payable
Unrecognized tax benefits (see note 10)
Customer deposit
Contingent note payable - pAC (see note 18)
Other
26
december 31
$ 993
1,014
859
$ 2,866
2014
$ 1,811
411
921
164
425
—
—
1,490
$ 5,222
2013
$ 3,843
3,843
(976)
$ 2,867
2013
$ 2,568
588
883
503
275
1,427
745
1,276
$ 8,265
(10) income taxes
the Company’s income tax provision for the years ended December 31, 2014, 2013 and 2012 consists of the following (in
thousands):
Current:
Federal
state
Deferred:
Federal
state
Years ended december 31
2014
$ 2,638
336
2,974
1,262
(30)
1,232
2013
$ 4,353
824
5,177
641
99
740
2012
$ 4,301
768
5,069
699
(89)
610
total income tax provision
$ 4,206
$ 5,917
$ 5,679
At December 31, 2014, the Company had net operating loss carryforwards for federal income tax purposes of approximately
$710,000, which are available to offset future taxable income and expire during the federal tax year ending December 31,
2019. 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 (in thousands):
Current deferred tax assets:
Reserves
Inventory capitalization
Compensation programs
Retirement liability
equity-based compensation
december 31
2014
2013
$ 428
264
139
35
276
$ 383
244
204
33
246
total current deferred tax assets:
$ 1,142
$ 1,110
Long-term deferred tax assets/(liabilities):
excess of book over tax basis of fixed assets
Goodwill
$ (3,471)
(848)
$ (2,413)
(827)
total long-term deferred tax liabilities
$ (4,319)
$ (3,240)
net operating loss carryforwards
Deferred rent
Intangible assets
Compensation programs
$ 242
36
188
265
total long-term deferred tax assets
net long-term deferred tax liabilities
731
$ (3,588)
$ 342
46
117
411
916
$ (2,324)
the amounts recorded as deferred tax assets as of December 31, 2014, and 2013, 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 $1.8 million at
December 31, 2014, 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 34.0% to income before income tax expense as follows:
27
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
Unrecognized tax benefits
Other
Years ended december 31
2014
34.0%
1.1
0.3
(0.7)
(1.4)
0.4
1.3
0.8
2013
34.0%
3.6
0.1
(1.0)
(2.4)
0.2
(0.1)
-
2012
34.0%
2.7
0.1
(0.1)
(2.5)
0.1
(0.2)
0.2
effective tax rate
35.8%
34.4%
34.3%
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,
income tax returns filed in Massachusetts which have been audited through 2007 and income tax returns filed in Florida which
have been audited through 2009. the Company’s federal tax return for 2008 has been audited. Federal and state tax returns
for the years 2011 through 2013 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 (in thousands):
Gross UtB balance at beginning of fiscal year
Increases for tax positions of prior years
Reductions for tax positions of prior years
Gross utb balance at end of fiscal year
2014
$ 275
195
(45)
$ 425
december 31
2013
$ 290
10
(25)
$ 275
the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2014
and 2013, are $425,000 and $275,000, respectively, for each year.
the total amount of accrued interest and penalties on uncertain tax positions at December 31, 2014 and 2013 was $195,000 and
$0, respectively.
At December 31, 2014, all 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 2015, since the Company expects to
resolve this examination in 2015.
(11) 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 (in thousands):
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
2014
2013
2012
7,028
6,824
6,679
147
281
349
7,175
7,105
7,028
28
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, 2014, 2013 and 2012, the number of stock awards excluded from
the computation was 53,651, 78,908 and 17,770, respectively.
(12) 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, 2014, there were 15,000 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”). the plan was further amended on March 7, 2013,
to (i) prohibit the repricing of stock options or other equity awards without the consent of the Company’s shareholders, and (ii)
prohibit the Company from buying out underwater stock options.
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, 2014, 1,150,533 shares of common stock have been issued under the 2003 Incentive plan, none of
which have been restricted. An additional 35,088 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, 2014, 170,000 options have been granted and
115,000 options are outstanding. At December 31, 2014, 905,629 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, which was amended and renamed, on June 3, 2009, the
2009 non-employee Director stock Incentive plan (the “Director plan”). the Director plan was amended on March 7, 2013, to
(i) prohibit the repricing of stock options or other equity awards without the consent of the Company’s shareholders, and (ii)
prohibit the Company from buying out underwater stock options. the Director plan, as amended, provides for the issuance of
stock options and other equity-based securities of up to 975,000 shares to non-employee members of the Company’s board of
directors. through December 31, 2014, 289,782 options have been granted and 210,107 options are outstanding. For the year
ended December 31, 2014, 5,092 shares of common stock were issued and 177,993 shares remained available to be issued under
the Director plan.
29
the following is a summary of stock option activity under all plans:
weighted average
remaining
aggregate
Shares
exercise Price
contractual Life
intrinsic value
under options
(per share)
(in years)
(in thousands)
weighted average
outstanding december 31, 2013
Granted
exercised
Cancelled or expired
467,500
35,193
(162,586)
—
outstanding december 31, 2014
340,107
exercisable at december 31, 2014
257,608
vested and expected to vest at
$ 9.00
24.69
4.36
—
$ 12.84
$ 10.35
—
—
—
—
3.83
3.92
—
—
—
—
$ 4,008
$ 3,675
december 31, 2014
340,107
$ 12.84
3.83
$ 4,008
During the years ended December 31, 2014, 2013 and 2012, 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 approximately $3.4 million, $2.1
million and $2.0 million, respectively, and the total amount of consideration received from the exercise of these options was
approximately $709,000, $416,000 and $506,000, respectively. At its discretion, the Company allows option holders to
surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During the year ended
December 31, 2014, 32,164 shares (14,931 for options and 17,233 for taxes) were surrendered at an average market price of
$25.42. During the years ended December 31, 2013 and 2012, 26,662 shares were surrendered at an average market price of
$20.54 and 22,161 shares were surrendered at an average market price of $18.01, respectively.
During the years ended December 31, 2014, 2013 and 2012, the Company recognized compensation expense related to stock
options granted to directors and employees of approximately $354,000, $214,000 and $133,000, respectively.
On February 18, 2014, the Company’s Compensation Committee approved an award of $400,000 payable in shares of the
Company’s common stock to the Company’s Chairman, Chief executive Officer, and president under the 2003 equity Incentive
plan. the shares were issued on December 15, 2014. the Company has recorded compensation expense of $400,000 for the
year ended December 31, 2014. stock compensation expense of $400,000 and $300,000 was recorded in 2013 and 2012,
respectively, for similar awards.
On March 12, 2014, the Company issued 196 shares of unrestricted common stock to a non-employee member of the Company’s
Board of Directors as part of their retainer for serving on the Board. Based upon the closing price of $25.48 on March 12, 2014, the
Company recorded compensation expense of $5,000 associated with the stock issuance for the year ended December 31, 2014.
On June 11, 2014, the Company issued 4,893 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 $25.04
on June 11, 2014, the Company recorded compensation expense of $122,000 associated with the stock issuance for the year
ended December 31, 2014. the Company recorded compensation expense of $60,000 in 2013 and 2012 for similar awards.
the Company grants RsUs to its executive officers. the stock unit awards are subject to various time-based vesting
requirements, and certain portions of these awards are subject to performance criteria of the Company. Compensation expense
on these awards is recorded based on the fair value of the award at the date of grant, which is equal to the Company’s closing
stock price, and is charged to expense ratably during the service period. 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, 2014:
restricted Stock units
award date Fair value
weighted average
outstanding at december 31, 2013
Awarded
shares distributed
Forfeited/Cancelled
outstanding at december 31, 2014
50,900
14,441
(30,253)
—
35,088
$ 11.94
25.97
10.11
—
$ 17.87
the Company recorded approximately $237,000, $250,000 and $368,000 in compensation expense related to these RsUs
during the years ended December 31, 2014, 2013 and 2012 respectively.
30
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, 2014, 9,878 shares were redeemed for this purpose at an average market price of $25.88. During the years ended December
31, 2013 and 2012, 22,089 and 25,684 shares were redeemed for this purpose at an average market price of $19.29 and $16.10,
respectively.
the following summarizes the future share-based compensation expense the Company will record as the equity securities
granted through December 31, 2014, vest (in thousands):
options
common Stock
$ 172
147
46
16
—
—
—
—
restricted
Stock units
$ 196
147
101
16
$ 381
$ —
$ 460
total
$ 368
294
147
32
$ 841
2015
2016
2017
2018
total
tax benefits totaling approximately $1,219,000, $818,000 and $831,000 were recognized as additional paid-in capital during
the years ended December 31, 2014, 2013 and 2012, respectively, since the Company’s tax deductions exceeded the share-based
compensation charge recognized for stock options exercised and RsUs vested.
(13) 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.
(14) 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 $23,000, $17,000 and $32,000 for the years ended December 31, 2014, 2013 and 2012,
respectively. the present value of the supplemental retirement obligation has been calculated using a 4.0% discount rate,
and is included in retirement and other liabilities. total projected future cash payments for the years ending December 31,
2015 through 2019, are approximately $25,000 for each year.
(15) commitments and contingencies
(a) Leases – the Company has operating leases for certain facilities that expire through 2018. Certain of the leases contain
escalation clauses that require payments of additional rent, as well as increases in related operating costs.
Future minimum lease payments under non-cancelable operating leases as of December 31, 2014, are as follows (in
thousands):
Years ending december 31
operating Leases
2015
2016
2017
2018
total minimum lease payments (a)
$ 1,443
1,341
921
91
$ 3,796
(a) Minimum payments have not been reduced by minimum sublease rentals of approximately $589,000 due in the
future under noncancelable subleases.
Rent expense amounted to approximately $1.8 million, $2.0 million and $2.4 million in 2014, 2013 and 2012 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.
31
(16) 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 profit sharing amounts determined by the
Board of Directors to be funded by March 15 following each fiscal year. Contributions were approximately $750,000,
$800,000 and $760,000 in 2014, 2013 and 2012, 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 $150,000 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 from 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 gains or losses determined by the participants’ deferral
elections 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, 2014 and 2013, the balance of the deferred compensation
liability totaled approximately $1.5 million and $1.7 million, respectively. 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 $2.0 million and $1.8 million as of December 31, 2014 and 2013, respectively.
(17) 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
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 on a recurring basis.
(18) acquisition
On December 31, 2012, the Company acquired substantially all of the assets of packaging Alternatives Corporation
(“pAC”), a Costa Mesa, California-based foam fabricator, for $5.7 million. pAC specialized in the fabrication of technical
urethane foams primarily for the medical industry. this acquisition brought to the Company further access and expertise
in fabricating technical urethane foams, a more significant presence on the west coast and a seasoned management team.
the Company has leased the former pAC facility for a period of two years through December 31, 2014.
the following table summarizes the consideration paid and the acquisition date fair value of the assets acquired and
liabilities assumed relating to the transaction (in thousands):
Pac acquisition
december 31, 2012
Consideration:
Cash
purchase holdback
Contingent note payable, at present value
$ 4,400
600
692
Fair value of total consideration transferred
$ 5,692
acquisition costs (professional fees)
included in SG&a
$ 57
Recognized amounts of identifiable assets acquired:
32
Cash
Accounts receivable
Inventory
Other assets
Fixed assets
non-compete
Customer list
Goodwill
total identifiable net assets
Accounts payable
Accrued expenses
$ 804
1,375
737
54
793
312
1,277
841
6,193
(312)
(189)
net assets acquired
$ 5,692
Due to a refinement of certain estimates made in the initial purchase price allocation, the Fixed assets, Customer list and
Goodwill amounts noted above, were adjusted by approximately ($24,000), ($260,000) and $284,000, respectively, during
the year ended December 31, 2013.
With respect to the acquisition of selected assets of pAC, the Company acquired gross accounts receivable of $1,405,000,
of which it deemed $30,000 to be uncollectible. It therefore recorded the accounts receivable at its fair market value
of $1,375,000. With respect to the non-compete and customer list intangible assets acquired from pAC, the weighted
average amortization period is five years. no residual balance is anticipated for any of the intangible assets.
Consideration for the net assets acquired included a note payable to the sellers in the amount of $800,000. the note was
paid in October 2014. the note was discounted to reflect imputed interest at 2% and a probability of payment of 95% and
90% for 2013 and 2012, respectively.
the goodwill recorded of $841,000 approximates the amount of goodwill the Company expects to deduct for tax
purposes. the goodwill reflects the excess of consideration to be paid over the fair value of the net assets acquired, and
represents the value of the workforce as well as synergies expected to be realized.
the Consolidated statement of Operations for the year ended December 31, 2013 includes the following operating results
for pAC (in thousands):
sales
Operating Income
Year ended december 31, 2013
$ 10,253
438
the following table contains the unaudited pro forma condensed consolidated statement of operations for the year ended
December 31, 2012, as if the pAC acquisition had occurred at the beginning of 2012 (in thousands):
Year ended december 31, 2012 Proforma (unaudited)
sales
net Income
Earnings per share:
Basic
Diluted
$ 141,274
11,559
$ 1.73
1.64
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 pAC acquisition occurred as presented. In addition, future
results may vary significantly from the results reflected in such pro forma information.
(19) Segment data
the Company has historically reported two segments, Component products and packaging. However, the Company
has been undergoing a shift in the way the business is managed and the way information is used by the Chief Operating
Decision Maker (the “CODM”), who is the Chief executive Officer, to consider risks and opportunities and to make decisions
and review performance as further described below. In late 2013 and into 2014 the Company committed to changes to
the Company’s operations including plant consolidations, consolidation of the Company’s sales force, and other strategic
initiatives, to coincide with the Company’s change in operating strategy to maximize capacity in each plant and enhance
customer service across markets. By the end of the third quarter of 2014, many of those initiatives were complete and
the Company determined that the existing segment aggregation of Component products and packaging was no longer
consistent with how the business is structured and reviewed by the CODM. this is primarily because the Company has
numerous manufacturing processes that are duplicated through its plants allowing it to move workload based on available
capacity and proximity to customers. the CODM evaluates consolidated financial information to manage the business. As a
33
result, the Company has determined that it consists of a single operating and reportable segment.
Revenues from customers outside of the United states are not material. no customer comprised more than 10% of the
Company’s consolidated revenues for the year ended December 31, 2014. All of the Company’s assets are located in the
United states.
the Company’s custom products are primarily sold to customers within the Medical, Automotive, Consumer, electronics,
Industrial and Aerospace and Defense markets. sales by market for 2014 are as follows (in thousands) (it is not practical to
determine sales by market for previous years):
Market
Medical
Automotive
Consumer
electronics
Industrial
Aerospace & Defence
net Sales
%
$ 50,080
35.9%
24,943
17,366
17,022
15,327
14,569
17.9%
12.5%
12.2%
11.0%
10.5%
net Sales
$ 139,307
(20) quarterly Financial information (unaudited)
summarized quarterly financial data is as follows (in thousands, except per share data):
2014
net sales
Gross profit
net income
Basic net income per share
Diluted net income per share
2013
net sales
Gross profit
net income
Basic net income per share
Diluted net income per share
(21) Plant consolidation
q1
q2
q3
q4
$ 34,609
$ 34,025
$ 35,406
$ 35,267
9,108
2,062
0.30
0.29
q1
9,476
1,860
0.27
0.26
q2
9,683
2,066
0.29
0.29
q3
8,613
1,571
0.22
0.22
q4
$ 33,697
$ 35,832
$ 34,700
$ 34,993
8,902
2,030
0.30
0.29
10,719
2,982
0.44
0.42
10,162
2,887
0.42
0.41
11,231
3,377
0.49
0.47
On January 7, 2014, the Company committed to move forward with a plan to cease operations at its Glendale Heights, Illinois
plant and consolidate operations into its Grand Rapids, Michigan, facility. the Company’s decision was in response to a
pending significant increase in lease cost, declining sales at the Illinois facility, and significant anticipated savings as a result
of the consolidation. the consolidation into the Michigan facility is complete and the actual costs incurred are included in the
table below.
On July 16, 2014, the Company committed to move forward with a plan to cease operations at its Costa Mesa, California, plant
and consolidate operations into its Rancho Dominguez, California, facility and other UFp facilities. the Company’s decision
was in response to the upcoming December 31, 2014, expiration of the lease on the Costa Mesa facility as well as the close
proximity of the two properties. this consolidation is substantially complete and the actual costs incurred through December
31, 2014 are included in the table below.
the Company has recorded the following restructuring costs associated with the plant consolidations discussed above for the
year ended December 31, 2014 (in thousands):
restructuring costs
Michigan
california
employee severance payments
$ 237
Relocation costs
Workforce training costs
plant infrastructure costs
356
373
79
total restructuring costs
$ 1,045
$ 10
501
—
—
$ 511
total
$ 247
857
373
79
$ 1,556
34
these costs were reclassified in the 2014 Consolidated statement of Operations as “Restructuring Costs” as follows:
$1,385,000 from Cost of sales, $82,000 from selling, General and Administrative expenses and $89,000 from Gain on
sales of property, plant and equipment. the Company also incurred approximately $373,000 and $38,000, in related
capital improvements at its Michigan and California facilities, respectively, for the year ended December 31, 2014.
(22) Subsequent events
In January 2015, the Company acquired a 137,000 square foot commercial building on 27 acres in newburyport,
Massachusetts for approximately $6.8 million. the Company anticipates that it will further expand the property and
consolidate portions of its northeast operations into its new property in multiple phases between 2015 and 2017. It
expects to incur further costs with the consolidation but also expects the efficiency savings to be significant. It has not yet
estimated either the one-time costs or efficiency gains in a potential consolidation of operations.
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. these statements are subject to known and unknown risks,
uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-
looking statements include, but are not limited to, statements about the Company’s prospects, anticipated trends in the different
markets in which the Company competes, including the medical, automotive, consumer, electronics, industrial and aerospace and
defense markets, anticipated advantages relating to the Company’s decisions to consolidate its Midwest, California and northeast
facilities and the expected cost savings and efficiencies associated therewith, anticipated advantages of maintaining fewer, larger
plants, anticipated advantages the Company expects to realize from its investments and capital expenditures, including the
development of and investments in its molded fiber product lines, anticipated advantages the Company expects to realize as a
result of its new enterprise resource planning software system and its new customer relationship management system, expectations
regarding the manufacturing capacity and efficiencies of the Company’s new production equipment, statements about the
Company’s acquisition opportunities and strategies, its participation and growth in multiple markets, its business opportunities, the
Company’s growth potential and strategies for growth, anticipated revenues and the timing of such revenues, and any indication
that the Company may be able to sustain or increase its sales or earnings. Investors are cautioned that such forward-looking
statements involve risks and uncertainties, including without limitation risks and uncertainties associated with plant closures and
expected efficiencies from consolidating manufacturing, risks associated with the implementation of new production equipment
in a timely, cost-efficient manner, risks that any benefits from such new equipment may be delayed or not fully realized, or that the
Company may be unable to fully utilize its expected production capacity, and risks and uncertainties associated with the identification
of suitable acquisition candidates and the successful, efficient execution of acquisition transactions and integration of any such
acquisition candidates. Accordingly, actual results may differ materially. the forward-looking statements contained herein speak
only of the Company’s expectations as of the date of this report. except as otherwise required by law, 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. We qualify
all of our forward-looking statements by these cautionary statements and those set forth in our other filings with the securities and
exchange Commission, including those set forth under part I, Item 1A in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2014. We caution you that these risks are not exhaustive. We operate in a continually changing business
environment and new risks emerge from time to time.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFp technologies, Inc. and its
consolidated subsidiaries.
35
SToCkholdER INFoRMATIoN
tranSFer aGent and reGiStrar
American stock transfer
corPorate HeadquarterS
UFp technologies, Inc.
board oF directorS
and eXecutive oFFicerS
and trust Company, LLC
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 10,
PLant LocationS
California, Colorado, Florida,
2015, at the Black swan Country Club,
Georgia, Iowa, Massachusetts,
258 Andover street, Georgetown, MA
Michigan, new Jersey, texas.
01833, UsA.
indePendent reGiStered PubLic
coMMon Stock LiStinG
UFp technologies’ common stock
accountantS
Grant thornton LLp
is traded on nAsDAQ under the
symbol UFpt.
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
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:
Brown Rudnick LLp
1 Financial Center
Boston, MA 02111
about tHiS rePort
the objective of this report is to
Chairman, CEO and President
Kenneth L. Gestal
President & Managing Partner
Decision Capital, LLC
David B. Gould
President
Westfield, Inc.
Marc Kozin
Senior Advisor
LEK Consulting, LLC
Ronald J. Lataille
Sr. Vice President, Treasurer,
Secretary and
Chief Financial Officer
thomas Oberdorf
Chief Financial Officer
SIRVA, Inc.
Robert W. pierce, Jr.
Chairman, CEO,
and Co-Owner
Pierce Aluminum Co.
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, 2014, 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.
provide existing and prospective
Lucia Luce Quinn
shareholders a tool to understand
Chief People Officer
our financial results, what we do as a
Forrester Research, Inc.
company, and where we are headed
in the future. We aim to achieve
these goals with clarity, simplicity,
and efficiency. We welcome your
comments and suggestions.
worLd wide web
In the interest of providing timely,
cost-effective information to
shareholders, press releases, seC
filings, and other investor-oriented
matters are available on the Company’s
website at www.ufpt.com/investors/
filings.html.
Mitchell C. Rock
Sr. Vice President
Sales and Marketing
Daniel J. shaw, Jr.
Vice President
Research and Development
W. David smith
Sr. Vice President
Operations
David K. stevenson
Director, Trustee,
and Consultant
d directors
o officers
d
d
d
o
d
d
d
o
o
o
d
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 and rewarding work environment
for all of our employees.
Quality
We are dedicated to continuously improving our
quality of service, quality of communications, quality
of relationships, and quality of commitments.
simplifiCation
We seek to simplify our business process through
the constant re-examination of our methods and
elimination of all non-value-added activities.
entrepreneurship
We strive to create an environment that encourages
autonomous decision-making and a sense of
ownership at all levels of the company.
profit
Although profit is not the sole reason for our
existence, it is the lifeblood that allows us to exist.
172 east Main street, georgetown, MA 01833 | 800 372 3172 | ufpt.com