BRINGING THE
FUTURE INTO
FOCUS
2 0 1 9 A N N U A L R E P O R T
2019
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
We continue to shift our business
toward higher-margin, longer-run
opportunities, particularly in the
medical market.
DEAR FELLOW SHAREHOLDER,
As I write this letter, we are in a fast-changing and
unprecedented environment due to the coronavirus
outbreak. We are working hard to keep our employees
and communities safe, and to ensure the continuity of
supply to our customers.
We do important work that feeds our healthcare
system with products and components that impact
patient safety, comfort and well-being – and most
crucially the outcome of their hospital stays and
procedures. From preventing infections, to providing
patient surfaces such as hospital bed mattresses, to
producing home rehabilitation products that help
patients advance their healing outside of the hospital,
we view it as our duty to apply all our capabilities to
help mitigate this crisis. In order to continue this vital
work, keeping our factories clean and safe for our
employees is absolutely essential.
It is hard to know the overall impact COVID-19 will
have on our business. In some cases, customers
are asking us to double our output to keep up with
increased demand. But I also know that some of our
solutions are used in elective medical procedures that
will likely be delayed until the pandemic has passed.
What I can share with you is that, as of this writing,
we are working diligently with our suppliers (almost
all of which are based in the U.S.) to meet the needs
and requests of our customers and communities. We
are here to serve in every way we possibly can, and
determined to do our part to help bring this crisis
under control.
YEAR IN REVIEW AND
FUTURE OUTLOOK
Turning now to our 2019 results, I can report that it
was another record year for UFP Technologies. Our
revenues rose 4% to $198.4 million, while net income
grew 38% to $19.75 million. Why was that bottom line
growth percentage so much greater? The answer lies
in how your Company has evolved – and how this
evolution has clarified our vision for the future.
A CONSTANTLY IMPROVING
BOOK OF BUSINESS
For years, we have been shifting our business toward
higher-margin, longer-run opportunities, particularly
in the medical market. After growing 16.9% in 2019,
medical sales now account for 65% of our total.
That’s because we bring a deep expertise in areas
such as infection prevention, wound care, orthopedics
and minimally invasive surgery. As I’ve said many
times, this is where customer needs and our unique
skills are perfectly aligned. Because innovative
solutions, precision manufacturing and quality are
paramount, our engineering talent, materials expertise
and production systems are highly valued across this
large and growing market. In fact, our customers now
include most of the world’s largest medical device
manufacturers. The margins are strong, and the
programs typically last many years.
2
222
DILUTED EARNINGS PER SHARE
2.63
1.93
1.26
1.05
1.10
2015
2016
2017
2018
2019
At the same time, we’ve been optimizing our
overall book of business, shifting away from lower-
margin, smaller-volume jobs in some of our less
strategic segments. We still see great opportunities
in other areas such as aerospace & defense. And
we will continue to produce valuable solutions
for our automotive, consumer, electronics and
industrial customers, who remain essential to our
overall mix. But in many cases, these programs
don’t require our full arsenal of capabilities. So our
resources, such as engineering talent and capital,
are disproportionately aimed at the faster-growing
medical opportunities.
As a result, we’ve refocused our organizational
structure into two groups. The Medical Technology
group will work to continue building our thriving
medical and biotech business. The Advanced
Components group will focus on creating longer-
term, higher-margin solutions for non-medical
markets. Each group will take an integrated
approach, combining sales, engineering and
operations teams to target new opportunities and
grow existing ones. You can read more about it in
the following pages.
ALSO DRIVING PROFITS:
GREATER OPERATING EFFICIENCY
This has been another major point of emphasis
in recent years. A series of lean manufacturing
initiatives and automation investments have
improved our efficiency and reduced direct labor
costs as a percentage of sales – despite rising wages
in a challenging labor market. As a result, we have
increased gross margins from 24% of sales to 27.2%
in the past two years alone. Long-term contracts
and partnerships with both suppliers and customers
have helped to justify these efficiency investments
and create a win-win environment for all involved.
SETTING UP OUR
NEXT STAGE OF GROWTH
There are some other important ways we’ve been
moving our business forward.
• Adding experienced talent across the Company.
We brought on a new chief operating officer for
our Dielectrics team, who now leads operations
at two of UFP’s most important medical facilities.
And we added key talent to our program
management, engineering, sales and quality
groups. We will continue to strengthen the team
and work to increase employee engagement. This
will help us benefit from everyone’s great ideas,
and ensure that all team members have a clear
understanding of our strategy and how they fit
into it.
• Ramping up product development. We are
focused on growing our product development
business, which brings several key benefits. It
tightens our customer and vendor relationships
as we collaborate on product design. It feeds our
production pipeline and often translates into
3
333
long-term, high-margin manufacturing revenue in
the years ahead. It also increases our knowledge
base and technical capabilities – and allows us to
benefit from significant R&D tax incentives.
• Paying off debt and freeing up capital for
acquisitions. We paid off the balance of the $56
million we borrowed to purchase Dielectrics in
2018, a testament to the quality of the acquisition
and the value created by combining these two
businesses. Now we again have ample borrowing
capacity to finance future acquisitions aimed
at increasing our value to customers with new
capabilities, talent or locations.
• Improving metrics in several key areas. We made
important strides to improve our quality systems,
on-time delivery and critical safety metrics. We’re
building our in-house expertise and utilizing third-
party experts to continue to improve these areas
and provide additional employee training and
support.
• Earning workplace recognition. UFP has
recently been named among “The Best and
Brightest Companies to Work For®” at our two
largest locations in Massachusetts and Michigan.
The measures include communication, work-
life balance, employee education, diversity,
recognition, retention and more. Awards like
this are a testament to our increasing employee
engagement, and help us attract the dedicated
talent we need to continue growing the business.
MARKET-FOCUSED,
CUSTOMER-DRIVEN
While the past few years have brought
unprecedented change and growth, our core values
and strategic vision have not changed. We focus our
resources on the best-fit market opportunities, then
strive to continuously increase the value we bring
to our customers. We do this with creative problem
solving, cutting-edge processing and the kind of
market insights and technical expertise for which
UFP is known. Innovation is simply in our DNA.
Still, our business has evolved in many important
ways, and our vision for the future has become
more focused. We know, better than ever, how to
become even more valuable to our customers and
shareholders, how to build profitable partnerships
that endure, and where to direct our energy and
resources. As we build on the momentum of recent
years, we will pursue the best opportunities before
us with passion and purpose. I believe the pieces are
all in place for continued success, and I thank you
very much for your support.
Sincerely,
R. Jeffrey Bailly
Chairman and CEO
4444
MEDICAL TECHNOLOGY GROUP
Focused on continuing to build our
fast-growing medical and biotech business
SOLID PLATFORM,
POWERFUL ADVANTAGES
Since 2014, our medical business has delivered
a compound annual growth rate of 20.8%.
This is our sweet spot. So we’ve combined
key members of our sales, engineering and
operations groups into a unified Medical
Technology team charged with making these
programs an even larger part of our business.
Our medical portfolio includes a broad range
of critical offerings, from infection prevention
systems and orthopedic implant packaging to
medical device development and advanced
wound care therapy. As solutions continue
to grow more sophisticated, we are ideally
positioned to meet customers’ changing needs
and target new product categories that fit our
skills. Our competitive advantages include:
• An engineering group with the proven ability
to solve customers’ most critical medical
device issues
• Exclusive or semi-exclusive access to a
range of key medical-grade materials
• Multiple FDA-approved plants with extensive
clean room facilities
• Advanced systems to ensure quality
• The ability to design and manufacture
custom equipment, and much more
555
STRONGER TOGETHER
As expected, our 2018 Dielectrics acquisition
has performed very well and quickly become an
essential part of our medical platform. In 2019,
we integrated this business further into UFP
by launching a duplicate manufacturing line in
a UFP medical facility for one of our fastest-
growing Dielectrics programs. This increased
capacity enabled us to meet the rising demand,
transfer know-how from Dielectrics to UFP,
provide a backup manufacturing location for
our customer and free up space for new
programs at our Dielectrics facility.
This is an excellent example of how our
combined medical resources are much more
than the sum of their parts. And it illustrates how
we will continue to tackle more of the high-value,
long-term programs our customers are bringing
to us.
6
6
ADVANCED COMPONENTS GROUP
Focused on creating longer-lasting, higher-margin solutions
This group utilizes our platform of materials
and capabilities to meet the needs of markets
outside of medical, where our skills can add
significant value and lead to long-term profitable
programs. In 2019, non-medical markets
combined for approximately $70 million in
sales. Our new Advanced Components group is
charged with optimizing the success of these
programs – and pursuing new opportunities
where we can add the most value and earn the
highest returns.
For example, we see strong potential in
aerospace & defense, where our materials
expertise, engineering talent and precision
manufacturing provide a strong competitive
edge. The same is true in automotive, where
our precision components help to reduce weight
and noise for many of the world’s leading
brands. By bringing these and other non-medical
segments under one umbrella, we will work to
sharpen our focus on the best-fit opportunities,
improve our efficiency and optimize the
potential of this important part of our business.
7
57
SELECTED FINANCIAL DATA
The following table summarizes the Company’s 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 the Company’s 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, 2019, 2018 and 2017, and the selected balance
sheet data as of December 31, 2019 and 2018, 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, 2016 and 2015, and the selected
balance sheet data at December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements not included in
this Report.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31
(in thousands, except per share data)
Consolidated Statements of Income data
2019
2018
2017
2016
2015
Net sales
Gross profit
Operating income
Net income from consolidated operations
Diluted earnings per common share
Weighted average number of diluted common shares outstanding
$ 198,381
$ 190,455
$ 147,843
$ 146,132
$ 138,850
$ 53,959
$ 48,308
$ 35,487
$ 34,650
$ 37,454
$ 24,708
$
$
19,750
2.63
7,516
$
$
$
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
Consolidated Balance Sheets data
2019
2018
2017
2016
2015
As of December 31
(in thousands)
Working capital
Total assets
Current installments of long-term debt
Long-term debt, excluding current installments
Total liabilities
Total stockholders’ equity
MARKET PRICE
$ 36,942
$ 34,968
$
65,131
$ 60,291
$ 52,620
$ 188,758
$ 189,598
$ 138,207
$ 127,934
$
119,635
$
$
-
-
$
2,857
$ 22,286
$ 26,767
$
49,141
$
161,991
$ 140,457
$
$
$
$
-
-
14,495
$
$
$
856
-
14,881
$
$
$
1,011
859
16,063
123,712
$ 113,053
$ 103,572
The Company’s common stock is listed on the NASDAQ Capital Market under the symbol “UFPT”. 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, 2018 to
December 31, 2019:
Fiscal Year Ended December 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 31.30
34.00
37.25
39.98
High
$ 37.58
42.87
46.42
50.00
Low
$ 26.05
29.00
30.58
28.25
Low
$ 27.80
34.05
38.00
38.22
NUMBER OF STOCKHOLDERS
As of March 5, 2020, there were 78 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 beneficial stockholders represented by these holders of record.
8
DIVIDENDS
The Company did not pay any dividends in 2019 or 2018. The Company presently intends to retain all 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, 2019, 2018 and 2017. During the year ended December 31, 2015, the Company repurchased 29,559 shares of common stock at a
cost of approximately $587 thousand. At December 31, 2019, 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.
Sales for the Company for the year ended December 31, 2019 grew 4.2% to $198.4 million from $190.5 million for the year ended
December 31, 2018 largely due to strong growth in sales to customers in the medical market. Streamlined manufacturing operations
and a better mix of business enabled the Company to improve gross margins to 27.2% for the year ended December 31, 2019, from
25.4% in 2018. Operating income and net income for the year ended December 31, 2019 grew by 26.0% and 38.0%, 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
Operating income
Total other expense (income)
Income before taxes
Income tax expense
Net income from consolidated operations
2019
2018
2017
100.0%
100.0%
100.0%
72.8%
27.2%
14.7%
0.0%
0.0%
12.5%
0.5%
12.0%
2.0%
10.0%
74.6%
25.4%
14.5%
0.6%
0.0%
10.3%
0.7%
9.6%
2.1%
7.5%
76.0%
24.0%
16.0%
0.0%
0.0%
8.0%
-0.1%
8.1%
1.9%
6.2%
2019 COMPARED TO 2018
Sales
Net sales increased 4.2% to $198.4 million for the year ended December 31, 2019 from net sales of $190.5 million in 2018. The increase
in sales was primarily due to increased sales to customers in the medical, and aerospace and defense markets of 16.9%, and 5.0%,
respectively. These increases were partially offset by a collective decline in sales to the consumer, electronics, and industrial markets
of 24.1%. The increase in sales to customers in the medical market was primarily due to strong sales at Dielectrics (including one
9
additional month of sales of $3.1 million) as well as increased demand from legacy UFP medical customers. The increased demand
for sales to customers in the aerospace & defense market is due to increased government spending. The collective decline in sales to
customers in the consumer, electronics and industrial markets was primarily due to decreased demand for molded fiber packaging.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) increased to 27.2% for the year ended December 31, 2019, from 25.4% in 2018.
As a percentage of sales, material and direct labor costs collectively decreased approximately 0.5%, while overhead decreased
approximately 1.3%. The decrease in collective material and labor costs as a percentage of sales is primarily due to gains in
manufacturing efficiencies resulting from continuous improvement initiatives and an improvement in the overall book of business.
The decline in overhead as a percentage of sales was primarily due to leveraging fixed overhead costs against increased sales as well
as targeted cost cuts.
Selling, General and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) increased approximately 5.8% to $29.3 million for the year ended December
31, 2019, from $27.7 million in 2018. As a percentage of sales, SG&A increased to 14.7% in 2019, from 14.5% in 2018. The increase
in SG&A is primarily due to one extra month of operations at Dielectrics as well as compensation increases and new strategic
management hires at the Company’s plants.
Interest Income and Expense
The Company had net interest expense of approximately $0.7 million and $1.3 million for the years ended December 31, 2019 and
2018, respectively. The decrease in net interest expense was primarily due to lower debt levels.
Income Taxes
The Company recorded income tax expense, as a percentage of income before income tax expense, of 16.5% for the year ended
December 31, 2019 compared to 22.2% for the same period in 2018. The decline in the Company’s effective tax rate for the year
ended December 31, 2019, was largely due to a significant increase in the amount of business tax credits earned in its federal and
state 2018 tax returns due, in part, to qualifying research expenses at Dielectrics.
The Company notes the potential for volatility in its effective tax rate, as any windfall or shortfall tax benefits related to its share-
based compensation plans will be recorded directly into income tax expense.
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 16.6% to $27.7 million for the year ended December
31, 2018, from $23.7 million in 2017. As a percentage of sales, SG&A decreased to 14.5% in 2018 from 16.0% 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.
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.
10
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.
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, 2019 was approximately $31.2 million and was primarily a result
of net income generated of approximately $19.7 million, depreciation and amortization of approximately $8.2 million, share-based
compensation of approximately $1.6 million, an increase in deferred taxes of approximately $0.8 million, a decrease in inventory of
approximately $1.3 million, a decrease in refundable income taxes of approximately $2.0 million, and an increase in other long term
liabilities of approximately $0.3 million due primarily to a change in the fair value of the interest rate swap. These cash inflows and
adjustments to income were partially offset by an increase in accounts receivable of approximately $0.3 million and an increase in
accounts payable and accrued expenses of approximately $2.4 million due to the timing of vendor payments in the ordinary course
of business.
Net cash used in investing activities during the year ended December 31, 2019 was approximately $5.8 million and was primarily the
result of additions of manufacturing machinery and equipment and various building improvements across the Company.
Net cash used for financing activities was approximately $25.0 million for the year ended December 31, 2019, resulting from
repayments on the Company’s credit facility of approximately $25.2 million and payments of statutory withholding for stock options
exercised and restricted stock units vested of approximately $0.5 million, offset by net proceeds received upon stock option
exercises of approximately $0.7 million.
Outstanding and Available Debt
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, as well as 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 0.25% 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, 2019, there were $0.7 million in standby letters of credit outstanding,
drawable as a financial guarantee on worker’s compensation insurance policies. As of December 31, 2019, the applicable interest rate
was approximately 2.8% and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
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
Years Ended December 31
2019
-
-
-
-
-
$
$
2018
8,000
17,143
25,143
(2,857)
22,286
$
$
Derivative Financial Instruments
The Company used 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. Derivative financial instruments expose the Company 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
11
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 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 exposed the Company
to variability in interest payments due to changes in interest rates. The Company believed that it was 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 modified 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 $14,285,712 at December 31, 2019. The fair value of the swap as of December 31, 2019 was
approximately $(325) thousand and is included in other liabilities. Changes in the fair value of the swap are recorded in other income/
expense and resulted in expense of approximately $388 thousand and income of $64 thousand during the years ended December 31,
2019 and 2018, respectively.
During the fourth quarter of 2019, the Company paid the remaining balance of the term loan in its entirety. As a result, there is no
longer underlying debt to hedge against with the swap. The changes in the fair value of the swap will continue to be accounted for as a
financial instrument until the sooner of the time that the Company elects to cancel it or until its maturity.
Future Liquidity
The Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations. The
Company’s principal sources of funds are its operations and its amended and restated credit facility. The Company generated cash of
approximately $31.2 million in operations during the year ended December 31, 2019; 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 2020, 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 additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset
acquisitions, through the next twelve 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.
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, 2019, 2018 and 2017. At December 31, 2019, 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, 2019:
Payment Due By Period (in thousands) (1)
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Operating leases (2)
$
3,284
Total (3)
$ 3,284
$
$
1,173
$
2,075
1,173
$ 2,075
$
$
36
36
$
$
-
-
12
(1)
The amounts set forth in the “Less than 1 Year” column represents amounts to be paid in 2020, the “1-3 Years” column represents amounts to be paid in 2021
and 2022, the “3-5 Years” column represents amounts to be paid in 2023 and 2024 and the “More than 5 Years” column represents amounts to be paid after
2024.
(2) Represents scheduled payments for non-cancelable building lease commitments. See Note 15 to the accompanying Consolidated Financial Statements.
(3)
In addition, the Company incurs various purchase obligations in the ordinary course of business which relate to commitments to purchase materials, supplies,
machinery and tooling.
The Company requires cash to pay its operating expenses, purchase capital equipment, and to service the obligations listed above.
The Company’s principal sources of funds are its operations and its revolving credit facility. Although the Company generated cash
from operations in the year ended December 31, 2019, it cannot guarantee that its operations will generate cash in future periods.
Subject to the Risk Factors set forth in Part I, Item 1A of the Company’s Annual Report on form 10-K for the year ended December 31,
2019 and the general disclaimers set forth in our Special Note Regarding Forward-Looking Statements contained in this Report, the
Company believes that cash flow from operations will provide it with sufficient funds in order to fund its expected operations over
the next twelve months.
The Company does not believe inflation has had a material impact on its results of operations in the last three years.
OFF-BALANCE-SHEET ARRANGEMENTS
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, 2019, there was approximately $0.7 million in standby letters of credit
drawable as a financial guarantee on worker’s compensation insurance policies.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible
assets, income taxes, warranty obligations, restructuring charges, contingencies, and litigation. The Company bases its estimates on
historical experience and on various other assumptions believed to be reasonable under the circumstances, including current and
anticipated worldwide economic conditions, both in general and specifically in relation to the packaging and component product
industries, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in 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 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 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, resulting
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. The Company recognizes
revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the
ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being
immaterial. 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 year 2017, 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.
• 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.
13
The Company consists of a single reporting unit. The Company last performed “step 1” of the goodwill impairment test as of
December 31, 2018. 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 Company’s annual impairment testing date is December 31. The Company performed a qualitative assessment
(“step 0”) as of December 31, 2019 and determined that it was more likely than not that the fair value of its reporting unit
exceeded its carrying amount. As a result, the Company is not required to proceed to a “step 1” impairment assessment.
Factors considered included the 2018 step 1 analysis and the calculated excess fair value over carrying amount, financial
performance, forecasts and trends, market cap, regulatory and environmental issues, macro-economic conditions,
industry and market considerations, raw material costs and management stability.
• Accounts Receivable The Company periodically reviews the collectability of its accounts receivable. Provisions are
recorded for accounts that are potentially 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, 2019.
•
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, 2019.
• 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.
14
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, 2019, 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
0.25% to zero. Therefore, future operations could be affected by interest rate changes. As of December 31, 2019, the applicable interest rate
was approximately 2.8%. 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 modified
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, 2019 and 2018, the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2019, 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, 2019 and 2018, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated
March 13, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method
of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification
(ASC) Topic 842, Leases.
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 13, 2020
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 (a Delaware corporation) and subsidiaries
(the “Company”) as of December 31, 2019, 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, 2019, 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, 2019, and our
report dated March 13, 2020 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.
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 13, 2020
17
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
ASSETS
Current assets:
Cash and cash equivalents
$
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
Operating lease right of use assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Operating lease liabilities
Current installments of long-term debt
Total current liabilities
Long-term debt, excluding current installments
Deferred income taxes
Non-qualified deferred compensation plan
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized;
7,475,768 and 7,446,209 shares issued and outstanding, respectively
at December 31, 2019; 7,415,002 and 7,385,443 shares issued
and outstanding, respectively at December 31, 2018
Additional paid-in capital
Retained earnings
Treasury stock at cost, 29,559 shares at
December 31, 2019 and 2018
Total stockholders’ equity
2019
2018
3,743
28,648
18,276
2,304
279
53,250
116,089
(59,350)
56,739
51,838
20,975
2,775
3,034
147
$
3,238
28,321
19,576
2,206
2,285
55,626
111,779
(54,112)
57,667
51,838
22,232
2,034
-
201
$
188,758
$
189,598
$
4,577
$
6,836
8,483
2,574
674
-
16,308
-
4,921
2,788
2,416
334
8,458
2,507
-
2,857
20,658
22,286
4,129
2,044
-
24
26,767
49,141
—
—
74
30,952
131,552
(587)
161,991
74
29,168
111,802
(587)
140,457
Total liabilities and stockholders’ equity
$
188,758
$
189,598
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
2019
2018
2017
$ 198,381
$ 190,455
$ 147,843
Selling, general and administrative expenses
29,251
Net sales
Cost of sales
Gross profit
Acquisition costs
Restructuring costs
(Gain) Loss on sales of property, plant and equipment
Operating Income
Interest income
Interest expense
Other (expense) income
Income before income tax provision
Income tax expense
Net income
Net income per common share outstanding:
144,422
53,959
—
—
—
24,708
—
(674)
(388)
23,646
3,896
142,147
48,308
27,654
1,089
—
(47)
19,612
47
(1,320)
64
18,403
4,092
112,356
35,487
23,724
—
63
7
11,693
216
(50)
—
11,859
2,649
$ 19,750
$ 14,311
$ 9,210
Basic
Diluted
$ 2.66
$ 2.63
$ 1.95
$ 1.93
$ 1.27
$ 1.26
Weighted average common shares outstanding:
Basic
Diluted
7,424
7,516
7,347
7,430
7,248
7,337
The accompanying notes are an integral part of these consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
Years Ended December 31, 2019, 2018, and 2017
Common Stock
Additional
Paid-in
Total
Retained Treasury Stock Stockholders’
Shares
Amount
Capital
Earnings
Shares
Amount
Equity
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
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
29
45
(13)
—
—
—
—
—
1,591
705
(512)
—
—
—
—
19,750
—
—
—
—
—
—
—
—
1,591
705
(512)
19,750
Balance at December 31, 2019
7,446
$ 74
$ 30,952 $ 131,552
30 $ (587)
$ 161,991
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
$ 19,750
$ 14,311
$ 9,210
Years Ended December 31
2019
2018
2017
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
Changes in operating assets and liabilities:
Receivables, net
Inventories
Prepaid expenses
Refundable income taxes
Other assets
Accounts payable
Accrued expenses
Deferred revenue
Non-qualified deferred compensation plan and other liabilities
8,172
—
1,591
792
(327)
1,300
(98)
2,006
110
(2,472)
25
67
313
7,831
(47)
1,212
1,881
(2,556)
(2,295)
(249)
(1,268)
(76)
1,113
1,472
35
(44)
5,635
7
1,068
(1,019)
(132)
1,288
446
(210)
(228)
93
974
91
246
Net cash provided by operating activities
31,229
21,320
17,469
Cash flows from investing activities:
Additions to property, plant and equipment
Acquisition of Dielectrics, net of 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
(5,778)
—
4
(5,774)
—
(8,000)
—
(17,143)
705
(512)
(5,428)
(76,978)
77
(82,329)
36,000
(28,000)
20,000
(2,857)
1,270
(144)
Net cash (used in)/provided by financing activities
(24,950)
26,269
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
505
3,238
(34,740)
37,978
(10,382)
—
7
(10,375)
—
—
—
(856)
677
(296)
(475)
6,619
31,359
Cash and cash equivalents at end of year
$ 3,743
$ 3,238
$ 37,978
The accompanying notes are an integral part of these consolidated financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
UFP Technologies, Inc. (“the Company”) is an innovative designer and custom converter of foams, plastics, composites and
natural fiber products principally serving the medical, automotive, 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 UFP Realty LLC,
and its wholly-owned subsidiaries, UFP MA LLC, UFP CO LLC, UFP FL LLC, UFP TX LLC, UFP MI LLC, and UFP IA LLC. 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 the fair value
of goodwill, 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, 2019 and 2018, the Company did not have any cash equivalents.
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, 2019, exceed the federal depository
insurance limit by approximately $4.7 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, 2019.
(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, 2019.
(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,
2019 that 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. The Company last performed “step 1” of the goodwill impairment
test as of December 31, 2018. 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 the Company’s actual operating results and/or the key
assumptions utilized in management’s calculations differ from our expectations, it is possible that a future impairment charge
may be necessary.
The Company’s annual impairment testing date is December 31. The Company performed a qualitative assessment (“step
0”) as of December 31, 2019 and determined that it was more likely than not that the fair value of its reporting unit exceeded
its carrying amount. As a result, the Company was not required to proceed to a “step 1” impairment assessment. Factors
considered included the 2018 step 1 analysis and the calculated excess fair value over carrying amount, financial performance,
forecasts and trends, market cap, regulatory and environmental issues, macro-economic conditions, industry and market
considerations, raw material costs and management stability.
Approximately $47.9 million of goodwill is deductible for tax purposes.
(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,
2019 that 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
which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the
23
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, resulting 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. The Company recognizes revenue from bill and hold transactions at
the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company
accepts sales returns from customers for defective goods, such amounts being immaterial. 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 year 2017, 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 & administrative expenses as follows (in
thousands):
Share-based compensation expense
2019
$ 1,591
2018
$ 1,212
2017
$ 1,068
Years Ended December 31
The compensation expense for stock options granted during the three-year period ended December 31, 2019, 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
2019
28.9%
None
2.3%
$38.61
Years Ended December 31
2018
27.7%
None
2.7%
2017
27.4%-29.1%
None
1.56%-1.84%
$31.20
$27.05-$28.70
6.0 years
6.0 years
2.7 to 5.8 years
Weighted-average grant-date fair value
$12.70
$10.15
$5.59-$8.51
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 $653 thousand, $544 thousand and $525 thousand for the years ended December 31,
2019, 2018 and 2017, respectively.
(m) 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
(n) 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.
(o) 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 17).
(p) 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, 2019, 2018 and 2017.
(q) Research and Development
On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as
incurred. Approximately $9.5 million, $10.5 million and $5.0 million were expensed in the years ended December 31, 2019,
2018 and 2017, respectively.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,
“Leases (Accounting Standards Codification (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 Company adopted ASC 842 on January
1, 2019. See Note 13 for further details.
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.
In June 2016, the FASB issued accounting standard that requires companies to utilize an impairment model (current expected
credit loss, or CECL) for most financial assets measured at amortized cost and certain other financial instruments, which include,
but are not limited to, trade and other receivables. This accounting standard will replace the incurred loss model under current
GAAP with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to estimate those losses. Effective January 1, 2020, the Company adopted this standard. The adoption
of this standard is not expected to have a material impact on our Consolidated Financial Statements.
Revisions
Certain revisions have been made to the December 31, 2018 and 2017 Consolidated Statements of Income to conform to the
current year presentation relating to a reclassification of material overcharge settlement to selling, general and administrative
expenses. The reclassification resulted in the removal of the material overcharge settlement line item and a decrease in selling,
general and administrative expenses of $104 thousand and $121 thousand for the years ended December 31, 2018 and 2017,
respectively. These revisions had no impact on previously reported operating or net income and are deemed immaterial to the
previously issued financial statements.
25
(2) Revenue Recognition
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 17 for further information regarding net sales by market):
Net sales of:
Products
Tooling and Machinery
Engineering services
Years Ended December 31
2019
2018
2017
$ 193,016
2,730
2,635
$ 183,186
4,302
2,967
$ 146,275
1,181
387
Total net sales
$
198,381
$
190,455
$
147,843
Contract balances
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, or contract liabilities, included within “deferred revenue” on the condensed
consolidated balance sheet.
The following table presents opening and closing balances of contract liabilities for the years ended December 31, 2019 and 2018
(in thousands):
Deferred revenue - beginning of period
Acquired in Dielectrics business combination
Increases due to consideration received from customers
Revenue recognized
Deferred revenue - end of period
Contract Liabilities
Years Ended December 31
2019
2,507
—
3,216
(3,149)
2,574
$
$
2018
871
2,175
4,188
(4,727)
2,507
$
$
Revenue recognized during the years ended December 31, 2019 and 2018 from amounts included in deferred revenue at the
beginning of the period were approximately $1.7 million and $0.6 million, respectively.
When invoicing occurs after revenue recognition, the Company has unbilled receivables (contract assets) included within
“receivables” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract assets for the years ended December 31, 2019 and 2018
(in thousands):
Unbilled Receivables - beginning of period
Increases due to revenue recognized - not invoiced to customers
Decrease due to customer invoicing
Unbilled Receivables - end of period
Contract Assets
Years Ended December 31
2019
65
831
(824)
72
$
$
2018
—
301
(236)
65
$
$
(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
$
$
$
Years Ended December 31
2019
2018
(in thousands)
664
1,255
$
$
1,303
3,463
213
$
218
2017
47
3,878
85
$
$
$
During the years ended December 31, 2019, 2018 and 2017, the Company permitted the exercise of stock options with exercise
proceeds paid with the Company’s stock (“cashless” exercises) totaling approximately $0, $0 and $172 thousand, respectively.
26
(4) Receivables
Receivables consist of the following (in thousands):
Accounts receivable—trade
Less allowance for doubtful receivables
December 31
2019
$ 29,134
(486)
2018
$ 28,885
(564)
Receivables, net
$ 28,648
$ 28,321
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 net reversal of the provision for doubtful accounts of approximately $52
thousand and $50 thousand the years ended December 31, 2019 and 2018, respectively.
(5) Inventories
Inventories consist of the following (in thousands):
Raw materials
Work in process
Finished goods
Total Inventory
2019
$ 10,540
2,279
5,457
$ 18,276
December 31
2018
$ 11,727
2,521
5,328
$ 19,576
(6) Other Intangible Assets
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2019 and 2018, are as follows (in thousands):
December 31, 2019
Trade Name & Brand
Non-Compete
Customer List
Total
Estimated useful life
Gross amount
Accumulated amortization
Net balance
10 years
367
(70)
297
$
$
5 years
462
(177)
285
$
$
20 years
22,555
(2,162)
20,393
$
$
December 31, 2018
Trade Name & Brand
Non-Compete
Customer List
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
(2,409)
20,975
Total
23,384
(1,152)
22,232
Amortization expense related to intangible assets was approximately $1.3 million, $1.2 million, and $0.3 million for the years ended
December 31, 2019, 2018 and 2017, respectively. The estimated remaining amortization expense as of December 31, 2019 is as follows
(in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
$ 1,257
1,257
1,257
1,172
1,164
14,868
$ 20,975
27
(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
2019
$ 3,191
35,502
3,022
66,438
6,414
1,522
$ 116,089
December 31
2018
$ 3,191
35,187
2,843
62,440
7,119
999
$ 111,779
Depreciation and amortization expense of Property, Plant and Equipment for the years ended December 31, 2019, 2018 and 2017,
were approximately $6.9 million, $6.6 million, and $5.3 million, respectively.
(8) Indebtedness
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, as well as 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, 2019, the
applicable interest rate was approximately 2.8% and the Company was in compliance with all covenants under the Amended and
Restated Credit Agreement.
Included in the Amended and Restated Credit Facilities were approximately $0.7 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
2019
2018
$
$
—
—
—
—
$
$
8,000
17,143
25,143
(2,857)
22,286
Derivative Financial Instruments
The Company used 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. Derivative financial instruments expose the Company 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.
28
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
exposed the Company to variability in interest payments due to changes in interest rates. The Company believed that it was
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 modified 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 $14,285,712
at December 31, 2019. The fair value of the swap as of December 31, 2019 was approximately $(325) thousand and is included
in other liabilities. Changes in the fair value of the swap are recorded in other income/expense and resulted in expense of
approximately $388 thousand and income of $64 thousand during the years ended December 31, 2019 and 2018, respectively.
During the fourth quarter of 2019, the Company paid the remaining balance of the term loan in its entirety. As a result, there
is no longer underlying debt to hedge against with the swap. The changes in the fair value of the swap will continue to be
accounted for as a financial instrument until the sooner of the time that the Company elects to cancel it or until its maturity.
(9) Accrued Expenses
Accrued expenses consist of the following (in thousands):
Compensation
Benefits/self-insurance reserve
Paid time off
Other
December 31
$
2019
3,961
1,033
1,315
2,174
$
2018
3,542
1,153
1,131
2,632
$ 8,483
$
8,458
(10) Income Tax
The Company’s income tax provision for the years ended December 31, 2019, 2018 and 2017 consists of the following (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Years Ended December 31
2019
$ 2,920
185
3,105
485
306
791
2018
$ 1,772
439
2,211
1,917
(36)
1,881
2017
$ 3,117
551
3,668
(1,091)
72
(1,019)
Total income tax provision
$ 3,896
$ 4,092
$ 2,649
29
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
2019
Deferred tax assets:
Reserves
Inventory capitalization
Compensation programs
Retirement liability
Equity-based compensation
Lease liability
Intangible assets
State tax credits, net of federal impact
Gross deferred tax assets
Valuation allowance
$
362
396
578
—
403
795
73
274
2,881
(136)
$
2018
367
421
447
2
290
11
141
257
1,936
—
Net deferred tax assets
$
2,745
$
1,936
Deferred tax liabilities:
Excess of book over tax basis of fixed assets
Goodwill
Right of use asset
$
(4,877)
(2,008)
(781)
Total deferred tax liabilities
Net long-term deferred tax liabilities
(7,666)
(4,921)
$
$
(4,668)
(1,397)
—
(6,065)
(4,129)
$
The amounts recorded as deferred tax assets as of December 31, 2019 and 2018, 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 gross deferred tax assets of approximately
$2.9 million at December 31, 2019, 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 provided a valuation allowance
of approximately $136 thousand for deferred tax assets (net of federal tax benefit), primarily related to tax credits generated in
its 2018 Massachusetts state income tax return that are being carried forward to future periods. The Company is uncertain as
to whether it will have sufficient future taxable income in Massachusetts to utilize the credits prior to their expiration date. The
valuation allowance against the Company’s deferred tax assets may require adjustments in the future based on changes in the
mix of temporary difference, changes in tax laws, and operating performance.
The Company has approximately $348 thousand of tax credit carryforwards related to one state jurisdiction that expire between
2020 and 2033.
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
2019
2018
Computed “expected” tax rate
21.0%
21.0%
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
Change in valuation allowance
1.8
0.2
(6.2)
—
—
(0.7)
(0.7)
0.6
—
0.4
0.1
2.8
0.2
(1.9)
—
0.1
—
(1.3)
0.8
—
0.5
—
2017
34.0%
3.5
0.3
(0.6)
(2.6)
0.1
—
(1.4)
—
(11.1)
0.1
—
Effective tax rate
16.5%
22.2%
22.3%
30
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 2017. Federal and state tax returns for the years 2016 through 2019 remain
open to examination by the IRS and various state jurisdictions.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) resulting from uncertain tax
positions is as follows (in thousands):
Gross UTB balance at beginning of fiscal year
Reductions for tax positions of prior years
Gross UTB balance at end of fiscal year
2019
$
$
150
(150)
—
December 31
2018
$
$
150
—
150
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2019
and 2018 is $0 and $150 thousand, respectively.
In addition, the total amount of accrued interest and penalties on uncertain tax positions at December 31, 2019 and 2018 is $0
and $153 thousand, respectively.
At December 31, 2018, all of the unrecognized tax benefits related 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.
(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):
Years Ended December 31
2019
2018
2017
Basic weighted average common shares
outstanding during the year
7,424
7,347
7,248
Weighted average common equivalent shares due to
stock options and restricted stock units
92
83
89
Diluted weighted average common
shares outstanding during the year
7,516
7,430
7,337
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, 2019, 2018 and 2017, the number of stock awards excluded from the computation was 16,536,
10,344 and 27,336, 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):
31
Years Ended December 31
Share-based compensation related to:
2019
2018
2017
Common stock grants
Stock option grants
Restricted Stock Unit awards
$
400
$
151
1,040
505
149
558
$
505
138
425
Total share-based compensation
$
1,591
$
1,212
$
1,068
Incentive Plan
In June 2003, the Company formally adopted the 2003 Incentive Plan (the “Plan”). As amended and restated to date, the Plan
is intended to benefit the Company by offering equity-based and other incentives to certain of the Company’s executives and
employees who are in a position to contribute to the long-term success and growth of the Company, thereby encouraging the
continuance of their involvement with the Company and/or its subsidiaries.
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, 2019, 1,252,613 shares of common stock have been issued under the 2003 Incentive Plan, none of
which have been restricted. An additional 108,424 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, 2019, 185,000 options have been granted and
10,000 options are outstanding. At December 31, 2019, 803,244 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, 2019, 365,026 options have been granted and 95,614 options are outstanding. For the year
ended December 31, 2019, 5,442 RSUs are being reserved for outstanding grants of RSUs, and 79,648 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, 2018
Granted
Exercised
134,043
16,536
(44,965)
$
20.46
38.61
15.68
—
—
—
—
—
—
Outstanding December 31, 2019
105,614
$
25.34
5.70
$
2,563
Exercisable at December 31, 2019
85,328
$
22.62
5.10
$
2,303
Vested and expected to vest at
December 31, 2019
105,614
$
25.34
5.70
$
2,563
During the years ended December 31, 2019, 2018 and 2017, 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 $1.0 million, $1.2
million and $0.6 million, respectively, and the total amount of consideration received from the exercise of these options was
approximately $0.7 million, $1.3 million and $0.8 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 years ended
December 31, 2019 and 2018, no shares were surrendered for this purpose. During the year ended December 31, 2017, 6,511
shares were surrendered to pay the exercise price at an average market price of $26.45.
On February 19, 2019, the Company’s Compensation Committee approved the award of $400 thousand payable in shares of the
Company’s common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Equity Incentive
32
Plan. The shares were issued on December 12, 2019.
On June 5, 2019 the Company issued 16,536 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, 2019:
Restricted Stock Units
Award Date Fair Value
Weighted Average
Outstanding at December 31, 2018
Awarded
Shares vested
Forfeitures
Outstanding at December 31, 2019
72,996
64,701
(20,529)
(3,302)
113,866
$
23.60
33.55
23.74
33.31
$
28.36
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, 2019,
8,341 shares were redeemed for this purpose at an average market price of $33.69. During the years ended December 31, 2018 and
2017, 5,238 and 4,377 shares were redeemed for this purpose at an average market price of $27.60 and $24.50, respectively.
The following summarizes the future share-based compensation expense the Company will record as the equity securities granted
through December 31, 2019, vest (in thousands):
Options
$
116
—
—
—
Restricted
Stock Units
$
999
746
409
48
$
Total
1,115
746
409
48
$
116
$
2,202
$
2,318
2020
2021
2022
2023
Total
(13) Leases
The Company adopted ASC 842 - Leases (“ASC 842”) as of January 1, 2019, using the transition method wherein entities could
initially apply the new leases standard at adoption date and recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. Accordingly, all periods prior to January 1, 2019 were presented in accordance with
the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. The
adoption of ASC 842 resulted in an increase to total assets due to the recording of operating lease right-of-use (“ROU”) assets
and operating lease liabilities of approximately $4.0 million and $4.1 million, respectively, as of January 1, 2019. The Company
did not have any finance leases at the adoption date. The adoption did not materially impact the Company’s condensed
consolidated statements of income or cash flows.
The Company has operating leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company has elected the practical
expedient to account for each separate lease component of a contract and its associated non-lease components as a single
lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical
expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease
classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases
in lease payments based on changes in index rates or usage, are not included in the ROU assets or operating lease liabilities.
These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease
at the inception of a contract. Operating lease ROU assets and operating lease liabilities are stated separately in the condensed
consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities
represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are
recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company’s
lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. ROU
33
assets will also be adjusted for any deferred or accrued rent. As the Company’s operating leases do not typically provide an
implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in
determining the present value of lease payments. The Company’s incremental borrowing rate is based on its borrowing rate
under the Amended and Restated Credit Agreement, adjusted to reflect an estimated fixed rate for the term of the underlying
lease. Operating fixed lease expense is recognized on a straight-line basis over the lease term.
Lease cost:
Operating
Variable
Short-term
Total lease cost
Cash paid for amounts included in
measurement of lease liabilities:
Operating
Weighted-average remaining lease term (years):
Operating
Weighted-average discount rate:
Operating
Year Ended
December 31, 2019
($ in thousands)
$
$
1,222
219
27
1,468
$
1,208
2.69
4.45%
The aggregate future lease payments for operating leases as of December 31, 2019 were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: interest
Present value of lease liabilities
$
1,173
1,118
957
36
—
—
3,284
(194)
$ 3,090
The aggregate future lease payments for operating leases as of December 31, 2018 were as follows (in thousands):
2019
2020
2021
2022
2023
Total
$
1,051
1,070
1,063
975
36
$ 4,195
Rent expense amounted to approximately $1.2 million, $1.2 million, and $0.9 million, in 2019, 2018 and 2017, respectively.
(14) 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. See Note 13 for
details on lease commitments.
(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.
34
(15) Employee Benefit 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 to the Plan were approximately
$1.0 million, $1.1 million and $0.8 million for the years 2019, 2018 and 2017, 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 thousand 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.
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, 2019 and 2018, the balance of the deferred compensation liability
totaled approximately $2.8 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 $2.8 million and $2.0 million as of December 31, 2019 and 2018,
respectively.
(16) 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.
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, 2019
Derivative financial instruments
$
(325)
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.
(17) Segment Data
The Company consists of a single operating and reportable segment.
Revenues from customers outside of the United States are not material. No customer comprised more than 10% of the
Company’s consolidated revenues for the year ended December 31, 2019. A vast majority of the Company’s assets are located
in the United States.
35
The Company’s custom products are primarily sold to customers within the Medical, Automotive, Consumer, Aerospace and
Defense, Industrial, and Electronics markets. Sales by market for the years ended December 31, 2019, 2018 and 2017 are as
follows (in thousands):
Market
Medical
Automotive
Consumer
Aerospace & Defense
Industrial
Electronics
2019
2018
2017
Net Sales
%
Net Sales
%
Net Sales
%
$
128,915
65.0%
$
110,282
57.9%
$
70,090
20,004
10.1%
17,669 8.9%
13,778
6.9%
9,607 4.8%
8,408 4.2%
20,022
10.5%
24,989
13.1%
13,130 6.9%
10,579 5.6%
11,453 6.0%
23,119
21,328
11,521
9,826
11,959
47.4%
15.6%
14.4%
7.8%
6.6%
8.1%
Net Sales
$
198,381 100.0%
$
190,455 100.0%
$
147,843
100.0%
Certain amounts for the years ended December 31, 2018 and 2017 were reclassified between markets to conform to the
current year presentation.
(18) Quarterly Financial Information (unaudited)
Summarized quarterly financial data is as follows (in thousands, except per share data):
2019
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
2018
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
Q1
Q2
Q3
Q4
$
47,328
$
51,399
$
49,394
$
50,260
12,497
3,734
0.50
0.50
Q1
14,371
4,598
0.62
0.62
Q2
13,321
5,641
0.76
0.75
Q3
$
42,931
$
49,019
$
47,808
$
10,185
1,777
0.24
0.24
12,986
3,990
0.54
0.54
12,431
4,134
0.56
0.56
13,770
5,777
0.78
0.76
Q4
50,697
12,706
4,410
0.60
0.59
(19) 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 thousand 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.
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
$
80,000
250
(3,272)
$
76,978
36
Purchase Price Allocation:
Accounts receivable
Inventory
Other current assets
Property, plant and equipment
Customer list
Non-compete
Trade name and brand
Goodwill
$
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
Years 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.
37
STOCK PERFORMANCE GRAPH
The following graph compares cumulative total stockholder return on our Common Stock since December 31, 2014 with the
cumulative total return of the (1) NASDAQ Stock Market (US Companies), (2) SIC Codes 3080-3089 Miscellaneous Plastic Products,
(3) SIC Code 3841 Surgical and Medical Instruments and Apparatus, (4) GICS 15103020 Paper Packaging and (5) the Company’s
peer group, as determined by Radford, a national compensation consulting company engaged by our Compensation Committee in
2018 to perform a comprehensive comparative market study of the compensation programs offered to peer company executives
and directors, as described in our Proxy Statement for our 2020 Annual Meeting of Stockholders. This graph assumes the investment
of $100 on December 31, 2014 in our Common Stock, and for comparison the companies that comprise each of (1) the NASDAQ
Stock Market, (2) SIC Codes 3080-3089 Miscellaneous Plastic Products, (3) SIC Code 3841 Surgical and Medical Instruments and
Apparatus, (4) GICS 15103020 Paper Packaging and (5) the Company’s peer group, as described above, and that all dividends were
reinvested. Measurement points are the last trading day of each respective fiscal year. The Company’s change to SIC Code 3841 was
approved by the SEC on December 4, 2019.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
DECEMBER 2019
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2014
2015
2016
2017
2018
2019
UFP Technologies, Inc.
NASDAQ Stock Market (US Companies)
New SIC Code 3841
Old SIC Codes 3080-3089
GICS 15103020 Paper Packaging
Peer Group
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; statements about the impact the COVID-19
pandemic may have on the Company’s business, including the demand for its products, the Company’s efforts to address the pandemic,
including regarding the safety of its employees, and the impact of the pandemic on the businesses of the Company’s suppliers and customers;
statements about the Company’s acquisition strategies and opportunities and the Company’s growth potential and strategies for growth;
statements about the Company’s reorganization efforts involving its Medical Technology Group and its Advanced Components Group,
and the anticipated benefits of such reorganization; expectations about shifting the Company’s book of business to higher-margin, longer-
run opportunities; anticipated trends and potential advantages in the different markets in which the Company competes, including the
medical, aerospace and defense, automotive, consumer, electronics, and industrial markets, and the Company’s plans to expand in certain
of its markets; expectations regarding customer demand; anticipated advantages the Company expects to realize from its investments
and capital expenditures; anticipated advantages to improvements and alterations at the Company’s existing plants; expectations
regarding the Company’s manufacturing capacity, operating efficiencies, and new production equipment; statements about new product
offerings and program launches; statements about the Company’s acquisition and integration of Dielectrics and the synergies and other
benefits anticipated in connection with the Dielectrics business; the Company’s participation and growth in multiple markets; its business
opportunities; expectations regarding the Company’s liquidity, including the availability of borrowing capacity to fund potential future
acquisitions; anticipated revenues and the timing of such revenues; and any indication that the Company may be able to sustain or increase
its sales, earnings or earnings per share, or its sales, earnings or earnings per share growth rates. Investors are cautioned that such forward-
looking statements involve risks and uncertainties, including without limitation risks and uncertainties associated with the COVID-19 pandemic
and its impact on the Company, including demand for its products, the Company’s employees, and the Company’s suppliers and customers;
the Company’s acquisition and integration of Dielectrics; risks associated with the identification of suitable acquisition candidates and the
successful, efficient execution of acquisition transactions, the integration of any such acquisition candidates, the value of those acquisitions
to our customers and shareholders, and the financing of such acquisitions; risks associated with corporate reorganizations and our creation
of the Medical Technology and Advanced Components Groups; risks associated with efforts to shift the Company’s book of business to
higher-margin, longer-run opportunities; risks associated with the Company’s entry into and growth in certain markets; risks and uncertainties
associated with seeking and implementing manufacturing efficiencies and implementing new production equipment; risks and uncertainties
associated with growth of the Company’s business and increases to sales, earnings and earnings per share; risks associated with new product
and program launches, and risks related to our indebtedness and compliance with covenants contained in our financing arrangements .
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 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, 2019. 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 virtually at 10:00 a.m., on June
Massachusetts, Michigan, Texas
10, 2020.
COMMON STOCK LISTING
UFP Technologies’ common stock
ACCOUNTANTS
Grant Thornton LLP
INDEPENDENT PUBLIC
Daniel C. Croteau
Chief Executive Officer
Surgical Specialties Corporation
Cynthia L. Feldmann
Former Partner and
National Chair
Medical Device Industry
is traded on NASDAQ under the
125 High Street, 21st Floor
KPMG LLP
symbol UFPT.
Boston, MA 02110
STOCKHOLDER SERVICES
Stockholders whose shares are held in
CORPORATE COUNSELS
Lynch Fink & Labelle LLP
street names often experience delays
6 Beacon Street, Suite 415
in receiving company communications
Boston, MA 02108
d
d
o
d
d
d
d
o
o
o
Ronald J. Lataille
Sr. Vice President, Treasurer,
and Chief Financial Officer
Christopher P. Litterio, Esq.
o
General Counsel, Secretary
& Sr. Vice President of
Human Resources
Marc D. Kozin
Professional Board Member
Thomas Oberdorf
Chairman & CEO
SIRVA, Inc.
Brown Rudnick LLP
1 Financial Center
Boston, MA 02111
ABOUT THIS REPORT
The objective of this report is to
provide existing and prospective
shareholders a tool to understand
our financial results, what we do as a
Robert W. Pierce, Jr.
company, and where we are headed
in the future. We aim to achieve
Chairman, CEO,
and Co-Owner
these goals with clarity, simplicity
Pierce Aluminum Co.
and efficiency. We welcome your
comments and suggestions.
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
www.ufpt.com/investors/filings.html
Lucia Luce Quinn
Chief People Officer
WuXi NextCode
Mitchell C. Rock
Sr. Vice President
and General Manager, Medical
Daniel J. Shaw, Jr.
Vice President
Research & Development
W. David Smith
Sr. Vice President
Operational Excellence
& Shared Services
d Directors
o Officers
forwarded through brokerage firms or
financial institutions. Any shareholder
or other interested party who wishes to
receive information directly should call
or write the Company. Please specify
regular or electronic mail:
UFP Technologies, Inc.
Attn: Shareholder Services
100 Hale Street
Newburyport, MA 01950 USA
phone: (978) 352-2200
e-mail: investorinfo@ufpt.com
web: www.ufpt.com
FORM 10-K REPORT
A copy of the Annual Report
on Form 10-K for the fiscal
year ended December 31, 2019,
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
40
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