HEALTHY
PROGRESS
A DECADE OF ROBUST MEDICAL GROWTH
2 0 1 6 A N N U A L R E P O R T
2016
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
2
8
9
CEO’s Letter
Selected Financial Data
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
18
Financial Statements
36
Stockholder Information
1
Dear Fellow Shareholder,
2016 was another strong year for UFP Technologies.
We achieved record sales of $146 million and
continued to make great progress in shifting our
book of business toward highly engineered medical
programs, while strengthening our platform to better
serve our growing customer base.
In this letter, I will discuss our strategic shift toward
medical sales, which rose 12.6% in 2016 and have
grown at an average annual compounded rate of 17%
for the last ten years. I will explain why our skills are an
excellent fit for this market, and how this shift in focus
will help UFP secure long-term profitable growth.
Clear vision, firm direction
Our vision is to be our customers’ most valued
partner, and their first choice for solutions
involving fabricated or molded foams, plastics,
and natural fibers. So we have tightened our focus
to capitalize on opportunities that best fit our
unique capabilities. In recent years, most of those
opportunities have been in the medical space.
It’s where UFP’s skills and market needs are in
perfect sync, where we can add the most value and
therefore enjoy the highest margins.
Ten years ago, our medical sales were roughly in line
with other target markets. Then came a series of
strategic acquisitions. The steady expansion of our
clean rooms and specialized equipment. The creation
of a dedicated medical team. The development of
our own branded products. The signing of one major
customer after another. As a result, medical sales
have grown 379% over these ten years, and now
account for nearly half our total revenue.
For us and our customers, a true win-win
Why are so many medical customers drawn to UFP?
First, they benefit from our outstanding team of
2
“ Our medical sales are up
379% over the last ten years.
This is no accident. It’s the
result of many strategic
decisions and investments.”
engineers, who know how to solve even the toughest
product and packaging challenges. We also give
customers access to the broadest range of medical-
grade materials, and the latest material innovations,
thanks to our close supplier relationships.
When it comes to production, we offer the critical
resources medical customers need, from in-house
mold-making to diverse manufacturing capabilities
in eight states. In all, we have ten clean rooms and
a broad range of certified quality systems across
the country; our ability to provide redundant
manufacturing capacity for large orders is also an
important advantage.
Our medical programs are often multiyear production
runs, with long-term contracts that bring a level
of security beneficial to both parties. Once a UFP
component is designed into an FDA-approved product,
it would be very costly for customers to switch out. So
they value the partnership just as much as we do. For
our part, these long-term arrangements allow us to
maximize returns on the large engineering investments
often required to get new programs up and running.
Our plan to keep growing
Looking ahead, we see great opportunities in areas
like robotic surgery, negative pressure wound therapy,
post-surgical stimulation products, orthopedic braces,
and branded products such as our FlexShield® medical
device pouches. We are focused on increasing our
penetration of these segments, and others, while
continuing to attract and develop the top talent we
need in this space. We are also working to strengthen
our critical supplier relationships with joint agreements
designed to grow our business and protect our
engineered solutions.
again our ability to deliver. The market is growing, the
opportunities are vast, and we have every reason to
believe our medical sales and profits will continue to climb.
Steady progress in other target markets
Despite the tremendous growth of our medical business,
our other five target markets – automotive, aerospace
and defense, electronics, consumer and industrial – still
account for more than half of total sales. We see new
opportunities for many of our traditional applications,
such as protective cases and inserts, molded fiber
packaging, and acoustical and thermal insulation.
These types of solutions provide a reliable stream of
income year after year. We are committed to their
continued success, and are constantly working to
improve every aspect of our Company, from operating
efficiencies to customer service.
With continued growth expected in our medical
business, and a robust pipeline of exciting
opportunities across the Company, we are bullish
about our long-term success. As always, I thank you for
your support of UFP Technologies.
Sincerely,
Our medical customers trust us to provide innovative
solutions and the highest quality parts. We tackle their
most challenging problems and prove time and time
R. Jeffrey Bailly
Chairman and CEO
3
A COMPANY ON THE MOVE:
Some key developments of the past year.
We continued to strengthen
our strategic partnerships
with key material suppliers.
For example, we signed
a five-year deal with
Zotefoams Inc., our largest
supplier of cross-linked
polyethylene foams. It gives
UFP exclusive or semi-
exclusive access to a wide
range of unique high-value
medical grades of foam.
We enjoyed strong
sales of our orthopedic
brace components
in 2016. These often
involve encapsulating
electronics or metals,
a complex process
that’s become a core
skill. Other growing
medical segments
include robotic surgery
and negative pressure
wound therapy.
4
4
We secured new
contracts with many
of our largest medical
customers. Most of our
medical sales involve
long-term programs,
multiyear production
runs and plenty of
repeat business.
We completed our plant
consolidations in 2016, and now
have a much stronger platform
from which to grow. As part of this
process, we’ve optimized factory
layouts to streamline workflows
and improve efficiency.
We added new clean rooms in 2016 and
now have ten across the US for medical
customers. Other recent equipment
initiatives include new skiving machines,
custom molding lines, automated assembly
equipment, and rotary sealing equipment.
55
We have begun a
relationship with Boeing,
long a key aerospace
target. After completing
the aerospace AS9100
certification process and
Boeing internal quality
audit, we demonstrated
proof of concept for a
complex sample product,
and are on track to become
a qualified vendor.
6
We continued to strengthen
our team, adding new sales
and engineering talent, filling
key managerial positions,
and introducing new training
initiatives to get new hires up
and running quickly. Attracting
and retaining more top talent
remains a high priority.
R&D initiatives, like advances in
lightweight structural panels for
auto load floors, could potentially
boost sales to the automotive
market in coming years. Other
innovations, such as new
honeycomb/glass fiber materials,
hold great promise for other
target markets.
Demand remains strong for our
Wine Packs® made from 100%
recycled paper. We believe the
environmental benefits of our
molded fiber packaging will
only grow more compelling; new
pulp additives are enhancing
performance as well.
REVENUE
NET INCOME
SHAREHOLDERS’ EQUITY
2
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Given our strong balance sheet and streamlined
national factory footprint, we are well positioned
to integrate new acquisitions as strategic
opportunities are identified. We’ve widened the
search beyond our traditional scope, and the
pipeline has never been more promising.
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 income data for the fiscal years ended December 31, 2016, 2015, and 2014, and the selected balance sheet
data as of December 31, 2016, and 2015, are derived from our audited consolidated financial statements, which are included elsewhere
in this Report. The selected statements of income data for the years ended December 31, 2013, and 2012, and the balance sheet data at
December 31, 2014, 2013, and 2012, are derived from our audited consolidated financial statements not included in this Report.
SELECTED CONSOLIDATED FINANCIAL DATA
Consolidated statement of operations data
2016
2015
2014
2013
2012
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
$ 146,132
$ 138,850
$ 139,307
$ 139,223
$ 130,962
34,650
37,454
36,880
12,237
7,970
1.10
7,275
11,714
7,593
1.05
7,206
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
As of December 31
(in thousands)
Consolidated balance sheet data
2016
2015
2014
2013
2012
Working capital
Total assets
Short-term debt obligations
Long-term debt, excluding current portion
Total liabilities
Stockholders’ equity
MARKET PRICE
$ 60,291
$ 52,620
$ 55,658
$ 56,398
$ 51,263
127,934
119,635
112,548
104,908
98,617
856
-
1,011
859
993
1,873
976
2,867
1,550
8,314
14,881
16,063
17,556
19,318
25,357
113,053
103,572
94,992
85,590
73,260
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,
2015, to December 31, 2016:
Fiscal Year Ended December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 24.83
23.13
23.25
25.50
High
$ 24.40
25.49
27.35
27.50
Low
$ 19.89
19.45
17.51
21.23
Low
$ 20.50
20.40
21.70
24.50
8
NUMBER OF STOCKHOLDERS
As of March 2, 2017, there were 71 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 2015 or 2016. 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.
ISSUER PURCHASES OF EQUITY SECURITIES
On June 16, 2015, the Company issued a press release announcing that its Board of Directors authorized the repurchase of up to
$10.0 million of the Company’s outstanding common stock. There was no share repurchase activity for the year ended December
31, 2016. During the year ended December 31, 2015, the Company repurchased 29,559 shares of common stock at a cost of
approximately $587,000. At December 31, 2016, approximately $9.4 million was available for future repurchases of the Company’s
common stock under this authorization.
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. The Company consists of a single operating and reportable segment.
The Company grew sales by 5.2% for its fiscal year ended December 31, 2016, largely due to sales increases to the medical and
consumer markets. However, gross margins continued to be impacted by manufacturing inefficiencies related to the Company’s plant
consolidations and need to requalify parts with many of its medical customers. The Company anticipates that these inefficiencies will
diminish during 2017. Also, the Company recently secured contracts on both the vendor and customer fronts that should strengthen
its position to grow.
The Company’s current 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 Income:
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expenses
Restructuring costs
Material overcharge settlement
(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
2016
2015
2014
100.0%
100.0%
100.0%
76.3%
23.7%
16.5%
0.3%
-1.4%
0.0%
8.3%
-0.1%
8.4%
2.9%
5.5%
73.0%
27.0%
17.3%
1.3%
0.0%
0.0%
8.4%
-0.1%
8.5%
3.0%
5.5%
73.5%
26.5%
17.1%
1.1%
0.0%
0.0%
8.3%
-0.1%
8.4%
3.0%
5.4%
9
2016 COMPARED TO 2015
Sales
Net sales increased 5.2% to $146.1 million for the year ended December 31, 2016, from net sales of $138.9 million in 2015, primarily
due to increases in sales to customers in the medical and consumer markets of approximately 12.6% and 24.0%, respectively, partially
offset by decreases in sales to customers in the aerospace and defense and electronics markets of approximately 20.2% and 12.4%,
respectively. The increase in sales to customers in the medical market was largely due to a new five-year contract with one of the
Company’s larger customers in this market as well as an overall increase in demand from other medical customers. The increase in
sales to customers in the consumer market was largely due to increased demand for molded fiber protective packaging for consumer
products. The reduction in sales to customers in the aerospace and defense market was largely due to continued cuts in government
spending. The decrease in sales to customers in the electronics market in 2016 was primarily due to a temporary spike in demand for
packaging at one of our larger customers in 2015. The Company recently secured contracts on both the vendor and customer fronts
that should strengthen its position to grow.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) decreased to 23.7% for the year ended December 31, 2016, from 27.0% in
2015. As a percentage of sales, material and direct labor costs collectively increased approximately 2.6%, while overhead increased
approximately 0.4%. The increase in material and direct labor costs was primarily due to manufacturing inefficiencies of approximately
$3.6 million resulting from recent plant consolidations and the resulting need to requalify parts with many of the Company’s customers
in the medical market. The Company anticipates that these manufacturing inefficiencies will diminish during 2017.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) increased 0.4% to $24.1 million for the year ended December 31, 2016, from
$24.0 million in 2015. The slight increase in SG&A for the year ended December 31, 2016, is primarily due to increased recruiting
and other professional fees of approximately $500,000 partially offset by decreased compensation and benefit expenses of
approximately $350,000.
Restructuring Costs
On March 18, 2015, the Company committed to move forward with a plan to cease operations at its Raritan, New Jersey, plant
and consolidate operations into its Newburyport, Massachusetts, facility and other UFP facilities. The Company’s decision was
in response to a continued decline in business at the Raritan facility and the recent purchase of the facility in Newburyport. The
activities related to this consolidation are complete.
The Company also relocated all operations in its Haverhill, Massachusetts, and Byfield, Massachusetts, facilities and is in the process
of relocating certain operations in its Georgetown, Massachusetts, facility to Newburyport. The Haverhill and Byfield relocations were
complete at December 31, 2015, and the Georgetown relocation is substantially complete.
The Company has incurred approximately $2.1 million in one-time expenses in connection with the Massachusetts consolidations.
Included in this amount are approximately $180,000 relating to employee severance payments and relocation costs; approximately
$1.5 million in moving expenses and expenses associated with vacating the Raritan, Haverhill, and Byfield properties; and
approximately $360,000 in lease termination costs. Total cash charges were approximately $2.0 million. The Company expects
annual cost savings of approximately $1.0 million as a result of these consolidations.
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 December 31, 2014, expiration of the lease on the Costa Mesa facility as well as the close proximity of the two
properties. The California consolidation was complete at December 31, 2015.
The Company recorded the following restructuring costs associated with the consolidations discussed above for the fiscal years
ended December 31, 2016, and 2015 (in thousands):
2016
2015
Restructuring Costs
Massachusetts Total Massachusetts California
Total
Employee severance
$ -
$ -
$ 178
$ 18 $ 196
Relocation
Lease termination
420
-
420
-
1,138
356
66
1,204
-
356
Total restructuring costs
$ 420
$ 420
$ 1,672
$ 84 $ 1,756
The 2016 costs were reclassified in the Consolidated Statement of Income as “Restructuring Costs” from Cost of Sales. The 2015
costs were reclassified in the Consolidated Statement of Income as “Restructuring Costs” as follows: $1,669,000 from Cost of Sales;
$36,000 from Selling, General, and Administrative expenses; and $51,000 from Gain on sales of property, plant, and equipment.
10
Material Overcharge Settlement
The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that
recently reached settlement. The suit was filed to recover damages and obtain injunctive relief for Defendants’ alleged violations of
the federal antitrust laws with respect to the fixing of prices of polyurethane foam sold from January 1, 1999, through August 2010.
The Company recorded a gain of approximately $2.1 million during the year ended December 31, 2016, which represents the full
settlement amount received. The settlement amount is recorded as “Material overcharge settlement” in the operating income section
of the Consolidated Statements of Income.
Interest Income and Expense
The Company had net interest income of approximately $80,000 for the year ended December 31, 2016, compared to net interest income
of approximately $27,000 for the year ended December 31, 2015. The increase in net interest income is due primarily to an increase in
interest earned on money market accounts and certificates of deposit and decreasing interest costs on the Company’s term loans.
Income Taxes
The Company recorded income tax expense as a percentage of income before income tax expense, of 35.3% for each of the years
ended December 31, 2016, and 2015. 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, 2016.
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.
2015 COMPARED TO 2014
Sales
Net sales decreased 0.3% to $138.9 million for the year ended December 31, 2015, from net sales of $139.3 million in 2014, primarily
due to decreases in sales to customers in the electronics, industrial, and aerospace and defense markets of approximately 16.5%,
16.5%, and 13.2%, respectively, primarily offset by an increase in sales to customers in the medical market of approximately 14.6%. The
decline in sales to customers in the electronics market was largely due to the loss of a packaging contract by one of the Company’s
distributor customers. The decline in sales to customers in the aerospace and defense market was primarily due to a large, one-
time order from a single customer in this market in 2014. The decline in sales to customers in the industrial market is comprised
of reductions in sales to many smaller accounts. The increase in sales to customers in the medical market reflects the Company’s
strategy of focusing resources in the area as well as the overall growth of our customers’ products.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) increased to 27.0% for the year ended December 31, 2015, from 26.5% in
2014. As a percentage of sales, material and direct labor costs collectively increased approximately 0.2%, while overhead decreased
approximately 0.7%. The increase in material and direct labor costs was primarily the result of a slight increase in overall labor
costs. The decrease in overhead was primarily due to decreased employee health care costs of approximately $900,000 due to
a higher than typical frequency of large claims in 2014 and decreased rent costs of approximately $600,000 due to recent plant
consolidations, offset by higher depreciation costs of $450,000 due largely to a full year of depreciation for our Texas building and
new molded fiber equipment, as well as depreciation for our new building in Newburyport.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) increased 0.7% to $24.0 million for the year ended December 31, 2015, from
$23.8 million in 2014. The slight increase in SG&A for the year ended December 31, 2015, is primarily due to higher technology-related
costs of approximately $300,000 and higher travel costs of approximately $100,000, primarily due to the Company’s enterprise
resource planning software system implementation, partially offset by decreased employee health care costs of approximately
$250,000 due largely to a higher than typical frequency of large claims in 2014.
Restructuring Costs
On March 18, 2015, the Company committed to move forward with a plan to cease operations at its Raritan, New Jersey, plant
and consolidate operations into its Newburyport, Massachusetts, facility and other UFP facilities. The Company’s decision was
in response to a continued decline in business at the Raritan facility and the recent purchase of the facility in Newburyport. The
activities related to this consolidation are complete.
The Company also relocated all operations in its Haverhill, Massachusetts, and Byfield, Massachusetts, facilities and is in the process
of relocating certain operations in its Georgetown, Massachusetts, facility to Newburyport. The Haverhill and Byfield relocations were
complete at December 31, 2015, and the Georgetown relocation is substantially complete.
The Company expects to incur approximately $2.1 million in one-time expenses in connection with the Massachusetts consolidations.
Included in this amount are approximately $180,000 relating to employee severance payments and relocation costs; approximately
$1.5 million in moving expenses and expenses associated with vacating the Raritan, Haverhill, and Byfield properties; and
approximately $360,000 in lease termination costs. Total cash charges are estimated at $2.0 million. The Company expects annual
cost savings of approximately $1.0 million as a result of these consolidations. The actual costs incurred through December 31, 2015,
are included in the table on the next page.
11
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 December 31, 2014, expiration of the lease on the Costa Mesa facility as well as the close proximity of the two
properties. The California consolidation is complete, and the actual costs incurred are included in the table below.
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.
The Company recorded the following restructuring costs associated with the consolidations discussed above for the fiscal years
ended December 31, 2015, and 2014 (in thousands):
2015
2014
Restructuring Costs
Massachusetts California Total
Michigan
California
Total
Employee severance
$ 178
$ 18
$ 196
$ 237
$ 10 $ 247
Relocation
Lease termination
Workforce training
Plant infrastructure
1,138
356
-
-
66
1,204
-
-
-
356
-
-
356
-
373
79
501
857
-
-
-
-
373
79
Total restructuring costs
$ 1,672
$ 84
$ 1,756
$ 1,045
$ 511 $ 1,556
The 2015 costs were reclassified in the Consolidated Statement of Income as “Restructuring Costs” as follows: $1,669,000 from
Cost of Sales; $36,000 from Selling, General, and Administrative expenses; and $51,000 from Gain on sales of property, plant
and equipment. The 2014 costs were reclassified in the Consolidated Statement of Income 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.
Interest Income and Expense
The Company had net interest income of approximately $27,000 for the year ended December 31, 2015, compared to net interest
expense of approximately $108,000 for the year ended December 31, 2014. The increase in net interest income was due primarily
to an increase in interest earned on money market accounts and certificates of deposit along with a nonrecurring interest charge in
2014 to adjust a contingent note payable to fair value.
Income Taxes
The Company recorded income tax expense as a percentage of income before income tax expense, of 35.3% and 35.8% for the years
ended December 31, 2015, and 2014, respectively. The decrease in the effective tax rate for the year ended December 31, 2015, was
primarily attributable to a higher than anticipated Domestic Production Deduction on the Company’s 2015 federal tax return. 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, 2016. 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.
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, 2016, was approximately $9.4 million and was primarily a result
of net income generated of approximately $8.0 million, depreciation and amortization of approximately $5.6 million, share-based
compensation of approximately $1.0 million, an increase in deferred taxes of approximately $0.6 million, an increase in other liabilities
of $0.2 million, and a decrease in refundable income taxes of approximately $0.2 million. These cash inflows and adjustments to
income were partially offset by an increase in accounts receivable of approximately $3.8 million due to an increase in sales during
the fourth quarter of 2016 over the same period for 2015 of approximately $2.6 million and an increase in payment terms to a large
customer, an increase in prepaid expenses of approximately $1.4 million due primarily to prepayments on equipment purchases, and
a decrease in accounts payable and accrued expenses of approximately $1.0 million due to the timing of vendor payments in the
ordinary course of business.
12
Net cash used in investing activities during the year ended December 31, 2016, was approximately $7.3 million of which approximately
$2.6 million was the result of renovations to our corporate headquarters and manufacturing facility in Newburyport, Massachusetts, and
approximately $4.7 million was the result of other additions of technology, manufacturing machinery, and equipment across the Company.
Net cash used in financing activities was approximately $0.6 million for the year ended December 31, 2016, representing cash used
to service term debt of approximately $1.0 million and to pay statutory withholding for stock options exercised and restricted stock
units vested of approximately $0.2 million, partially offset by excess tax benefits on share-based compensation of approximately $0.1
million, and net proceeds received upon stock option exercises of approximately $0.5 million.
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, 2016, the Company had no borrowings outstanding under the credit facility. Included in the credit facility were
approximately $0.4 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.
As of December 31, 2016, 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,
2016, the outstanding balance of the term loan facility was approximately $856,000.
Future Liquidity
The Company requires cash to pay its operating expenses, to 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 $9.4 million in operations during the year ended December 31, 2016; however, the Company cannot guarantee
that its operations will generate cash in future periods. The Company’s longer-term liquidity is contingent upon future operating
performance.
Throughout fiscal 2017, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants.
The Company plans to further expand its Newburyport, Massachusetts, manufacturing plant. 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 12 months.
Stock Repurchase Program
The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and includes treasury
stock as a component of stockholders’ equity. On June 16, 2015, the Company announced that its Board of Directors authorized
the repurchase of up to $10.0 million of the Company’s outstanding common stock. Under the program, the Company is authorized
to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases, or
otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. The
stock repurchase program will end upon the earlier of the date on which the plan is terminated by the Board or when all authorized
repurchases are completed. The timing and amount of stock repurchases, if any, will be determined based upon our evaluation of
market conditions and other factors. The stock repurchase program may be suspended, modified, or discontinued at any time, and
the Company has no obligation to repurchase any amount of its common stock under the program. There were no share repurchases
during the year ended December 31, 2016. During the year ended December 31, 2015, the Company repurchased 29,559 shares
of common stock at a cost of approximately $587,000. At December 31, 2016, approximately $9.4 million was available for future
repurchases of the Company’s common stock under this authorization.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The following table summarizes the Company’s contractual obligations at December 31, 2016 (in thousands):
Payment Due By Period
Less than
Total
1 Year
Equipment loans
$ 856
$ 856
Operating leases
891
675
1-3
Years
$ -
140
3-5
More than
Years
5 Years
$ -
$ -
76
-
13
Debt interest
Supplemental retirement
7
75
7
25
-
50
-
-
-
-
Total
$ 1,829
$ 1,563
$ 190
$ 76
$ -
The Company requires cash to pay its operating expenses, to 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, 2016, it cannot guarantee that its operations will generate cash in future
periods. Subject to the Risk Factors set forth in Part I, Item 1A of this Report and the general disclaimers set forth in our Special Note
Regarding forward-looking Statements at the outset of this Report, we believe that cash flow from operations will provide us with
sufficient funds in order to fund our expected operations over the next 12 months.
The Company does not believe inflation has had a material impact on its results of operations in the last three years.
OFF-BALANCE-SHEET ARRANGEMENTS
In addition to operating leases, the Company’s off-balance-sheet arrangements include standby letters of credit, which are included
in the Company’s revolving credit facility. As of December 31, 2016, there was approximately $0.4 million in standby letters of credit
drawable as a financial guarantee on worker’s compensation insurance policies.
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 Item 8 of
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. 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 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. The Company consists of a single reporting unit. We last 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 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.
14
• 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 million or 74%. In performing these calculations, management used its most
reasonable estimates of the key assumptions discussed above. 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.
The Company’s annual impairment testing date is December 31. The Company performed a qualitative assessment (“step 0”) as
of December 31, 2016, and determined that it was more likely than not that the fair value of its reporting unit exceeded its carrying
amount. As a result, the Company is not required to proceed to a “step 1” impairment assessment. Factors considered included the
2014 step 1 analysis and the calculated excess fair value over carrying amount, financial performance, forecasts and trends, market
cap, regulatory and environmental issues, macroeconomic 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, 2016.
•
Inventories Inventories include material, labor, and manufacturing overhead and are valued at the lower of cost or net realizable
value. Cost is determined using the first-in, first-out (FIFO) method.
The Company periodically reviews the realizability of its inventory for potential excess or 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, 2016.
• 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.
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, 2016, 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, 2016, the Company had no
borrowings outstanding under the revolving credit facility, and the Company believes the market risk associated with the facility is minimal.
300
250
200
150
100
50
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
December 2016
ASSUMES INITIAL INVESTMENT OF $100
DECEMBER 2016
UFP Technologies, Inc.
NASDAQ Stock Market (US Companies)
SIC Codes 3080-3089 Miscellaneous
Plastic Products
GICS 15103020 Paper Packaging
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
15
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, 2016
and 2015, and the related consolidated statements of income, changes in stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2016.
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, 2016 and 2015, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2016 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, 2016, 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 10, 2017 expressed an
unqualified opinion.
GRANT THORNTON LLP
Boston, Massachusetts
March 10, 2017
16
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, 2016,
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, 2016, 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, 2016, and our report dated March 10,
2017 expressed an unqualified opinion on those financial statements.
GRANT THORNTON LLP
Boston, Massachusetts
March 10, 2017
17
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
DECEMBER 31
2016
2015
Cash and cash equivalents
$ 31,359
$ 29,804
Receivables, net
Inventories
Prepaid expenses
Refundable 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
Non-qualified deferred compensation plan
Other liabilities
Total liabilities
Commitments and contingencies (Note 14)
Stockholders’ equity:
21,249
14,151
2,281
807
69,847
96,806
(48,290)
48,516
7,322
318
1,931
17,481
14,202
930
871
63,288
90,564
(44,009)
46,555
7,322
636
1,834
$ 127,934
$ 119,635
$ 4,002
$ 4,598
4,698
856
9,556
—
3,459
1,682
184
14,881
5,059
1,011
10,668
859
2,883
1,482
171
16,063
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized;
7,242,023 and 7,212,464 shares issued and outstanding, respectively
at December 31, 2016; 7,170,377 and 7,140,818 shares issued
and outstanding, respectively at December 31, 2015
Additional paid-in capital
Retained earnings
Treasury stock at cost, 29,559 shares at December 31, 2016
and December 31, 2015
—
—
72
25,216
88,352
(587)
72
23,705
80,382
(587)
Total stockholders’ equity
113,053
103,572
Total liabilities and stockholders’ equity
$ 127,934
$ 119,635
The accompanying notes are an integral part of these consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expenses
Restructuring costs
Material overcharge settlement
(Gain) loss on sales of property, plant, and equipment
Operating Income
Other (income) expenses:
Interest income
Interest expense
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
2016
2015
$ 146,132
111,482
34,650
$ 138,850
101,396
37,454
24,105
420
(2,114)
2
12,237
(149)
69
—
(80)
12,317
4,347
7,970
$ 1.11
$ 1.10
7,190
7,275
24,008
1,756
—
(24)
11,714
(114)
87
—
(27)
11,741
4,148
7,593
$ 1.07
$ 1.05
7,102
7,206
2014
$ 139,307
102,427
36,880
23,847
1,556
—
(84)
11,561
(46)
154
(312)
(204)
11,765
4,206
7,559
$ 1.08
$ 1.05
7,028
7,175
The accompanying notes are an integral part of these consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
Years Ended December 31, 2016, 2015, and 2014
Common Stock
Additional
Paid-in
Shares
Amount
Capital
Retained
Earnings
Treasury Stock
Shares Amount
Total
Stockholders’
Equity
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
units 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
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
Repurchase of common stock
Net income
24
77
—
—
(30)
—
—
1
—
—
—
—
1,069
357
—
—
(209)
—
356
—
—
—
—
7,593
—
—
—
—
30
—
—
—
—
—
(587)
—
1,069
358
(209)
356
(587)
7,593
Balance at December 31, 2015
7,140
$ 72
$ 23,705
$ 80,382
$ 30
$ (587)
$ 103,572
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
33
48
(9)
—
—
—
—
—
—
—
1,056
529
(219)
145
—
—
—
—
—
7,970
—
—
—
—
—
—
—
—
—
—
1,056
529
(219)
145
7,970
Balance at December 31, 2016
7,212
$ 72
$ 25,216
$ 88,352
$ 30
$ (587)
$ 113,053
The accompanying notes are an integral part of these consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cash flows from operating activities:
Net income from consolidated operations
$ 7,970
$ 7,593
$ 7,559
Years Ended December 31
2016
2015
2014
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Loss 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:
Receivables, net
Inventories
Prepaid expenses
Refundable income taxes
Accounts payable
Accrued expenses
Other liabilities
Other assets
5,634
2
1,056
576
(145)
(3, 768)
51
(1,351)
209
(596)
(361)
213
(97)
4,846
27
1,069
437
(356)
(1, 011)
(1,309)
(266)
2,677
(800)
(163)
29
325
4,376
5
1,119
1,232
(1,219)
562
(1,845)
26
(436)
2,317
(2,243)
(181)
(146)
Net cash provided by operating activities
9,393
13,098
11,126
Cash flows from investing activities:
Additions to property, plant, and equipment
Proceeds from sale of property, plant, and equipment
Net cash used in investing activities
Cash flows from financing activities:
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
Repurchases of common stock
Payment of contingent note payable
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
(7,293)
14
(7,279)
145
529
(1,014)
(219)
—
—
(559)
1,555
29,804
(16,321)
53
(16,268)
356
358
(996)
(209)
(587)
—
(13,436)
112
(13,324)
1,219
336
(977)
(831)
—
(800)
(1,078)
(1,053)
(4,248)
34,052
(3,251)
37,303
Cash and cash equivalents at end of year
$ 31,359
$ 29,804
$ 34,052
The accompanying notes are an integral part of these consolidated financial statements.
21
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. The Company has evaluated all subsequent events through the date of this filing.
(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 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, accrued expenses, 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, 2016, and 2015, 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 $17.6 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, 2016.
(g) Inventories
Inventories include material, labor, and manufacturing overhead and are valued at the lower of cost or net realizable value.
Cost is determined using the first-in, first-out (FIFO) method.
The Company periodically reviews the realizability of its inventory for potential excess or 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, 2016.
(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.
22
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
20-40 years
7-15 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. The Company consists of a single reporting unit. We last 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 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 million or 74%. In performing these calculations, management used
its most reasonable estimates of the key assumptions discussed above. 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.
The Company’s annual impairment testing date is December 31. The Company performed a qualitative assessment (“step
0”) as of December 31, 2016, and determined that it was more likely than not that the fair value of its reporting unit
exceeded its carrying amount. As a result, the Company is not required to proceed to a “step 1” impairment assessment.
Factors considered included the 2014 step 1 analysis and the calculated excess fair value over carrying amount, financial
performance, forecasts and trends, market cap, regulatory and environmental issues, macroeconomic conditions, industry
and market considerations, raw material costs, and management stability.
(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. 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).
23
The Company issues share-based awards through several plans that are described in detail in Note 11. The compensation cost
charged against income for those plans is included in selling, general, & administrative expenses as follows (in thousands):
Share-based compensation expense
$ 1,056
$ 1,069
Year Ended December 31
2016
2015
2014
$ 1,119
The compensation expense for stock options granted during the three-year period ended December 31, 2016, was
determined as the fair value of the options using the Black Scholes valuation model. The assumptions are noted as follows:
Expected volatility
Expected dividends
Risk-free interest rate
Exercise price
Expected term
2016
29.7%
None
0.9%
Year Ended December 31
2015
2014
31.5% to 32.3%
32.8% to 37.9%
None
None
1.0% to 1.2%
0.7% to 0.9%
$22.02
$19.97-$22.36
$22.55-$25.48
5.0 years
5.0 years
3.8 to 5.0 years
Weighted-average grant-date fair value
$ 6.11
$ 6.04
$ 7.24
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 estimated based on historical option exercise activity.
The total income tax benefit recognized in the consolidated statements of income for share-based compensation
arrangements was approximately $318,000, $312,000 and $320,000 for the years ended December 31, 2016, 2015 and
2014, 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 $1.3 million, $1.3 million and $1.4 million were expensed in the years ended December 31, 2016, 2015
and 2014, respectively.
(p) Income Taxes
The Company’s income taxes are accounted for under the asset and liability method. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and
operating loss and tax credit 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
24
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 17).
(r) Treasury Stock
The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and we
include treasury stock as a component of stockholders’ equity. The Company did not repurchase any shares of common
stock during the year ended December 31, 2016. During the year ended December 31, 2015, the Company repurchased
29,559 shares of common stock at a cost of approximately $587,000.
Recent Accounting Pronouncements
In May 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. The standard permits the use of either the full retrospective or modified retrospective transition methods.
In August 2015, the FASB issued an update to defer the effective date of this update by one year. The updated standard becomes
effective for the Company in the first quarter of 2018, but allows the Company to adopt the standard one year earlier if it so chooses.
The Company expects to adopt the standard in the first quarter of 2018 using the modified retrospective transition method. The
Company is continuing to evaluate its revenue sources for potential impact. Based on the work completed to date, the Company
expects that for a significant majority of our business, the recognition of revenue under the updated standard will occur at a point in
time, which is consistent with current practice.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance in this ASU supersedes the leasing guidance in Topic
840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for
those leases previously classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The
Company is evaluating the impact of adopting this ASU on its consolidated financial position and results of operations.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share Based Payment Accounting. This ASU simplifies
several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of
awards, forfeitures and classification on the statement of cash flows. The provisions of this ASU are effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years. The Company will adopt the new standard in
the first quarter of 2017. Although the impact of adopting this update to the Company’s consolidated financial statements is not
expected to have a material effect, the impact will depend on market factors and the timing and intrinsic value of future share-based
compensation award vests and exercises. The Company has elected to account for forfeitures as they occur, rather than estimate
expected forfeitures. Subsequent to adoption, the Company notes the potential for volatility in its effective tax rate as any windfall or
shortfall tax benefits related to its share-based compensation plans will be recorded directly into results of operations.
Revisions
Certain revisions have been made to the 2015 Consolidated Balance Sheet and 2015 Consolidated Statement of Cash Flows to
conform to the current year presentation relating to presentation of a reserve for uncertain tax positions. The impact on the 2015
Consolidated Balance Sheet was a decrease in the amount of $315,000 to both refundable income taxes and accrued expenses. The
impact on the 2015 Consolidated Statement of Cash Flows (cash provided by operating activities) was an increase to the change in
refundable income taxes of $315,000 and a decrease to the change in accrued expenses of $315,000. These revisions had no impact
on previously reported net income and are deemed immaterial to the previously issued financial statements.
Certain revisions have been made to the 2015 Consolidated Balance Sheet, 2015 Consolidated Statement of Operations and 2015
Consolidated Statement of Stockholders’ Equity to conform to the current year presentation relating to the presentation of common
shares outstanding. The impact to the Consolidated Balance Sheet was a decrease of 29,559 in the number of common shares
outstanding. The impact to the Statements of Operations was a decrease of approximately 13,000 shares in basic and diluted
weighted average common shares outstanding. The impact to the Consolidated Statement of Stockholders’ Equity was a decrease of
approximately 30,000 in common shares outstanding (repurchase of common stock line). These revisions had no impact on previously
reported net income, earnings per share, or cash flows and are deemed immaterial to the previously issued 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
2016
$ 66
$ 3,562
2015
$ 86
$ 1,459
2014
$ 103
$ 3,259
25
During the years ended December 31, 2016, 2015, and 2014, the Company permitted the exercise of stock options with exercise
proceeds paid with the Company’s stock (“cashless” exercises) totaling approximately $166,000, $36,000 and $372,000,
respectively.
(3) Receivables
Receivables consist of the following (in thousands):
Accounts receivable—trade
Less allowance for doubtful receivables
Receivables, net
2016
$ 21,816
(567)
$ 21,249
December 31
2015
$ 17,980
(499)
$ 17,481
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 $126,000 and $16,000
for the years ended December 31, 2016, and 2015, respectively.
(4) Inventories
Inventories consist of the following (in thousands):
Raw materials
Work in process
Finished goods
Total Inventory
2016
$ 7,111
1,354
5,686
$ 14,151
December 31
2015
$ 7,506
1,192
5,504
$ 14,202
(5) Other Intangible Assets
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2016, and 2015 are as follows (in thousands):
Estimated useful life
Gross amount at December 31, 2016
Accumulated amortization at December 31, 2016
14 years
$ 429
(429)
5 years
$ 512
(449)
5 years
$ 2,046
(1,791)
$ 2,987
(2,669)
Patents
Non-Compete
Customer List
Total
Net balance at December 31, 2016
$ —
$ 63
$ 255
$ 318
Gross amount at December 31, 2015
Accumulated amortization at December 31, 2015
$ 429
(429)
$ 512
(387)
$ 2,046
(1,535)
$ 2,987
(2,351)
Net balance at December 31, 2015
$ —
$ 125
$ 511
$ 636
Amortization expense related to intangible assets was approximately $318,000, $318,000 and $393,000, for the years ended December
31, 2016, 2015 and 2014, respectively. Future amortization for the years ending December 31 will be approximately (in thousands):
2017
Total
318
$ 318
(6) Property, Plant, and Equipment
Property, plant, and equipment consist of the following (in thousands):
26
Land and improvements
Buildings and improvements
Leasehold improvements
Machinery & Equipment
Furniture, fixtures, computers, & software
Construction in progress–equipment
2016
$ 3,191
28,241
2,759
54,633
6,419
1,563
$ 96,806
December 31
2015
$ 3,191
25,399
2,839
51,016
6,498
1,621
$ 90,564
Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014, were approximately $5.3 million, $4.5
million and $4.0 million, respectively.
(7) 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’s $40 million credit facility matures on November 30, 2018.
As of December 31, 2016, the Company had no borrowings outstanding under the credit facility. Included in the credit facility
were approximately $0.4 million in standby letters of credit drawable as a financial guarantee on worker’s compensation
insurance policies. As of December 31, 2016, the Company was in compliance with all covenants 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, 2016, approximately $5.0
million had been advanced on the loan, and the outstanding balance was approximately $856,000. 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
2016
$ 856
856
(856)
2015
$ 1,870
1,870
(1,011)
Long-term debt, excluding current installments
$ —
$ 859
Aggregate maturities of long-term debt are as follows (in thousands):
Year ending December 31:
2017
(8) Accrued Expenses
Accrued expenses consist of the following (in thousands):
Compensation
Benefits/self-insurance reserve
Paid time off
Commissions payable
Other
856
$ 856
2016
$ 2,144
180
990
260
1,124
$ 4,698
December 31
2015
$ 2,107
250
965
319
1,418
$ 5,059
27
(9) Income Taxes
The Company’s income tax provision for the years ended December 31, 2016, 2015 and 2014 consists of the following (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Years Ended December 31
2016
$ 3,120
651
3,771
546
30
576
2015
$ 3,131
580
3,711
508
(71)
437
2014
$ 2,638
336
2,974
1,262
(30)
1,232
Total income tax provision
$ 4,347
$ 4,148
$ 4,206
At December 31, 2016, the Company had net operating loss carryforwards for federal income tax purposes of approximately
$119,000, which are available to offset future taxable income and expire during the federal tax year ending December 31, 2019.
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):
December 31
2016
2015
Deferred tax assets:
Reserves
Inventory capitalization
Compensation programs
Retirement liability
Equity-based compensation
Net operating loss carryforwards
Deferred rent
Intangible assets
$ 531
427
578
19
257
40
7
340
Total deferred tax assets:
$ 2,199
Deferred tax liabilities:
Excess of book over tax basis of fixed assets
Goodwill
$ (4,767)
(891)
Total deferred tax liabilities
Net long-term deferred tax liabilities
$ (5,658)
$ (3,459)
$ 532
407
501
27
290
141
10
264
$ 2,172
$ (4,186)
(869)
$ (5,055)
$ (2,883)
The amounts recorded as deferred tax assets as of December 31, 2016, and 2015, represent the amount of tax benefits of
existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation
of sufficient future taxable income within the carryforward period. The Company has total deferred tax assets of $2.2 million at
December 31, 2016, 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:
28
Years Ended December 31
2016
2015
Computed “expected” tax rate
34.0%
34.0%
Increase (decrease) in income taxes resulting from:
State taxes, net of federal tax benefit
Meals and entertainment
R&D credits
Domestic production deduction
Non-deductible ISO stock option expense
Unrecognized tax benefits
Other
3.7
0.2
(0.6)
(2.5)
0.3
(0.1)
0.3
2.3
0.3
(0.8)
(2.5)
0.4
—
1.6
2014
34.0%
1.1
0.3
(0.7)
(1.4)
0.4
1.3
0.8
Effective tax rate
35.3%
35.3%
35.8%
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, income tax returns filed in Florida, which
have been audited through 2009 and income tax returns in Colorado, which have been audited through 2013. An audit for
income tax returns filed in New Jersey for the years 2009, through 2012 is currently in progress. An audit for the Company’s
federal tax return for 2014 is currently in progress. Federal and state tax returns for the years 2013 through 2016 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
Reductions for tax positions of prior years
Gross UTB balance at end of fiscal year
2016
$ 162
(12)
$ 150
December 31
2015
$ 230
(68)
$ 162
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2016,
and 2015, is $150,000 and $162,000, respectively.
In addition, the total amount of accrued interest and penalties on uncertain tax positions at December 31, 2016, and 2015 is
$153,000 and $153,000, respectively.
At December 31, 2016, 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 in 2017, as the examination is expected to
close within the next 12 months.
(10) Net Income Per Share
Basic income per share is based upon the weighted average of 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
2016
2015
2014
7,190
7,102
7,028
85
104
147
7,275
7,206
7,175
29
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, 2016, 2015, and 2014, the number of stock awards excluded
from the computation was 52,377, 72,495, and 53,651, respectively.
(11) Stock Option and Equity Incentive Plans
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, 2016, 1,197,034 shares of common stock have been issued under the 2003 Incentive Plan, none of which
have been restricted. An additional 46,065 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, 2016, 170,000 options have been granted, and 83,125 options
are outstanding. At December 31, 2016, 936,182 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, 2016, 325,810 options have been granted, and 149,453 options are outstanding. For the year
ended December 31, 2016, 4,764 shares of common stock were issued, and 131,554 shares remained available to be issued under
the Director Plan.
The following is a summary of stock option activity under all plans:
Shares
Weighted Average
Exercise Price
Remaining
Contractual Life
Aggregate
Intrinsic Value
Under Options
(per share)
(in years)
(in thousands)
Weighted Average
Outstanding December 31, 2015
Granted
Exercised
270,205
17,184
(54,811)
Outstanding December 31, 2016
232,578
Exercisable at December 31, 2016
210,078
Vested and expected to vest at
$ 15.40
22.02
24.57
$ 16.53
$ 16.02
—
—
—
3.66
3.86
—
—
—
$ 2,074
$ 1,981
December 31, 2016
232,578
$ 16.53
3.66
$ 2,074
30
During the years ended December 31, 2016, 2015, and 2014, 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 $0.7 million, $1.3
million, and $3.4 million, respectively, and the total amount of consideration received from the exercise of these options was
approximately $695,000, $394,000, and $709,000, 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, 2016, 6,514 shares (6,514 for options and zero for taxes) were surrendered at an average market price of $25.50.
During the year ended December 31, 2015, 1,632 shares (1,632 for options and zero for taxes) were surrendered at an average
market price of $21.97. 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, 2016, 2015, and 2014, the Company recognized compensation expense related to stock
options granted to directors and employees of approximately $238,000, $282,000, and $354,000, respectively.
On February 22, 2016, the Company’s Compensation Committee approved the 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 28, 2016. The Company has recorded compensation expense of $400,000 for the
year ended December 31, 2016. Stock compensation expense of $400,000 was also recorded in both 2015 and 2014 for similar
awards.
On June 9, 2016, the Company issued 4,764 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 $22.02
on June 9, 2016, the Company recorded compensation expense of approximately $105,000 associated with the stock issuance
for the year ended December 31, 2016. The Company recorded compensation expense of approximately $105,000 and $122,000
for similar awards in 2015 and 2014, respectively.
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, 2016:
Restricted Stock Units
Award Date Fair Value
Weighted Average
Outstanding at December 31, 2015
Awarded
Shares vested
Outstanding at December 31, 2016
40,645
17,822
(11,909)
46,558
$ 19.67
21.66
20.94
$ 20.05
The Company recorded approximately $314,000, $274,000 and $237,000 in compensation expense related to these RSUs
during the years ended December 31, 2016, 2015 and 2014, respectively.
At the Company’s discretion, RSU holders are given the option to net-share settle to cover the required minimum withholding
tax, and the remaining amount is converted into the equivalent number of common shares. During the year ended December
31, 2016, 3,389 shares were redeemed for this purpose at an average market price of $22.82. During the years ended December
31, 2015, and 2014, 3,405 and 9,878 shares were redeemed for this purpose at an average market price of $23.15 and $25.88,
respectively.
The following summarizes the future share-based compensation expense the Company will record as the equity securities
granted through December 31, 2016, vest (in thousands):
2017
2018
2019
2020
Total
Options
Common Stock
$ 44
16
—
$ —
$ 60
$ —
—
—
—
$ —
Restricted
Stock Units
$ 293
207
110
$ 23
$ 633
Total
$ 337
223
110
$ 23
$ 693
31
Tax benefits totaling approximately $145,000, $356,000, and $1,219,000 were recognized as additional paid-in capital during
the years ended December 31, 2016, 2015, and 2014, respectively, since the Company’s tax deductions exceeded the share-
based compensation charge recognized for stock options exercised and RSUs vested.
(12) 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.
(13) 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
$4,000, $4,000, and $23,000 for the years ended December 31, 2016, 2015, and 2014, respectively. The present value of the
supplemental retirement obligation has been calculated using a 4.0% discount rate, and is included in other liabilities. Total projected
future cash payments for the years ending December 31, 2017, through 2019, are approximately $25,000 for each year.
(14) Commitments and Contingencies
(a) Leases – The Company has operating leases for certain facilities that expire through 2021. 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, 2016, are as follows (in thousands):
Years Ending December 31
Operating Leases
2017
Total minimum lease payments (a)
891
$ 891
(a) Minimum payments have not been reduced by minimum sublease rentals of approximately $24,000 due in the future under
non-cancelable subleases.
Rent expense amounted to approximately $0.8 million, $1.2 million, and $1.8 million in 2016, 2015, and 2014, 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.
(15) 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 401(k) 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 $740,000, $750,000 and $750,000 in
2016, 2015, and 2014, 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 $200,000 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 other liabilities in the
accompanying balance sheets. At December 31, 2016, and 2015, the balance of the deferred compensation liability totaled
approximately $1.7 million and $1.5 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
$1.8 million and $1.7 million as of December 31, 2016, and 2015, respectively.
32
(16) 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.
(17) Segment Data
The Company consists of a single operating and reportable segment.
Revenues from customers outside the United States are not material. No customer comprised more than 10% of the Company’s
consolidated revenues for the year ended December 31, 2016. A vast majority 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 the fiscal years ended December 31, 2016, 2015 and 2014 are as follows
(in thousands):
Market
2016 Net Sales %
2015 Net Sales %
2014 Net Sales %
$ 64,522 44.2%
$ 57,297 41.3% $ 50,092 36.0%
27,450 18.8%
26,879
19.4%
Medical
Automotive
Consumer
Electronics
Industrial
Aerospace & Defense
10,494 7.2%
21,419 14.7%
11,586 7.9%
10,661 7.3%
17,274
12.4%
13,218
11,028
13,154
9.5%
7.9%
9.5%
27,358 19.6%
17,661 12.7%
15,830
11.4%
13,208 9.5%
15,158 10.9%
Net Sales $ 146,132 100.0%
$ 138,850 100.0%
$ 139,307 100.0%
(18) Quarterly Financial Information (unaudited)
Summarized quarterly financial data is as follows (in thousands, except per share data):
2016
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
2015
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
Q1
Q2
Q3
Q4
$ 34,503
$ 37,902
$ 37,220
$ 36,507
7,727
1,075
0.15
0.15
Q1
10,295
2,735
0.38
0.38
Q2
8,452
2,669
0.37
0.37
Q3
8,176
1,491
0.21
0.20
Q4
$ 33,977
$ 36,499
$ 34,441
$ 33,933
8,638
1,653
0.23
0.23
10,293
2,272
0.32
0.32
9,510
1,992
0.28
0.28
9,013
1,676
0.24
0.23
33
(19) Plant Consolidation
On March 18, 2015, the Company committed to move forward with a plan to cease operations at its Raritan, New Jersey, plant
and consolidate operations into its Newburyport, Massachusetts, facility and other UFP facilities. The Company’s decision was in
response to a continued decline in business at the Raritan facility and the recent purchase of the 137,000-square-foot facility in
Newburyport. The activities related to this consolidation are complete.
The Company also relocated all operations in its Haverhill, Massachusetts, and Byfield, Massachusetts, facilities and plans to
relocate certain operations in its Georgetown, Massachusetts, facility to Newburyport. The Haverhill and Byfield relocations
were complete at December 31, 2015, and the Georgetown relocation is substantially complete.
The Company has incurred approximately $2.1 million in one-time expenses in connection with the Massachusetts
consolidations. Included in this amount are approximately $180,000 relating to employee severance payments and relocation
costs; approximately $1.5 million in moving expenses and expenses associated with vacating the Raritan, Haverhill, and Byfield
properties; and approximately $360,000 in lease termination costs. Total cash charges were approximately $2.0 million. The
Company expects annual cost savings of approximately $1.0 million as a result of these consolidations.
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 December 31, 2014, expiration of the lease on the Costa Mesa facility as well as the close proximity of the two
properties. The California consolidation was complete at December 31, 2015.
The Company has recorded the following restructuring costs associated with the consolidations discussed above for the fiscal
years ended December 31, 2016, and 2015 (in thousands):
2016
2015
2014
Restructuring Costs
Massachusetts
Massachusetts
California Total
Michigan California Total
Employee severance
Relocation
Lease termination
Workforce training
Plant infrastructure
$ -
420
-
-
-
$ 178
$ 18 $ 196
$ 237
$ 10 $ 247
1,138
356
-
-
66
1,204
-
-
-
356
-
-
356
-
373
79
501
857
-
-
-
-
373
79
Total restructuring costs
$ 420
$ 1,672
$ 84
$ 1,756
$ 1,045
$ 511 $ 1,556
The 2016 costs were reclassified in the Consolidated Statement of Income as “Restructuring Costs” from Cost of Sales. The
2015 costs were reclassified in the Consolidated Statement of Income as “Restructuring Costs” as follows: $1,669,000 from
Cost of Sales; $36,000 from Selling, General, and Administrative expenses; and $51,000 from Gain on sales of property, plant
and equipment. The 2014 costs were reclassified in the Consolidated Statement of Income 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.
(20) Related Party Transactions
Daniel Croteau, who has been a member of the Company’s Board of Directors since December 16, 2015, is the Chief Executive
Officer of Vention Medical, Inc., a customer of the Company. Sales to Vention for the year ended December 31, 2016, were
approximately $474,000. Open accounts receivable from Vention were approximately $23,000 at December 31, 2016.
(21) Material Overcharge Settlement
The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that
recently reached settlement. The suit was filed to recover damages and obtain injunctive relief for Defendants’ alleged violations
of the federal antitrust laws with respect to the fixing of prices of polyurethane foam sold from January 1, 1999 through August
2010. The Company recorded a gain of approximately $2.1 million during the year ended December 31, 2016, which represents the
full settlement amount received. The settlement amount is recorded as “Material overcharge settlement” in the operating income
section of the Consolidated Statements of Income.
34
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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, statements regarding anticipated new customer and supplier contracts and new project approvals, 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 and the timing associated with requalification of parts,
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, expectations
regarding the manufacturing capacity and efficiencies of the Company’s new production equipment, statements about the
Company’s acquisition opportunities and strategies and the prospect of pursuing new acquisition opportunities, its participation and
growth in multiple markets, including the medical market, 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 or sales and earnings growth rates. 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, the risk that the Company may not be able to finalize anticipated new customer
contracts, risks associated with new project approvals, risks associated with the implementation of new production equipment, and
requalification or recertification of transferred 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, the integration of any such acquisition candidates and the value of those acquisitions to our customers
and shareholders. 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, 2016. 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
100 Hale Street
6201 15th Avenue, 3rd Floor
Newburyport, MA 01950 USA
R. Jeffrey Bailly
do
Brooklyn, NY 11219
(978) 352-2200 phone
Chairman, CEO and President
d
d
o
d
d
d
o
o
o
d
INDEPENDENT REGISTERED PUBLIC
LEK Consulting, LLC
ANNUAL MEETING
The annual meeting of stockholders
PLANT LOCATIONS
California, Colorado, Florida,
will be held at 10:00 a.m. on Tuesday,
Georgia, Iowa, Massachusetts,
June 6, 2017, at UFP Technologies,
Michigan, Texas
Inc., 100 Hale Street, Newburyport,
MA 01950.
COMMON STOCK LISTING
UFP Technologies’ common stock
is traded on Nasdaq under the
symbol UFPT.
ACCOUNTANTS
Grant Thornton LLP
125 High Street, 21st Floor
Boston, MA 02110
STOCKHOLDER SERVICES
Stockholders whose shares are held in
CORPORATE COUNSELS
Lynch Brewer Hoffman & Fink, LLP
75 Federal Street, 7th Floor
street names often experience delays
Boston, MA 02110
in receiving company communications
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
provide existing and prospective
Daniel C. Croteau
Former Chief Executive Officer
Vention Medical
Marc D. Kozin
Senior Advisor
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 Company, Inc.
Lucia Luce Quinn
Chief People Officer
Forrester Research, Inc.
UFP Technologies, Inc.
Attn: Shareholder Services
100 Hale Street
Newburyport, MA 01950 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, 2016,
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.
shareholders a tool to understand
Mitchell C. Rock
our financial results, what we do as a
Sr. Vice President
company, and where we are headed
Sales and Marketing
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.
Daniel J. Shaw, Jr.
Vice President
Research & Development
W. David Smith
Sr. Vice President
Operations
David K. Stevenson
Director, Trustee,
and Consultant
d Directors
o Officers
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.
100 Hale Street, Newburyport, MA 01950
800 372 3172 | ufpt.com