INCREASING OUR
VALUE
TO CUSTOMERS
2 0 1 8 A N N U A L R E P O R T
2018
ANNUAL
REPORT
UFP Technologies, Inc. (Nasdaq: UFPT) is an
innovative designer and custom manufacturer
of components, subassemblies, products and
packaging primarily for the medical market.
Utilizing highly specialized foams, films and plastics, UFP
converts raw materials through laminating, molding, radio
frequency welding and fabricating techniques. The Company is
diversified by also providing highly engineered solutions to
customers in the aerospace & defense, automotive, consumer,
electronics and industrial markets.
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
40
Stockholder Information
1
DEAR FELLOW SHAREHOLDER,
For UFP Technologies, 2018 was a strong year on
all fronts. We increased revenues by 29%, operating
income by 68% and earnings per share by 53%.
Even more importantly, we made great progress in
advancing our strategic initiatives, increasing our
value to customers and positioning your Company
for long-term success.
In this letter, I’ll discuss some of the year’s highlights
and our customer-driven strategy for growth.
Simply stated, our goal is to bring more value to
our customers by solving more of their problems,
providing more products and services, and
constantly refining our capabilities to meet their
evolving needs. It starts at the front end of their
new product development, when we help them
select the ideal design and materials to maximize
performance and profitability. It continues through the
manufacturing stage, where we often build our own
custom equipment to ensure production quality and
efficiency, and then through every step of the process
until the product reaches its ultimate consumer. This
level of engagement helps us to form closer customer
and vendor connections, and deepen the relationships
that are essential to our business.
DIELECTRICS ACQUISITION
AN IMMEDIATE SUCCESS
This customer-driven strategy also extends to
potential acquisitions. Our selection process is
often guided by specific customer feedback about
additional capabilities or geographic locations that
would make us more valuable to them. Our largest-
ever acquisition, completed in early 2018, is a great
example. The integration of Dielectrics into the UFP
family has gone very smoothly. As expected, they’ve
proven to be an excellent strategic and cultural fit,
and they brought many critical new skills to our
organization. With their blue-chip customer base and
high-margin book of business, they’ve also added
substantially to earnings. With the help of Dielectrics,
sales to the medical market in 2018 grew 57.4%.
Because we have many customers in common, and
produce complementary solutions, we see many
exciting possibilities to combine our offerings and
meet even more market needs. As we work to realize
all the potential synergies, our medical capabilities and
pipeline of opportunities have never been stronger.
REACHING A MEDICAL MILESTONE
With the boost provided by Dielectrics, we’ve
achieved an important milestone: Sales to the medical
market now account for approximately 60% of our
total revenues. In the coming years, we expect high-
value, long-term medical programs to become an
even bigger part of our business. So we will continue
to expand our medical infrastructure with new
cleanroom capacity, new equipment, new talent and
more. The medical market is where our skills and the
customers’ needs are most closely aligned. These
customers require the highest levels of engineering
expertise, manufacturing excellence and exacting
quality standards. That’s precisely what we strive
to deliver every day. They also like knowing we can
manufacture in multiple plants and provide backup
locations should the need arise.
OTHER TARGET MARKETS
ALSO GROWING
Beyond medical, we remain strongly committed to
our other five target markets. Here, too, the news in
2018 was generally very positive. For 2018, sales to
2
2
By increasing our value to customers, we’re
also improving our profitability, upgrading
our book of business and positioning UFP
for long-term success.
STOCKHOLDERS’ EQUITY
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2014
2015 2016 2017 2018
the aerospace and defense market grew 14.0%. On a
combined basis, sales to our consumer, electronics
and industrial markets grew 9.1%. Our Molded Fiber
group had a very good year as well. The sole laggard
was the automotive market, where sales declined
13.4%. Our ability to serve diverse markets with
a broad range of solutions is an integral part of
our strategy. It helps us adapt quickly to changes
in the economy and direct resources to where
opportunities are greatest at any time.
IMPROVING OPERATING EFFICIENCY
Another major piece of our strategy: continuing
to improve our operating efficiency. In 2018, we
qualified the last of the new equipment from our
plant consolidation program. It took several years
to optimize our national footprint—closing or
expanding locations, increasing automation, adding
experienced operations talent and more.
Those efforts are now paying off with significant
productivity gains and meaningful improvements to
our operating results. For example, lower overhead
expenses as a percentage of sales and improved
manufacturing techniques in 2018 helped us increase
gross margins by 1.4% to 25.4% of sales. Selling,
general and administrative (SG&A) expenses as a
percentage of sales also fell, allowing us to increase
operating income from 7.9% to 10.3% of sales.
We will continue our efforts to drive down costs
and ensure that we run every aspect of our business
with maximum efficiency. At the same time, we
will continue to improve our book of business by
targeting higher-margin programs that best fit our
skills. We’re well known in the industry for creating
innovative solutions to complex customer problems.
A key objective is to extend the value of those
innovations by applying what we’ve learned to new
market segments and applications.
STRENGTHENING OUR
BALANCE SHEET TO
FINANCE FUTURE GROWTH
Thanks to our strong cash flow, we’ve been able
to pay down more than $30 million of the $56
million we borrowed to purchase Dielectrics. With
that integration largely complete, we now have
the bandwidth and resources to take on new
acquisitions. We have multiple candidates in mind
and are working through our process to make sure
any acquisitions will increase our value to customers
and advance our overall strategy.
As we move ahead, we will continue to build on our
great progress in 2018. For all the reasons described
in this letter, I remain very bullish about the long-
term prospects of your Company. I thank all of our
talented associates who work so hard to drive our
business forward, and I thank you for your support.
Sincerely,
R. Jeffrey Bailly
Chairman and CEO
3
3
We will continue to build our medical
sales by focusing on high-value, long-term
programs that require absolute quality
and precision. To achieve this objective,
we’re expanding our medical platform
and targeting new product categories
where our skills and market needs are
the best fit.
ADVANCING
MEDICAL
CAPABILITIES
As high-margin medical
programs become
a bigger part of our
business, we continue to
expand our offerings and
develop more integrated
solutions.
The addition of Dielectrics to our already
robust medical business has greatly
enhanced our capabilities—and our value
to both current and prospective customers.
A combined UFP-Dielectrics go-to-market
team is working to leverage our collective
strengths and create solutions that integrate
the best innovations of both organizations.
Among large medical customers, our
reputation for innovation and reliability
grows stronger with each passing year.
In an industry that accounts for a large
share of the overall U.S. economy, the
opportunities for continued growth
are substantial.
44
We continue to deepen our partnerships
through long-term contracts and greater
connectivity with customers and vendors.
For example, in 2018 we finalized a three-way
agreement with our largest customer and
largest vendor that will extend our highest-
volume medical program through 2025 and
bring an estimated $70 million in revenue.
As we expand our capabilities and grow
more connected to customers, we’re
well positioned to address even more of
their product and packaging challenges.
Everything we do is about becoming a
more valuable partner to them. That is
one strategic tenet that will never change.
Through our vendor exclusivity agreements,
we give our customers access to the
leading-edge materials and technologies
they need. These agreements also help
protect our product innovations and boost
the long-term value of our solutions.
STRENGTHENING
CUSTOMER
CONNECTIONS
Long-term agreements with
customers and vendors help
lock us in to the kind of high-
value programs that best fit
our skills.
5
By constantly improving the efficiency of
our processes, we can keep our pricing
competitive while still maintaining
healthy margins. As we continue to drive
down manufacturing costs, we can help
customers in more ways and extend those
relationships into promising new areas.
INNOVATING
PRODUCTS &
PROCESSES
As we add new capabilities
and drive down costs, we can
solve more of our customers’
problems throughout their
product life cycles.
We thrive on creating new solutions and
improving existing ones. Our ability to
innovate means we can take on many of our
customers’ most difficult challenges and apply
the knowledge gained from one successful
program to new market opportunities.
6
We also made several strategic hires in
2018 to bolster our operations group and
help us improve efficiency and reduce
costs. In addition, we continue to build
our bench of extraordinary engineers.
Their ability to create effective solutions
to tough customer challenges remains our
most powerful competitive advantage.
When we acquired Dielectrics, we brought
some truly outstanding talent into the UFP
family. The Dielectrics team brings expertise
in many product areas that are new to UFP.
By combining the strengths of both
organizations, we’ve created a technical
team that, together, can solve many more
problems than we could apart.
BUILDING
OUR TEAM
With the Dielectrics
acquisition and some key
personnel moves, our
talent is deeper than ever.
57
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 years ended December 31, 2018, 2017 and 2016, and the selected balance sheet data as
of December 31, 2018 and 2017, 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, 2015 and 2014, and the selected balance sheet data
at December 31, 2016, 2015 and 2014 are derived from our audited Consolidated Financial Statements not included in this report.
SELECTED CONSOLIDATED FINANCIAL DATA
Consolidated statement of operations data
2018
2017
2016
2015
2014
Years Ended December 31
(in thousands, except per share data)
Net sales
Gross profit
Operating income
Net income from consolidated operations
Diluted earnings per common share
Weighted average number of diluted common shares outstanding
Consolidated balance sheet data
Working capital
Total assets
Current installments of long-term debt
Long-term debt, excluding current installments
Total liabilities
Total stockholders’ equity
MARKET PRICE
$
$
$
$
$
$
$
$
$
$
$
190,455
$ 147,843
$
146,132
$ 138,850
$ 139,307
48,308
$ 35,487
$ 34,650
$ 37,454
$ 36,880
19,612
14,311
1.93
7,430
$
$
$
11,693
9,210
1.26
7,337
$
$
$
12,237
7,970
1.10
7,275
$
$
$
11,714
7,593
1.05
7,206
$
$
$
11,561
7,559
1.05
7,175
As of December 31
(in thousands)
2018
2017
2016
2015
2014
34,968
$
65,131
$ 60,291
$ 52,620
$ 55,658
189,598
$ 138,207
$
127,934
$ 119,635
$ 112,548
2,857
22,286
49,141
140,457
$
$
$
$
-
-
14,495
$
$
$
856
-
$
$
1,011
859
14,881
$
16,063
$
$
$
993
1,873
17,556
123,712
$
113,053
$ 103,572
$ 94,992
The Company was formed on July 9, 1963. 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, 2017, to December 31, 2018:
Fiscal Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 26.30
28.48
29.00
31.50
High
$ 31.30
34.00
37.25
39.98
Low
$ 22.95
24.05
25.88
26.00
Low
$ 26.05
29.00
30.58
28.25
NUMBER OF STOCKHOLDERS
As of March 5, 2019, there were 63 holders of record of the Company’s common stock.
Since 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.
8
DIVIDENDS
The Company did not pay any dividends in 2018 or 2017. 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 years ended December 31,
2018, 2017 and 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, 2018, 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
The Company is an innovative designer and custom manufacturer of components, subassemblies, products and packaging utilizing
highly specialized foams, films and plastics primarily for the medical market. The Company manufactures its products by converting
raw materials using laminating, molding, radio frequency and impulse welding and fabricating manufacturing techniques. The
Company is diversified by also providing highly engineered products and components to customers in the aerospace and defense,
automotive, consumer, electronics and industrial markets. The Company consists of a single operating and reportable segment.
As previously disclosed, on February 1, 2018, the Company acquired Dielectrics, Inc., pursuant to a stock purchase agreement and
related agreements for an aggregate purchase price of $77 million net of Dielectrics’ cash.
Sales for the Company for the year ended December 31, 2018, grew 28.8% to $190.5 million from $147.8 million for the year ended
December 31, 2017, largely due to sales of approximately $36.2 million from Dielectrics. Dielectrics contributed significantly to
earnings. The Company absorbed $1.1 million in transaction costs during the year ended December 31, 2018, approximately $760,000
in losses associated with the closure of its manufacturing plant in Georgia and an increase of approximately $700,000 in health care
costs. Despite these costs, for the year ended December 31, 2018, the Company generated increases of 67.7% and 52.6% in operating
income and net income, respectively.
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
Acquisition costs
Restructuring costs
Material overcharge settlement
Operating income
Total other expense (income)
Income before taxes
Income tax expense
Net income from consolidated operations
2018
2017
2016
100.0%
100.0%
100.0%
74.6%
25.4%
14.6%
0.6%
0.0%
-0.1%
10.3%
0.7%
9.6%
2.1%
7.5%
76.0%
24.0%
16.1%
0.0%
0.0%
-0.1%
8.0%
-0.1%
8.1%
1.9%
6.2%
76.3%
23.7%
16.5%
0.0%
0.3%
-1.4%
8.3%
-0.1%
8.4%
2.9%
5.5%
9
2018 COMPARED TO 2017
Sales
Net sales increased 28.8% to $190.5 million for the year ended December 31, 2018, from net sales of $147.8 million in 2017. The
increase in sales was primarily due to Dielectric’s sales of approximately $36.2 million which were all in the medical market. On
a market basis, sales to customers in the medical, aerospace and defense and consumer markets grew 57.3%, 14.0% and 17.2%,
respectively, while sales to customers in the automotive market declined 13.4%. The increase in sales to customers in the medical
market was primarily due to sales by Dielectrics as well as a 5.8% increase in demand from the Company’s legacy medical customers.
The increase in sales to customers in the aerospace and defense market was largely due to a general uptick in government contract-
based orders. The increase in sales to customers in the consumer market was primarily due to sales of molded fiber protective
packaging to a new customer. The decline in sales to customers in the automotive market was primarily due to the phase-out of the
automotive door panel program for Mercedes-Benz.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) increased to 25.4% for the year ended December 31, 2018, from 24.0% in 2017.
As a percentage of sales, material and direct labor costs collectively decreased approximately 0.6%, while overhead decreased
approximately 0.8%. The decrease in material and direct labor costs as a percentage of sales was primarily due to increased
manufacturing efficiencies resulting from continuous improvement initiatives as well as strategic price increases. The decrease in
overhead was primarily due to the increase in sales on fixed overhead costs partially offset by the impact on overhead of rising health
care costs.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses (“SG&A”) increased approximately 16.4% to $27.8 million for the year ended December
31, 2018, from $23.8 million in 2017. As a percentage of sales, SG&A decreased to 14.6% in 2018 from 16.1% in 2017. The increase
in SG&A for the year ended December 31, 2018 is due to approximately $2.6 million in SG&A expenses from Dielectrics as well as
higher health care costs. The decrease in SG&A as a percentage of sales is primarily due to lower SG&A as a percentage of sales at
Dielectrics as well as specific initiatives to reduce costs.
Acquisition Costs
The Company incurred approximately $1.1 million in costs associated with the Dielectrics acquisition which were charged to expense
for the year ended December 31, 2018. These costs were primarily for investment banking and legal fees and are reflected on the face
of the income statement.
Material Overcharge Settlement
The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that was
settled during 2016. 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. For each of
the years ended December 31, 2018 and 2017, the Company recorded gains of approximately $0.1 million. The settlement amounts are
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 expense of approximately $1.3 million and net interest income of approximately $0.2 million for the years
ended December 31, 2018 and 2017, respectively. The increase in net interest expense is primarily due to interest paid on the debt incurred
to finance the Dielectrics acquisition.
Income Taxes
The Company recorded income tax expense, as a percentage of income before income tax expense, of 22.2% for the year ended
December 31, 2018, compared to 22.3% for the same period in 2017.
2017 COMPARED TO 2016
Sales
Net sales increased 1.2% to $147.8 million for the year ended December 31, 2017, from net sales of $146.1 million in 2016, primarily
due to increases in sales to customers in the medical, aerospace and defense and consumer markets of approximately 8.1%, 5.2%
and 4.4%, respectively, partially offset by decreases in sales to customers in the automotive and industrial markets of approximately
15.1% and 7.4%, respectively. The increase in sales to customers in the medical market was largely due to general growth in demand
for products of our medical customers. The increase in sales to customers in the aerospace and defense market was largely due to
increased government spending on defense. 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 decrease in sales to customers in the automotive market
was largely due to the phase-out of the Company’s automotive door panel program for Mercedes-Benz, which began in 2004, as
well as reductions in demand on certain legacy programs.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) increased to 24.0% for the year ended December 31, 2017, from 23.7% in
2016. As a percentage of sales, material and direct labor costs collectively decreased approximately 1.2%, while overhead increased
approximately 1.0%. The decrease in material and direct labor costs was primarily due to manufacturing efficiencies realized as a
result of initiatives which began in the second half of 2017. The increase in overhead was primarily due to higher indirect labor and
benefits associated with hires made in the second half of 2017.
10
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses (“SG&A”) decreased 1.1% to $23.8 million for the year ended December 31, 2017, from
$24.1 million in 2016. As a percentage of sales, SG&A decreased to 16.1% in 2017 from 16.5% in 2016. The decrease in SG&A for the
year ended December 31, 2017, is primarily due to general cost containment efforts.
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 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 certain operations
in its Georgetown, Massachusetts facility to Newburyport. The Haverhill and Byfield relocations were complete at December 31, 2015,
and the partial Georgetown relocation was complete at June 30, 2017.
The Company incurred approximately $2.1 million in one-time expenses in connection with the Massachusetts consolidations.
Included in this amount is approximately $180,000 relating to employee severance payments and relocation costs, approximately
$1.6 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 recorded the following restructuring costs associated with the Massachusetts consolidations discussed above for the
years ended December 31, 2017 and 2016 (in thousands):
Restructuring Costs
Relocation
Total restructuring costs
2017
63
63
$
$
2016
420
420
$
$
The 2017 and 2016 costs were reclassified in the Consolidated Statement of Income as “Restructuring Costs” from Cost of Sales.
Material Overcharge Settlement
The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that was
settled during the second quarter of 2016. 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. For the years ended December 31, 2017 and 2016, the Company recorded gains of approximately $0.1 million and $2.1
million, respectively. The settlement amounts are 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 $166,000 for the year ended December 31, 2017, compared to net interest income
of approximately $80,000 for the year ended December 31, 2016. 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 22.3% for the year ended
December 31, 2017, compared to 35.3% for the same period in 2016. The decrease in the effective tax rate was primarily due to a tax
benefit of approximately $173,000 recorded as a result of the adoption of ASU No. 2016-09 on January 1, 2017, and a deferred tax
benefit of approximately $1.5 million recorded as a result of a change in the statutory federal tax rate for 2018 and beyond.
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, 2018, was approximately $21.3 million and was primarily a result
of net income generated of approximately $14.3 million, depreciation and amortization of approximately $7.8 million, share-based
compensation of approximately $1.2 million, an increase in deferred taxes of approximately $1.9 million and an increase in accounts
payable and accrued expenses of approximately $2.6 million due to the timing of vendor payments in the ordinary course of business.
These cash inflows and adjustments to income were partially offset by an increase in accounts receivable of approximately $2.6
million primarily due to increased sales in the last two months of the fourth quarter of 2018 over the same period of 2017, an increase
in inventory of approximately $2.3 million primarily due to the building of inventory to support the higher sales, an increase in prepaid
expenses and other assets of approximately $0.3 million and an increase in refundable income taxes of approximately $1.3 million.
11
Net cash used in investing activities during the year ended December 31, 2018 was approximately $82.3 million and was primarily the
result of the acquisition of Dielectrics and additions of manufacturing machinery and equipment and various building improvements
across the Company.
Net cash provided by financing activities was approximately $26.3 million for the year ended December 31, 2018, representing
borrowings under our credit facility to fund the Dielectrics acquisition of $56.0 million and net proceeds received upon stock options
exercises of approximately $1.3 million, partially offset by repayments on our credit facility and term loan of approximately $30.9 million,
and payments of statutory withholding for stock options exercised and restricted stock units vested of approximately $0.1 million.
Outstanding and Available Debt
On December 2, 2013, the Company entered into an unsecured $40 million revolving credit facility with Bank of America, N.A.
The credit facility called for interest of LIBOR plus a margin that ranged from 1.0% to 1.5% or, at the discretion of the Company, the
bank’s prime rate less a margin that ranged from 0.25% to zero. In both cases the applicable margin was dependent upon Company
performance. Under the credit facility, the Company was 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 was to mature on November 30, 2018.
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement
(the “Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of
America, N.A. in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from
time to time party thereto. The Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement.
The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”) consist of a
$20 million unsecured term loan to the Company and an unsecured revolving credit facility, under which the Company may borrow
up to $50 million. The Amended and Restated Credit Facilities mature on February 1, 2023. The proceeds of the Amended and
Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of Dielectrics, as well as
certain other permitted acquisitions. The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed
by the Subsidiary Guarantors.
The Amended and Restated Credit Facilities call 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 .25% to zero. In both cases the applicable margin is dependent
upon Company performance. Under the Amended and Restated Credit Agreement, 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 Amended and
Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain
payments, permitted indebtedness and permitted investments.
Included in the Amended and Restated Credit Facilities is approximately $0.6 million in standby letters of credit as a financial
guarantee on worker’s compensation insurance policies. As of December 31, 2018, the Company was in compliance with all covenants
under the credit facility.
Long-term debt consists of the following (in thousands):
Revolving credit facility
Term loan
Total long-term debt
Current portion
Long-term debt, excluding current position
December 31, 2018
$ 8,000
17,143
25,143
(2,857)
$ 22,286
Future Liquidity
The Company requires cash to pay its operating expenses, purchase capital equipment and service its contractual obligations. The
Company’s principal sources of funds are its operations and its amended and restated credit facility. The Company generated cash of
approximately $21.3 million in operations during the year ended December 31, 2018; 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 2019, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants.
The Company may consider additional acquisitions of companies, technologies or products that are complementary to its business. The
Company believes that its existing resources, including its revolving credit facility together with cash expected to be generated from
operations and funds expected to be available to it through any necessary equipment financings and additional bank borrowings, will
be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next 12 months.
The Company may also require additional capital in the future to fund capital expenditures, acquisitions or other investments. These
capital requirements could be substantial. The Company anticipates that any future expansion of its business will be financed through
existing resources, cash flow from operations, the Company’s revolving credit facility or other new financing. The Company cannot
guarantee that it will be able to meet existing financial covenants or obtain other new financing on favorable terms, if at all. The Company’s
liquidity will be impacted to the extent additional stock repurchases are made under the Company’s stock repurchase program.
12
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 years ended December 31, 2018, 2017 and 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, 2018, approximately $9.4 million was available
for future repurchases of the Company’s common stock under this authorization.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company’s contractual obligations at December 31, 2018:
Payment Due By Period (in thousands) (1)
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Term loan (2) $ 18,910
$ 3,453
$ 6,589
$ 8,868
$
Revolving credit facility (3)
Operating leases (4)
9,151
4,195
Supplemental retirement (5)
25
258
1,051
25
564
2,133
-
8,329
1,011
-
-
-
-
-
Total
$ 32,281
$ 4,787
$ 9,286
$ 18,208
$ -
(1)
The amounts set forth in the “Less than 1 Year” column represent amounts to be paid in 2019, the “1-3 Years” column represents amounts to be paid in 2020
and 2021, the “3-5 Years” column represent amounts to be paid in 2022 and 2023 and the “More than 5 Years” column represents amounts to be paid after
2023.
(2) Represents scheduled payments of principal and interest on the term loan, including the interest effects of the related interest rate swap agreement. See Note
8 to the accompanying Consolidated Financial Statements.
(3) Represents scheduled payments of principal and interest on the revolving credit facility. See Note 8 to the accompanying Consolidated Financial Statements.
(4) Represents scheduled payments for non-cancelable building lease commitments. See Note 15 to the accompanying Consolidated Financial Statements.
(5) Represents scheduled payments for supplemental benefits. See Note 14 to the accompanying Consolidated Financial Statements.
The Company requires cash to pay its operating expenses, purchase capital equipment and 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, 2018, 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, 2018, there was approximately $600,000 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, 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
13
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 when a customer obtains control of a promised good or service.
The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange
for promised goods or services. The Company recognizes revenue in accordance with the core principles of Accounting
Standards Codification (“ASC”) 606, which include (1) identifying the contract with a customer, (2) identifying separate
performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to
the performance obligations and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its
product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon
customer acceptance, with the exception of certain tooling where control does not transfer to the customer, which results
in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool.
The Company recognizes revenue from engineering services as the services are performed. Although only applicable
to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price.
The Company has elected to account for shipping and handling activities for which the Company is responsible under
the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are
required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.
• 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. In testing goodwill for impairment at December 31, 2018, the Company
primarily 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 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 in size and market capitalization to each other and to
the Company.
As of December 31, 2018, based on our calculations under the above-noted approach, the fair value of the reporting
unit significantly exceeded the carrying value of the reporting unit. 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.
• 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, 2018.
•
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, 2018.
14
• 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, 2018, 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. 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
.25% to zero. Therefore, future operations could be affected by interest rate changes. As of December 31, 2018, the applicable interest rate was
approximately 3.52%. The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest
rates. In connection with this credit facility, the Company entered into a $20 million, 5-year interest rate swap agreement under which the
Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap modifies
the Company’s interest rate exposure by converting the term loan from a variable rate to a fixed rate in order to hedge against the possibility
of rising interest rates during the term of the loan.
15
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
UFP Technologies, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of UFP Technologies, Inc. (a Delaware
corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2018, and the related notes and financial statement schedule under Item 15(a) (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December
31, 2018, 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 15, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Boston, Massachusetts
March 15, 2019
16
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
UFP Technologies, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of UFP Technologies, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, 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)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our
report dated March 15, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
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 (“Management’s Report”). Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over
financial reporting of Dielectrics Inc., a wholly-owned subsidiary, whose financial statements reflect total assets and revenues
constituting 43.3% and 19.0%, respectively, of the related consolidated financial statement amounts as of and for the year
ended December 31, 2018. As indicated in Management’s Report, Dielectrics Inc. was acquired during 2018. Management’s
assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over
financial reporting of Dielectrics Inc.
Definition and limitations of internal control over financial reporting
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.
GRANT THORNTON LLP
Boston, Massachusetts
March 15, 2019
17
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
DECEMBER 31
2018
2017
Cash and cash equivalents
$ 3,238
$ 37,978
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
Non-qualified deferred compensation plan
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
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 15)
Stockholders’ equity:
28,321
19,576
2,206
2,285
55,626
111,779
(54,112)
57,667
51,838
22,232
2,034
201
21,381
12,863
1,835
1,017
75,074
106,716
(53,064)
53,652
7,322
—
2,015
144
$ 189,598
$ 138,207
$ 6,836
$ 4,180
8,458
2,507
2,857
20,658
22,286
4,129
2,044
24
49,141
5,466
297
—
9,943
—
2,440
2,030
82
14,495
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized;
7,415,002 and 7,385,443 shares issued and outstanding, respectively
at December 31, 2018; 7,309,909 and 7,280,350 shares issued
and outstanding, respectively at December 31, 2017
Additional paid-in capital
Retained earnings
Treasury stock at cost, 29,559 shares at both
December 31, 2018 and 2017
Total stockholders’ equity
—
—
74
29,168
111,802
(587)
140,457
73
26,664
97,562
(587)
123,712
Total liabilities and stockholders’ equity
$ 189,598
$ 138,207
The accompanying notes are an integral part of these consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31
2018
2017
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Acquisition costs
Restructuring costs
Material overcharge settlement
(Gain) Loss on sales of property, plant and equipment
Operating Income
Interest income
Interest expense
Other income
Income before income tax provision
Income tax expense
Net income
Net income per common share outstanding:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$ 190,455
142,147
48,308
27,758
1,089
—
(104)
(47)
19,612
47
(1,320)
64
18,403
4,092
$ 14,311
$ 1.95
$ 1.93
7,347
7,430
$ 147,843
112,356
35,487
23,845
—
63
(121)
7
11,693
216
(50)
—
11,859
2,649
$ 9,210
$ 1.27
$ 1.26
7,248
7,337
The accompanying notes are an integral part of these consolidated financial statements.
2016
$ 146,132
111,482
34,650
24,105
—
420
(2,114)
2
12,237
149
(69)
—
12,317
4,347
$ 7,970
$ 1.11
$ 1.10
7,190
7,275
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
Years Ended December 31, 2018, 2017 and 2016
Common Stock
Additional
Paid-in
Retained
Treasury Stock
Total
Stockholders’
Shares
Amount
Capital
Earnings
Shares Amount
Equity
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
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
Net income
32
47
(11)
—
1
1
(1)
—
1,067
676
(295)
—
—
—
—
9,210
—
—
—
—
—
—
—
—
1,068
677
(296)
9,210
Balance at December 31, 2017
7,280
$ 73
$ 26,664
$ 97,562
30
$ (587)
$ 123,712
Share-based compensation
31
—
1,212
Exercise of stock options net
of shares presented for exercise
79
1
1,269
Net share settlement of restricted stock
units and stock option tax withholding
(5)
—
(144)
Excess tax benefits on share-based
compensation - adjustment
ASC 606 adjustments
Net income
—
—
—
—
—
—
167
—
—
—
—
—
—
(71)
14,311
—
—
—
—
—
—
—
—
—
—
—
—
1,212
1,270
(144)
167
(71)
14,311
Balance at December 31, 2018
7,385
$ 74
$ 29,168
$ 111,802
30
$ (587)
$ 140,457
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
$ 14,311
$ 9,210
$ 7,970
Years Ended December 31
2018
2017
2016
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
(Gain) 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
Other assets
Accounts payable
Accrued expenses
Deferred revenue
7,831
(47)
1,212
1,881
—
(2,556)
(2,295)
(249)
(1,268)
(76)
1,113
1,472
35
Non-qualified deferred compensation plan and other liabilities
(44)
5,635
7
1,068
(1,019)
—
(132)
1,288
446
(210)
(228)
93
974
91
246
5,634
2
1,056
576
(145)
(3,768)
51
(1,351)
209
(97)
(683)
(567)
206
213
Net cash provided by operating activities
21,320
17,469
9,306
Cash flows from investing activities:
Additions to property, plant and equipment
Acquisition of Dielectrics, net cash acquired
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from advances on revolving line of credit
Payments on revolving line of credit
Proceeds from the issuance of long-term debt
Principal repayment of long-term debt
Proceeds from the exercise of stock options, net of shares
presented for exercise
Payment of statutory withholding for stock options exercised
and restricted stock units vested
Excess tax benefits on share-based compensation
(5,428)
(76,978)
77
(82,329)
36,000
(28,000)
20,000
(2,857)
1,270
(144)
—
Net cash provided by (used in) financing activities
26,269
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
(34,740)
37,978
Cash and cash equivalents at end of year
$ 3,238
$ 37,978
The accompanying notes are an integral part of these consolidated financial statements.
(10,382)
(7,206)
—
7
—
14
(10,375)
(7,192)
—
—
—
(856)
677
(296)
—
(475)
6,619
31,359
—
—
—
(1,014)
529
(219)
145
(559)
1,555
29,804
$ 31,359
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, aerospace and defense, consumer, electronics and industrial
markets. The Company was incorporated in the State of Delaware in 1993.
(a) Principles of Consolidation
The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc., its wholly
owned subsidiaries, Moulded Fibre Technology, Inc., Simco Industries, Inc., Dielectrics, 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, 2018, the Company did not have any cash equivalents and at December 31, 2017, 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 amounts contained within the
Company’s main operating accounts at Bank of America and TD Bank at December 31, 2018, exceed the federal depository
insurance limit by approximately $3.8 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, 2018.
(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, 2018.
(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. No events or changes in circumstances arose during the year ended December 31,
2018, which required management to perform an impairment analysis.
(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. In testing goodwill for impairment at December 31, 2018, the
Company primarily 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 in size and market capitalization to each other and to the Company.
As of December 31, 2018, based on our calculations under the above-noted approach, the fair value of the reporting unit
significantly exceeded the carrying value of the reporting unit. 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 net carrying amounts of goodwill for the years ended December 31, 2018 and 2017 are as follows (in thousands):
December 31, 2017
Acquired in Dielectrics business combination (See Note 22)
December 31, 2018
Approximately $47.9 million of goodwill is deductible for tax purposes.
Goodwill
$ 7,322
44,516
$ 51,838
(j)
Intangible Assets
Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from 5 to 20
years. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that their
carrying values may not be recoverable. No events or changes in circumstances arose during the year ended December 31,
2018, which required management to perform an impairment analysis.
(k) Revenue Recognition
Beginning in 2018, the Company recognizes revenue when a customer obtains control of a promised good or service.
The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for
promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606
23
which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the
contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and
(5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The
Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the
exception of certain tooling where control does not transfer to the customer, which results in revenue being recognized
over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes
revenue from engineering services as the services are performed. Although only applicable to an insignificant number
of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to
account for shipping and handling activities for which the Company is responsible under the terms and conditions of the
sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s
promise to transfer the good and are expensed when revenue is recognized.
For the years 2017 and 2016, prior to ASC 606, the Company recognized 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). Forfeitures are expensed as they occur.
The Company issues share-based awards through several plans that are described in detail in Note 12. The compensation cost
charged against income for those plans is included in selling, general and administrative expenses as follows (in thousands):
Share-based compensation expense
$ 1,212
$ 1,068
Year Ended December 31
2018
2017
2016
$ 1,056
The compensation expense for stock options granted during the three-year period ended December 31, 2018, 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
2018
27.7%
None
2.7%
Year Ended December 31
2017
27.4% to 29.1%
None
1.56% to 1.84%
$31.20
$27.05-$28.70
6.0 years
2.7 to 5.8 years
Weighted-average grant-date fair value
$ 10.15
$ 5.59 to $ 8.51
2016
29.7%
None
0.9%
$22.02
5.0 years
$ 6.11
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 $544,000, $525,000 and $318,000 for the years ended December 31, 2018, 2017 and
2016, 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.
24
(o) 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 or benefit results from the net change during the year in
deferred tax assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance. Should the Company determine that it would not be
able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged
to income in the period such determination was made.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the consolidated financial statements from such positions are then measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties
accrued related to unrecognized tax benefits in tax expense.
(p) Segments and Related Information
The Company follows the provisions of Accounting Standards Codification (ASC) 280, Segment Reporting, which establish
standards for the way public business enterprises report information and operating segments in annual financial statements
(see Note 18).
(q) 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 years ended December 31, 2018 and 2017.
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 was subsequently updated (“Accounting Standards Codification (ASC) 606”). The Company
adopted ASC 606 on January 1, 2018. See Note 2 for further details.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842),” and issued subsequent amendments to the initial guidance
in January 2018 within ASU No. 2018-01 and in July 2018 within ASU Nos. 2018-10 and 2018-11. The standard requires lessees to
recognize leases on the balance sheet as a right-of-use (“ROU”) asset and a lease liability, other than leases that meet the definition
of a short-term lease. The liability will be equal to the present value of the lease payments. The asset will be based on the liability,
subject to adjustment. Currently, under existing U.S. generally accepted accounting principles, the Company does not recognize
on the balance sheet a right-of-use asset or lease liability related to its operating leases. For income statement purposes, the leases
will continue to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current
operating leases), and finance leases will result in a front-loaded expense pattern (similar to current capital leases). The standard is
effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
The standard allows an entity to elect to have a date of initial application as of the beginning of the period of adoption. The standard
provides for the option to elect a package of practical expedients upon adoption.
The Company adopted ASC 842 as of January 1, 2019, using a modified retrospective approach and applying the standard’s
transition provisions at January 1, 2019, the effective date. The Company elected the package of practical expedients permitted
under the transition guidance, which among other things, allows us to carry forward the historical lease classification. In addition,
the Company elected to combine the lease and non-lease components into a single lease component for its leases and is making an
accounting policy election to exclude from balance sheet reporting those leases with initial terms of 12 months or less. The Company
estimates that adoption of the standard will result in recognition of operating lease ROU assets and lease liabilities of approximately
$4.0 million and $4.1 million, respectively, with the difference due to deferred rent that will be reclassified to the ROU asset value. We
do not expect adoption of the standard to materially affect our results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (ASC 350), Simplifying the Test for Goodwill
Impairment. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of
individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option
to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance will be applied
prospectively and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017. The Company does not believe
adoption will have a material impact on its financial condition or results of operations.
Revisions
Certain revisions have been made to the December 31, 2017 Condensed Consolidated Balance Sheet to conform to the current year
presentation relating to a reclassification of deferred revenue. The reclassification resulted in an increase in deferred revenue and
25
a decrease in accrued expenses in the amount of approximately $297,000. In addition, certain revisions have been made to the
Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016, also due to a reclassification
of deferred revenue. The reclassification resulted in an increase to the change in deferred revenue and a decrease in the change
in accrued expenses in the amount of approximately $91,000 and $206,000 for the years ended December 31, 2017 and 2016,
respectively. These revisions had no impact on previously reported net income and are deemed immaterial to the previously issued
financial statements.
(2) Revenue Recognition
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective
transition method. Under this method, the Company applied ASC 606 to contracts under which all performance obligations
were not completed as of January 1, 2018, and recognized the cumulative effect of initially applying the standard as an
adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018,
are presented in accordance with ASC 606. Prior period amounts are not adjusted and are reported in accordance with,
requirements in ASC 605, Revenue Recognition, which is also referred to herein as “legacy GAAP.”
The cumulative effect of the adoption on our condensed consolidated balance sheet, by applying the modified retrospective
method as of January 1, 2018, is as follows (in thousands):
As Reported
December 31,
2017
Cumulative
Adjustments
As Adjusted
January 1,
2018
Assets:
Property, plant and equipment
Accumulated depreciation and amortization
$ 106,716
(53,064)
Net property, plant and equipment
53,652
$ 1,027
(548)
479
$ 107,743
(53,612)
54,131
Liabilities:
Deferred revenue
Deferred income taxes
Stockholders’ Equity:
Retained earnings
297
2,440
574
(25)
871
2,415
97,562
(70)
97,492
The following reflects the Company’s condensed consolidated balance sheet and condensed consolidated statement of
income on an as-reported basis and as if we had continued to recognize revenue under legacy GAAP (in thousands):
Assets:
Property, plant and equipment
Accumulated depreciation and amortization
$
Net property, plant and equipment
Liabilities:
Deferred revenue
Deferred income taxes
Stockholders’ Equity:
Retained earnings
As Reported
111,779
(54,112)
57,667
2,507
4,129
111,802
111,750
December 31, 2018
Balances
without
adoption of
ASC 606
$
110,372
(53,110)
57,262
2,129
4,154
Difference
$
1,407
(1,002)
405
378
(25)
52
Net sales
Cost of sales
Gross profit
26
For the Year Ended December 31, 2018
Balances
without
As Reported
$ 190,455
142,147
48,308
adoption of
ASC 606
$ 190,259
142,073
48,186
Difference
$ 196
74
122
The following summarizes the significant changes under ASC 606 as compared to legacy GAAP:
•
•
Under legacy GAAP, the Company recognized revenue for certain customer tooling at the time the tooling was complete
and accepted by the customer. Under ASC 606, as “control” of this tooling does not transfer to the customer, the related
purchase orders do not qualify as an “accounting contract” and as a result the consideration received is recorded as deferred
revenue and recognized over the estimated time for which parts are produced on each respective tool (approximately two
years). The related costs to produce the tooling are capitalized and depreciated over the estimated useful life of the tool
(approximately two years).
Under legacy GAAP, the Company recognized revenue on certain long-term agreements with variable pricing at the selling
price that was in effect for the current period at the time of shipment. Under ASC 606, the Company will recognize revenue for
these contracts at the weighted average selling price for each part over the term of the agreement for any agreements where
the Company estimates that we will not be able to achieve the corresponding cost changes necessary to maintain a consistent
margin over the term of the agreement. The Company has a small number of long-term agreements with variable pricing.
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue
recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The
Company recognizes revenue in accordance with the core principles of ASC 606, which include (1) identifying the contract with a
customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating
the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial
portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily
upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, which results in
revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company
recognizes revenue from engineering services as the services are performed. Although only applicable to an insignificant number of
transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for
shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance
obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are
expensed when revenue is recognized.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to our customers
(in thousands) (See Note 9 for further information regarding net sales by market):
Net sales of:
Products
Tooling and Machinery
Engineering services
Year Ended December 31
2018
2017
2016
$ 183,186
4,302
2,967
$ 146,275
1,181
387
$ 144,210
1,633
289
Total net sales
$
190,455
$
147,843
$
146,132
Contract balances
The timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue
recognition, the Company has deferred revenue (contract liabilities), included within “deferred revenue” on the condensed
consolidated balance sheets.
The following table presents opening and closing balances of contract liabilities for the year ended December 31, 2018 (in thousands):
Deferred revenue - January 1, 2018
Acquired in Dielectrics business combination
Increases due to consideration received from customers
Revenue recognized
Deferred revenue - December 31, 2018
Contract
Liabilities
$
$
871
2,175
4,188
(4,727)
2,507
Revenue recognized during the year ended December 31, 2018, from amounts included in deferred revenue at the beginning of the
period was approximately $615,000.
When invoicing occurs after revenue recognition, the Company has unbilled receivables (contract assets) included within
“receivables” on the condensed consolidated balance sheet. Unbilled receivables were approximately $65,000 at December 31, 2018,
and were generated as a result of revenue recognized during the year ended December 31, 2018, that had not yet been billed.
27
(3) Supplemental Cash Flow Information
Cash paid for:
Interest
Income taxes, net of refunds
Non-cash investing and financing activities:
Capital additions accrued but not yet paid
Year Ended December 31
2018
2017
(in thousands)
$
$
$
1,303
3,463
218
$
$
$
47
3,878
85
2016
66
3,562
87
$
$
$
During the years ended December 31, 2018, 2017 and 2016, the Company permitted the exercise of stock options with exercise
proceeds paid with the Company’s stock (“cashless” exercises) totaling approximately $0, $172,000 and $166,000, respectively.
(4) Receivables
Receivables consist of the following (in thousands):
Accounts receivable—trade
Less allowance for doubtful receivables
December 31
2018
$ 28,885
(564)
2017
$ 22,033
(652)
Receivables, net
$ 28,321
$ 21,381
Receivables are written off against these reserves in the period they are determined to be uncollectable, 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 (reversal of) provision for doubtful accounts of approximately $(50,000)
and $116,000 for the years ended December 31, 2018 and 2017, respectively.
(5) Inventories
Inventories consist of the following (in thousands):
Raw materials
Work in process
Finished goods
Total Inventory
2018
$ 11,727
2,521
5,328
$ 19,576
December 31
2017
$ 6,898
1,207
4,758
$ 12,863
(6) Other Intangible Assets
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2018, are as follows (in thousands):
Trade Name & Brand
Non-Compete
Customer List
Total
Estimated useful life
Gross amount
Accumulated amortization
Net balance
10 years
367
(33)
334
$
$
5 years
462
(85)
377
$
$
20 years
$
$
22,555
(1,034)
21,521
$
23,384
(1,152)
$
22,232
The weighted-average amortization period for all intangible assets is 19.6 years. Amortization expense related to intangible assets
was approximately $1.2 million, $0.3 million and $0.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. The
estimated remaining amortization expense as of December 31, 2018, is as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$ 1,257
1,257
1,257
1,257
1,172
16,032
$ 22,232
28
(7) Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
Land and improvements
Buildings and improvements
Leasehold improvements
Machinery & Equipment
Furniture, fixtures, computers & software
Construction in progress
2018
$ 3,191
35,187
2,843
62,441
7,119
999
December 31
2017
$ 3,191
28,939
2,553
58,602
6,820
6,611
$ 111,780
$ 106,716
Depreciation and amortization expense of Property, Plant and Equipment for the years ended December 31, 2018, 2017 and 2016,
were approximately $6.6 million, $5.3 million and $5.3 million, respectively.
(8) Indebtedness
On December 2, 2013, the Company entered into an unsecured $40 million revolving credit facility with Bank of
America, N.A. The credit facility called for interest of LIBOR plus a margin that ranged from 1.0% to 1.5% or, at the
discretion of the Company, the bank’s prime rate less a margin that ranged from 0.25% to zero. In both cases the
applicable margin was dependent upon Company performance. Under the credit facility, the Company was 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 was to mature on November 30, 2018.
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and
Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with the Company’s subsidiaries
(the “Subsidiary Guarantors”) and Bank of America, N.A. in its capacity as the initial lender, Administrative
Agent, Swingline Lender and L/C Issuer, and certain other lenders from time to time party thereto. The
Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement.
The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”)
consist of a $20 million unsecured term loan and an unsecured revolving credit facility, under which the Company may
borrow up to $50 million. The Amended and Restated Credit Agreement matures on February 1, 2023. The proceeds
borrowed pursuant to the Amended and Restated Credit Agreement may be used for general corporate purposes, including
funding the acquisition of Dielectrics, Inc. (“Dielectrics”) (See Note 22), as well as certain other permitted acquisitions. The
Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Agreement 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 .25% to zero. In both
cases the applicable margin is dependent upon Company performance. Under the Amended and Restated Credit
Agreement, 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 Amended and Restated Credit Agreement contains other
covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness
and permitted investments. As of December 31, 2018, the applicable interest rate was approximately 3.52%, and
the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
Included in the Amended and Restated Credit Facilities was approximately $0.6 million in standby
letters of credit as a financial guarantee on worker’s compensation insurance policies.
Long-term debt consists of the following (in thousands):
Revolving credit facility
Term loan
Total long-term debt
Current portion
Long-term debt, excluding current portion
December 31,
2018
8,000
17,143
25,143
(2,857)
22,286
$
$
29
Derivative Financial Instruments
The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on
certain of its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other
than cash flow hedging. The Company does not speculate using derivative instruments. By using derivative financial instruments
to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the
failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is
positive, the counterparty owes the Company, creating credit risk for the Company. When the fair value of a derivative contract
is negative, the Company owes the counterparty and, therefore, in these circumstances the Company is not exposed to the
counterparty’s credit risk. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions
with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value
of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is
managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose
the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit
the variability of a portion of its interest payments. To meet this objective, in connection with the Amended and Restated Credit
Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-
month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap modifies the Company’s
interest rate exposure by converting the term loan from a variable rate to a fixed rate in order to hedge against the possibility of
rising interest rates during the term of the loan. The notional amount was $17,142,856 at December 31, 2018. The fair value of the
swap as of December 31, 2018, was approximately $64,000 and is included in other assets. Changes in the fair value of the swap are
recorded in other income/expense and resulted in income of approximately $64,000 during the year ended December 31, 2018.
(9) Accrued Expenses
Accrued expenses consist of the following (in thousands):
Compensation
Benefits/self-insurance reserve
Paid time off
Commissions payable
Other
December 31
2018
$ 3,529
782
1,131
384
2,632
$ 8,458
2017
$ 2,536
334
990
309
1,297
$ 5,466
(10) Income Taxes
The Company’s income tax provision for the years ended December 31, 2018, 2017 and 2016 consists of the following (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Years Ended December 31
2018
$ 1,772
439
2,211
1,917
(36)
1,881
2017
$ 3,117
551
3,668
(1,091)
72
(1,019)
2016
$ 3,120
651
3,771
546
30
576
Total income tax provision
$ 4,092
$ 2,649
$ 4,347
30
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
2018
2017
Deferred tax assets:
Reserves
Inventory capitalization
Compensation programs
Retirement liability
Equity-based compensation
Deferred rent
Intangible assets
State tax credits, net of federal impact
$ 367
421
447
2
290
11
141
257
Total deferred tax assets
$ 1,936
Deferred tax liabilities:
$ 398
228
394
7
158
6
274
—
$ 1,465
Excess of book over tax basis of fixed assets
Goodwill
$ (4,668)
(1,397)
Total deferred tax liabilities
Net long-term deferred tax liabilities
(6,065)
$ (4,129)
$ (3,305)
(600)
(3,905)
$ (2,440)
The amounts recorded as deferred tax assets as of December 31, 2018 and 2017, 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 approximately
$1.9 million at December 31, 2018, 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 Company has approximately $325,000 of tax credit carryforwards related to one state jurisdiction that expire in 2022.
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 21% to income before income tax expense as follows:
Years Ended December 31
2018
2017
2016
Computed “expected” tax rate
21.0%
34.0%
34.0%
Increase (decrease) in income taxes resulting from:
State taxes, net of federal tax benefit
Meals and entertainment
Tax credits
Domestic production deduction
Non-deductible ISO stock option expense
Unrecognized tax benefits
Excess tax benefits on equity awards
Excess compensation
Impact on deferred taxes of new legislation
Other
Effective tax rate
2.8
0.2
(1.9)
—
0.1
—
(1.3)
0.8
—
0.5
3.5
0.3
(0.6)
(2.6)
0.1
—
(1.4)
—
(11.1)
0.1
3.7
0.2
(0.6)
(2.5)
0.3
(0.1)
—
—
—
0.3
22.2%
22.3%
35.3%
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company has not been
audited by any state for income taxes with the exception of returns filed in Michigan, which have been audited through 2004;
income tax returns filed in Massachusetts, which have been audited through 2007; income tax returns filed in Florida which have
been audited through 2009; income tax returns filed in New Jersey, which have been audited through 2012; and income tax
returns in Colorado, which have been audited through 2013. Income tax returns in Colorado are currently being audited for the
years 2014 through 2017. Federal and state tax returns for the years 2015 through 2018 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):
31
Gross UTB balance at beginning of fiscal year
Reductions for tax positions of prior years
Gross UTB balance at end of fiscal year
2018
$ 150
—
$ 150
December 31
2017
$ 150
—
$ 150
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2018
and 2017 is $150,000 and $150,000, respectively.
In addition, the total amount of accrued interest and penalties on uncertain tax positions at December 31, 2018 and 2017 is
$153,000 and $153,000, respectively.
At December 31, 2018, all of the unrecognized tax benefits relate to tax returns of a specific state jurisdiction that are currently
under examination. On January 17, 2019, the Company came to an agreement with the state, and on February 21, 2019, the
Company received a check in the amount of $156,000 as settlement of the unrecognized tax benefits. Therefore, the Company
anticipates a reduction to zero of its gross UTB balance in the first quarter of 2019.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the
“2017 Tax Act”), resulting in significant modifications to existing law. Also on this date, the Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 118 to provide guidance to companies on how to implement the accounting and
disclosure changes in situations when a registrant does not have the necessary information available, prepared or analyzed
(including computations) in reasonable detail to complete the accounting for certain income tax effects of H.R.1, also known
as the 2017 Tax Act. Consistent with SAB 118, the Company provisionally recorded an income tax benefit of $1.5 million related
to the 2017 Tax Act, including remeasurement of its deferred tax assets and liabilities, and executive compensation limitations
under Internal Revenue Code Section 162(m), among others.
As of December 31, 2018, the Company has completed its assessment of the total impact of the 2017 Tax Act, which resulted
in a reduction in our deferred tax assets and liabilities for the change in the domestic tax rate and a reduction of deferred tax
assets related to executive stock-based compensation that would not be realized under the provisions of Internal Revenue Code
Section 162(m). In 2018, we revised our overall reduction in our deferred tax assets by $50,000 to reflect our analysis over stock-
based compensation.
(11) Net Income Per Share
Basic income per share is based upon the weighted average common shares outstanding during each year. Diluted income per
share is based upon the weighted average of common shares and dilutive common stock equivalent shares outstanding during
each year. The weighted average number of shares used to compute both basic and diluted income per share consisted of the
following (in thousands):
Basic weighted average common shares
outstanding during the year
7,347
7,248
Years Ended December 31
2018
2017
2016
7,190
Weighted average common equivalent shares due to
stock options and restricted stock units
83
89
85
Diluted weighted average common
shares outstanding during the year
7,430
7,337
7,275
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, 2018, 2017 and 2016, the number of stock awards excluded from
the computation was 10,344, 27,336 and 52,377, respectively.
(12) Stock Option and Equity Incentive Plans
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense
over the requisite service period (generally the vesting period of the equity grant). The Company issues share-based awards
through several plans that are described below. The compensation cost charged against income for those plans is included in
selling, general & administrative expenses as follows (in thousands):
32
Share-based compensation related to:
2018
2017
Years Ended December 31
Common stock grants
Stock option grants
Restricted Stock Unit awards
Total share-based compensation
$ 505
149
559
$ 1,213
$ 505
138
425
$ 1,068
2016
$ 505
237
314
$ 1,056
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 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, 2018, 1,236,812 shares of common stock have been issued under the 2003 Incentive Plan, none of which
have been restricted. An additional 73,392 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, 2018, 185,000 options have been granted, and 49,375 options are
outstanding. At December 31, 2018, 854,077 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, 2018, 348,490 options have been granted and 106,543 options are outstanding. For the year
ended December 31, 2018, 3,366 shares of common stock were issued and 101,626 shares remained available to be issued under
the Director Plan.
The following is a summary of stock option activity under all plans:
Weighted Average
Remaining
Aggregate
Shares
Exercise Price
Contractual Life
Intrinsic Value
Under Options
(per share)
(in years)
(in thousands)
Weighted Average
Outstanding December 31, 2017
Granted
Exercised
202,739
10,344
(78,680)
$ 18.23
31.20
31.43
Outstanding December 31, 2018
134,403
$ 20.46
Exercisable at December 31, 2018
126,543
$ 19.97
—
—
—
4.50
4.53
—
—
—
$ 1,296
$ 1,286
Vested and expected to vest at
December 31, 2018
134,403
$ 20.46
4.50
$ 1,296
During the years ended December 31, 2018, 2017 and 2016, 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 $1.2 million, $0.6
million and $0.7 million, respectively, and the total amount of consideration received from the exercise of these options was
approximately $1.3 million, $0.8 million and $0.7 million, 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
33
December 31, 2018, no shares were surrendered for this purpose. During the year ended December 31, 2017, 6,511 shares (6,511
for options and zero for taxes) were surrendered at an average market price of $26.45. 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.
On February 21, 2018, 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 12, 2018.
On June 6, 2018, the Company issued 3,366 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.
The Company grants RSUs to its executive officers and employees. 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, 2018:
Restricted Stock Units
Award Date Fair Value
Weighted Average
Outstanding at December 31, 2017
Awarded
Shares vested
Outstanding at December 31, 2018
57,395
30,831
(16,050)
72,176
$ 21.03
29.36
23.55
$ 23.60
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, 2018,
5,238 shares were redeemed for this purpose at an average market price of $27.60. During the years ended December 31, 2017 and
2016, 4,377 and 3,389 shares were redeemed for this purpose at an average market price of $24.50 and $22.82, respectively.
The following summarizes the future share-based compensation expense the Company will record as the equity securities
granted through December 31, 2018, vest (in thousands):
Options
Common Stock
2019
2020
2021
2022
Total
$ 28
28
—
—
$ 56
$ —
—
—
—
Restricted
Stock Units
$ 502
416
250
30
Total
$ 530
444
250
30
$ —
$ 1,198
$ 1,254
Tax benefits totaling approximately $0, $0 and $145,000 were recognized as additional paid-in capital during the years ended
December 31, 2018, 2017 and 2016, respectively, since the Company’s tax deductions exceeded the share-based compensation
charge recognized for stock options exercised and RSUs vested.
(13) Preferred Stock
On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding
share of common stock, par value $0.01 per share on March 20, 2009, to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share (the “Preferred Share”), of the Company, at a price of $25.00 per one one-thousandth
of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The Rights expired on March 19, 2019. On
March 13, 2019, the Company’s Board of Directors voted not to replace the Rights when they expired.
(14) Supplemental Retirement Benefits
The Company provides discretionary supplemental retirement benefits for certain retired officers, which will provide an annual benefit
to these individuals for various terms following separation from employment. The Company recorded an expense of approximately
$2,000, $3,000 and $4,000 for the years ended December 31, 2018, 2017 and 2016, respectively. The present value of the
supplemental retirement obligation has been calculated using a 4.1% discount rate and is included in other liabilities. Total projected
future cash payments for the year ending December 31, 2019, are approximately $25,000, representing the completion of all retirement
arrangements under this arrangement.
34
(15) Commitments and Contingencies
(a) Leases – The Company has operating leases for certain facilities that expire through 2023. 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, 2018, are as follows (in thousands):
Years Ending December 31
Operating Leases
2019
2020
2021
2022
2023
$
1,051
1,070
1,063
975
36
Total minimum lease payments
$
4,195
Rent expense amounted to approximately $1.2 million, $0.9 million and $0.8 million in 2018, 2017 and 2016, respectively.
(b) Legal – From time to time, the Company may be a party to various suits, claims and complaints arising in the ordinary
course of business. In the opinion of management of the Company, these suits, claims and complaints 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.
(16) Employee Benefits Plans
The Company maintains a profit-sharing plan for eligible employees. Contributions to the Plan are made in the form of
matching contributions to employee 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 $1.1 million,
$0.8 million and $0.7 million in 2018, 2017 and 2016, 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 $225,000 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 the liabilities
section in the accompanying balance sheets. At December 31, 2018 and 2017, the balance of the deferred compensation
liability totaled approximately $2.0 million and $2.0 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 classified within
the other assets section of the accompanying balance sheets and are accounted for based on the underlying cash
surrender values of the policies and totaled approximately $2.0 million and $2.0 million as of December 31, 2018 and
2017, respectively.
(17) Fair Value of Financial Instruments
Financial instruments recorded at fair value in the consolidated 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.
35
The following table presents the fair value and hierarchy levels for financial assets that are measured at fair value on a recurring
basis (in thousands):
Level 2
Assets:
December 31, 2018
Derivative financial instruments
$
64
Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing
model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full
term of the swap agreement.
The Company has financial instruments, such as accounts receivable, accounts payable and accrued expenses, that 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 estimated borrowing rate
currently available to the Company.
(18) 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, 2018. 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, Consumer, Automotive, Aerospace and
Defense, Electronics and Industrial markets. Sales by market for the years ended December 31, 2018, 2017 and 2016 are as
follows (in thousands):
Market
2018 Net Sales %
2017 Net Sales %
2016 Net Sales %
Medical
Consumer
Automotive
Aerospace & Defense
Electronics
Industrial
$ 110,282
57.9%
$ 70,087
47.4%
$ 64,733 44.3%
24,989
13.1%
20,012
10.5%
13,133
6.9%
11,453 6.0%
10,586 5.6%
21,328
14.4%
23,118
15.6%
11,521 7.8%
11,960
8.1%
9,829 6.6%
20,721
14.2%
27,255
18.7%
10,951
11,675
10,797
7.5%
8.0%
7.4%
Net Sales
$ 190,455 100.0%
$ 147,843 100.0%
$ 146,132 100.0%
Certain amounts for the year ended December 31, 2017 and 2016 were reclassified between markets to conform to the
current year presentation.
(19) Quarterly Financial Information (unaudited)
Summarized quarterly financial data is as follows (in thousands, except per share data):
2018
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
2017
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
Q1
Q2
Q3
Q4
$ 42,931
10,185
1,777
0.24
0.24
Q1
$ 49,019
$ 47,808
$ 50,697
12,986
3,990
0.54
0.54
Q2
12,431
4,134
0.56
0.56
Q3
12,706
4,410
0.60
0.59
Q4
$ 37,053
$ 37,886
$ 35,684
$ 37,220
9,516
2,171
0.30
0.30
9,941
2,630
0.36
0.36
8,193
1,695
0.23
0.23
7,837
2,714
0.38
0.37
36
(20) 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 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 certain
operations in its Georgetown, Massachusetts facility to Newburyport. The Haverhill and Byfield relocations were complete at
December 31, 2015, and the partial Georgetown relocation was complete at June 30, 2017.
The Company incurred approximately $2.1 million in one-time expenses in connection with the Massachusetts consolidations.
Included in this amount is approximately $180,000 relating to employee severance payments and relocation costs;
approximately $1.6 million is 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 has recorded the following restructuring costs associated with the consolidations discussed above for the years
ended December 31, 2017 and 2016 (in thousands):
Restructuring Costs
Massachusetts
Massachusetts
2017
2016
Relocation
Total restructuring costs
$
$
63
63
$
$
420
420
The above costs were reclassified in the Consolidated Statements of Income as “Restructuring Costs” from Cost of Sales.
(21) Material Overcharge Settlement
The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that
was settled during the second quarter of 2016. 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. During the years ended December 31, 2018, 2017 and 2016, the Company received settlement amounts
of approximately $0.1 million, $0.1 million and $2.1 million, respectively. These settlement amounts are recorded as “Material
overcharge settlement” in the operating income section of the Consolidated Statements of Income.
(22) Acquisition
On February 1, 2018, the Company purchased 100% of the outstanding shares of common stock of Dielectrics, Inc. pursuant
to a stock purchase agreement and related agreements, for an aggregate purchase price of $80 million in cash. The purchase
price was subject to adjustment based upon Dielectrics’ working capital at closing. An additional $250,000 of consideration
was paid by the Company as a result of the final working capital adjustment. A portion of the purchase price is being held in
escrow to indemnify the Company against certain claims, losses and liabilities. The Purchase Agreement contains customary
representations, warranties and covenants customary for transactions of this type.
Founded in 1954 and based in Chicopee, Massachusetts, Dielectrics is a leader in the design, development and manufacture
of medical devices using thermoplastic materials. They primarily use radio frequency and impulse welding to design and
manufacture solutions for the medical industry. The Company has leased the Chicopee location from a realty trust owned by the
selling shareholder and affiliates. The lease is for five years with two five-year renewal options.
37
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and
liabilities assumed based on management’s estimates of fair value (in thousands):
Consideration Paid:
Cash paid at closing
Working capital adjustment
Cash from Dielectrics
Total consideration
Purchase Price Allocation:
Accounts receivable
Inventory
Other current assets
Property, plant and equipment
Customer list
Non-compete
Trade name and brand
Goodwill
$
80,000
250
(3,272)
$
76,978
$
4,384
4,418
122
4,600
22,555
462
367
44,516
Total identifiable assets
$
81,424
Accounts payable
Accrued expenses
Deferred revenue
(1,325)
(946)
(2,175)
Net assets acquired
$
76,978
Acquisition costs associated with the transaction were approximately $1.1 million and were charged to expense in the year ended December
31, 2018. These costs were primarily for investment banking and legal fees and are reflected on the face of the income statement.
The following table contains an unaudited pro forma condensed consolidated statement of operations for the years ended December
31, 2018 and 2017, as if the Dielectrics acquisition had occurred at the beginning of each of the respective periods (in thousands):
Sales
Operating income
Net income
Earnings per share:
Basic
Diluted
Year Ended December 31,
2018
(Unaudited)
$
$
$
$
$
193,510
19,464
14,110
1.92
1.90
2017
(Unaudited)
$
$
$
$
$
180,419
18,990
13,126
1.81
1.79
The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of
operations that would have occurred had the Dielectrics acquisition occurred as presented. In addition, future results may vary
significantly from the results reflected in such pro forma information.
The amount of revenue and net income of Dielectrics recognized since the acquisition date, which is included in the condensed
consolidated statement of income for the year ended December 31, 2018, was approximately $36.2 million and $6.3 million, respectively.
38
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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 and potential advantages in the
different markets in which the Company competes, including the medical, automotive, consumer, electronics, industrial, and aerospace
and defense markets, and the Company’s plan to expand in certain of its markets, statements regarding macroeconomic trends and their
results on our business, statements regarding new customer and vendor contracts; anticipated advantages relating to the Company’s plant
consolidation program and the expected cost savings and efficiencies associated therewith; the closure of the Company’s Georgia plant and
the resulting impact to revenues, anticipated advantages and the timing associated with requalification of parts; anticipated advantages
of maintaining fewer, larger plants; anticipated advantages to improvements and alterations at the Company’s existing plants; expected
improvements to the Company’s cash flow; anticipated advantages the Company expects to realize from its investments and capital
expenditures; expectations regarding the Company’s manufacturing capacity and efficiencies; statements about the Company’s acquisition
opportunities and strategies; statements about the Company’s acquisition of Dielectrics and the integration of the Dielectrics business;
the effect of the acquisition of Dielectrics on the Company’s earnings, and the timing associated therewith; the Company’s 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 the Company’s acquisition and integration of Dielectrics;
risks associated with the effect of the acquisition of Dielectrics on the Company’s earnings; risks associated with plant closures and
consolidations, including the closure of our Georgia plant, and expected efficiencies from consolidating manufacturing; risks associated with
the Company’s entry into and growth in certain markets; risks and uncertainties associated with the seeking and implementing manufacturing
efficiencies; risks associated with the Company’s new long-term customer and vendor contracts; risks associated with the implementation
of new production equipment and requalification or recertification of transferred equipment in a timely, cost-efficient manner; risks 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; 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, 2018. 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.
39
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
ANNUAL MEETING
The annual meeting of stockholders will
PLANT LOCATIONS
California, Colorado, Florida, Iowa,
be held at 10:00 a.m., on June 5, 2019, at
Massachusetts, Michigan, Texas
UFP Technologies, Inc., 100 Hale Street,
Newburyport, MA 01950.
COMMON STOCK LISTING
UFP Technologies’ common stock
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
Grant Thornton LLP
125 High Street, 21st Floor
is traded on Nasdaq under the
Boston, MA 02110
symbol UFPT.
STOCKHOLDER SERVICES
Stockholders whose shares are held in
CORPORATE COUNSELS
Lynch Fink & Labelle LLP
6 Beacon Street, Suite 415
street names often experience delays
Boston, MA 02108
Daniel C. Croteau
Chief Executive Officer
Surgical Specialties Corporation
Cynthia L. Feldmann
Former Partner and
National Chair
Medical Device Industry
Ronald J. Lataille
Sr. Vice President, Treasurer,
and Chief Financial Officer
d
d
o
Christopher P. Litterio, Esq.
o
General Counsel, Secretary
& Sr. Vice President of
Human Resources
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
Marc D. Kozin
Professional Board Member
Thomas Oberdorf
Chairman & CEO
SIRVA, 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
shareholders a tool to understand
Robert W. Pierce, Jr.
our financial results, what we do as a
company, and where we are headed
Chairman, CEO,
and Co-Owner
in the future. We aim to achieve
Pierce Aluminum Co.
these goals with clarity, simplicity
and efficiency. We welcome your
comments and suggestions.
Lucia Luce Quinn
Chief People Officer
WuXi NextCode
FORM 10-K REPORT
A copy of the Annual Report
on Form 10-K for the fiscal
year ended December 31, 2018,
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
COMPANY WEBSITE
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
Mitchell C. Rock
Sr. Vice President
Sales and Marketing
Daniel J. Shaw, Jr.
Vice President
www.ufpt.com/investors/filings.html
Research & Development
W. David Smith
Sr. Vice President
Operations
d Directors
o Officers
40
d
d
d
d
o
o
o
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 the never-ending process of continuously improving our
quality of products, service, communications, relationships and commitments.
SIMPLIFICATION
We seek to simplify our business process through the constant reexamination
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
978 352 2200 | ufpt.com