S T R O N G A N D
G R O W I N G
2 0 2 1 A N N U A L R E P O R T
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.
C O N T E N T S
2 CEO’s Letter
9 Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
16 Financial Statements
40 Stockholder Information
“It was a year of solid
progress on many fronts,
D E A R F E L L O W S H A R E H O L D E R ,
For UFP Technologies, 2021 was an exciting
and successful year. We managed through
the disruptions of the Covid-19 pandemic
and experienced solid top- and bottom-
line growth. Sales increased 15%, operating
income grew 27%, and earnings per share
grew 18%. Sales by our MedTech group, by
far the largest part of our business, grew
10.2%. We also enjoyed robust growth in
our Advanced Components business, led by
a 25.7% sales increase in the aerospace &
defense market.
S I G N I F I C A N T E X P A N S I O N O F
O U R M E D I C A L C A P A B I L I T I E S
In addition, we made great progress
on our strategic initiatives to enhance
our capabilities and increase our value
to customers. In a six-month span we
completed three major medical acquisitions
that will strengthen our competitive position
for years to come. In October, we acquired
Contech Medical, a global leader in class
III medical device packaging, primarily for
catheters and guidewires. In December,
we acquired DAS Medical, a Dominican
Republic-based medical device contract
manufacturer specializing in single-use
surgical equipment covers, robotic draping
systems, and fluid control pouches. Then, in
March 2022, we acquired Advant Medical,
a developer and manufacturer of Class I,
II, and III medical devices and packaging
located in Galway, Ireland, and Costa Rica.
Each acquisition expands our capabilities
in fast-growing, high-margin segments
of the medical market, such as robotic
surgery. Each is an excellent strategic and
cultural fit that offers powerful synergies.
Each brings us new customer relationships,
product development opportunities, and
proven talent. And each helps us achieve
our strategic goal of expanding our
manufacturing footprint into locations
critical to our customers. You can learn more
about these important acquisitions inside.
O V E R C O M I N G P A N D E M I C
C H A L L E N G E S T O M E E T
C U S T O M E R N E E D S
In 2021, we achieved our strong results
despite the continuing challenges of the
Covid-19 pandemic—rising raw material
costs, limited direct labor availability, supply
chain disruptions, and more. These issues
cut into our gross margins and bottom-
line results, particularly in the latter half of
the year. I am very proud of the way our
team responded to meet our commitments
and keep our customers supplied with the
products they depend on.
Direct labor shortages—compounded by
a tight labor market—required many of
our people to work substantial overtime,
or quickly pivot to new roles and
responsibilities. They worked tirelessly
through Covid-related absences and raw
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with each initiative guided
by one basic principle:
increasing our value to customers.”
material-related production shutdowns,
constantly navigating challenging
conditions to meet customer needs. I
thank our UFP team members for their
extraordinary effort and dedication.
Our supplier partners really stepped up
too. They played a key role by helping
us manage allocation issues and qualify
alternate materials when specified
materials were not available. And our
customers showed great flexibility
and loyalty in a year filled with many
unforeseen challenges. I send them all my
sincere thanks and appreciation as well.
Unfortunately, we expect supply chain
issues to continue through at least the
first half of 2022. As I write, we have a
sizable backlog of open orders waiting
for these issues to be resolved. Once that
happens, we can ramp up production
to catch up with customer demand and
accelerate our growth. Until then, we will
continue working to manage the impact
on our business. This includes passing on
strategic price increases to mitigate rising
material costs.
C U S T O M E R S U C C E S S I S
O U R S U C C E S S
It was a year of solid progress on many
fronts, with each initiative guided by one
basic principle: increasing our value to
customers. That is the consistent goal
behind everything we do. Customers know
we’re always trying to find new ways to
help them succeed, because their success
and ours are inextricably linked. In the
following pages, we will describe how this
customer-focused strategy is shaping our
business and our future.
When the pandemic finally ends, we
expect a great deal of pent-up demand
to be unleashed. With our new facilities
and capabilities, we are in a great position
to take advantage. We believe our newly
acquired entities will bring significant
benefits to our current and prospective
customers. And with our strong balance
sheet, we can pursue other exciting
acquisition opportunities that add even
more value. For all these reasons, I am
very optimistic about UFP’s prospects for
continued growth, and I thank you for your
support.
Sincerely,
R. Jeffrey Bailly
Chairman and CEO
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F O U R N E W S T R AT E G I C L O C AT I O N S T O
M E E T E V O LV I N G C U S T O M E R D E M A N D
In recent years, we have seen many price-sensitive, legacy medical programs migrate to
competitors in low-cost countries. This is business we would obviously like to retain. Our
customers want that too, so they can avoid the risk of changing suppliers.
So, for mature products in the later stages of their life cycles, customers asked us to explore
options for low-cost-country manufacturing. These efforts came to fruition in 2021 and
early 2022 with the acquisitions of Advant Medical, Contech Medical, and DAS Medical.
The next step is the opening of our own new facility in Tijuana, Mexico, which is expected
to be operational in the second half of 2022. Advant is headquartered in Galway, Ireland,
and has operations in Costa Rica and an outsourced manufacturing partner in Mexico. DAS
brings a manufacturing location in the Dominican Republic. Contech also adds partner
manufacturing in Costa Rica.
Taken together, these initiatives will allow us to retain more legacy programs. Beyond that,
the three acquisitions will help us penetrate further into high-value segments like minimally
invasive surgery and orthopedics. And help make us a global leader in certain niche markets,
such as catheterization packaging and robotic surgery drapes. All in all, it’s a big step
forward for our medical business.
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W O R K I N G C L O S E LY W I T H C U S T O M E R S
T O D E V E L O P T H E N E X T G E N E R AT I O N
O F P R O D U C T S
Product development is an increasingly vital part of our business. Over time, we have been
steadily building our development capabilities, and we continued this process in 2021 by
expanding our Newburyport lab space, and adding new clean rooms, next-generation
equipment, and engineering talent.
Our development business allows us to collaborate with customers from the very beginning
of their product life cycles. Customers come to us with their ideas, and we apply our
engineering, materials, and production expertise to help develop these concepts into
successful products. We play a role in every stage of a new product’s evolution—material
selection, prototypes, testing, tooling, quality systems design, equipment manufacturing,
supply chain management, and more. As a result, we are well positioned when the customer
is ready to choose a manufacturing partner.
Our product development skills have helped us secure many highly profitable, long-
running programs. It’s proven to be a powerful engine for growing our business organically,
and a great way to provide even more services to our customers. We expect this trend
to accelerate in the coming years, and plan to direct more talent and resources to help
customers bring their product ideas to life.
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C R I T I C A L W O R K F O R C U S T O M E R S
A N D P AT I E N T S — A N D A L A S E R F O C U S
O N Q U A L I T Y
Our entire team knows that thousands of patients every day depend on our products to
support successful outcomes and improve their health and quality of life. And so, we take
the quality and precision of our work very, very seriously. When we talk to team members
about it, we ask them to imagine a close friend or family member undergoing a medical
procedure that involves one of our products. Simply stated, that product must be flawless in
every way.
In our FDA-approved plants, we have developed advanced systems to ensure the highest
levels of quality. Many of the world’s leading medical device manufacturers have come to
rely on our unique engineering and production skills. And we are very proud to call them our
customers. But we never forget the ultimate “customer”—the patients hoping for successful
procedures, minimal complications, and speedy recoveries. Their health and safety is always
our primary concern, and the driving force behind our uncompromising approach to quality.
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H O W O U R H I G H - L E V E L M E D I C A L
C A P A B I L I T I E S B E N E F I T C U S T O M E R S
I N E V E R Y M A R K E T
To improve our focus and value to customers, UFP Technologies is organized in two groups:
MedTech and Advanced Components. The former is devoted to the healthcare industry,
while the latter works with our other target markets. We have a clear strategic goal to
continue growing our medical business. But our Advanced Components markets remain
very important as well. And we know these customers have benefited from the skills and
infrastructure we’ve worked so hard to develop for medical programs.
Here’s why. It takes great engineering and manufacturing skills to have a medical program
qualified by the FDA. To compete successfully in this space, we’ve had to continually
enhance our talent, knowledge base, facilities, and quality systems. This has led us to
develop many specialized precision manufacturing processes for medical customers, which
we have then leveraged to enhance solutions for customers in other industries. Whether our
solutions are used in surgical procedures or in vehicles, aircraft, or military equipment, they
are all created with the same discipline and commitment, often utilizing the same materials
and very similar equipment. As a result, our success in medical markets has had a very
positive impact on customers in other markets too.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET PRICE
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, 2020 to
December 31, 2021:
Fiscal Year Ended December 31, 2020
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2021
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 52.59
47.77
48.77
48.96
High
$ 55.52
59.68
71.17
75.34
Low
$ 30.80
34.06
37.39
36.69
Low
$ 44.02
49.02
56.11
59.00
NUMBER OF STOCKHOLDERS
As of March 11, 2022, there were 87 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.
DIVIDENDS
The Company did not pay any dividends in 2021 or 2020. 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, 2021,
2020, and 2019. 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, 2021, approximately $9.4 million was available for future repurchases of the Company’s
common stock under this authorization.
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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.
The Company’s current strategy includes further organic growth and growth through strategic acquisitions.
As further summarized below, the COVID-19 pandemic has had, and we believe it will continue to have, negative effects on our business
and financial results. Despite the continuing impact of the COVID-19 pandemic, conditions related to the pandemic generally appear
to be improving as sales for the Company for the year ended December 31, 2021 increased 15.0% to $206.3 million from $179.4 million
for the year ended December 31, 2020. Gross margin decreased slightly to 24.8% for the year ended December 31, 2021, from 24.9%
in 2020, primarily due to significant increases in raw material, labor and certain overhead costs. However, operating income and net
income for the year ended December 31, 2021 increased by 26.8% and 18.8%, respectively.
IMPACT OF COVID-19 ON OUR BUSINESS
Through much of 2021, COVID-19 continued to spread in areas in which our products are designed, manufactured, distributed, or sold.
The continued spread of COVID-19 and the response to it negatively impacted operating conditions for our business in 2021. Although
we expect COVID-19 will continue to have negative impacts on our operating results in future periods, the magnitude and duration of
the continuing impact is uncertain.
To stall the spread of COVID-19 during calendar year 2020, authorities in states in which we do business implemented numerous
measures, including social distancing guidelines, travel bans and restrictions, quarantines, curfews, stay-at-home orders, and
business shutdowns. Since then, most federal, state, and local mandates or executive orders have been lifted; however, it is uncertain
whether similar mandates or executive orders will be implemented in the future and what impact they will have on us, our customers,
consumers, employees, suppliers, and other third parties with whom we do business. Our top priorities continue to be ensuring the
health and safety of our workforce and serving our various constituencies with as little disruption as possible, so we continue to
follow practical safety procedures and continue to monitor that status of the COVID-19 pandemic, vaccination rates, and mutations of
COVID-19.
The COVID-19 pandemic continues to pose risks to our operations. The global supply chain disruption that has resulted from
the COVID-19 pandemic has resulted in delays in our receipt of raw materials and components we need to meet our anticipated
manufacturing and production schedules. The relative difficulty in sourcing raw materials and components for our manufacturing
operations has also resulted in increased costs. Our labor costs have increased due to a general labor shortage and related wage
increases and incentives to attract and retain employees. Our maintenance costs have also increased due to higher costs of supplies,
our efforts to create a safe work environment for our employees, and our continued enhanced cleaning and sterilization protocols.
Although the conditions related to the COVID-19 pandemic generally appear to be improving, due to the speed with which the
COVID-19 situation continues to evolve, its global nature, the range of governmental and community responses thereto, and our
business line and geographic diversity, the further impact of COVID-19 on our business and operations remains highly uncertain and
could adversely and materially affect our business, financial condition, and results of operations, as well as those of our customers.
To ensure the health and safety of our employees, since March 2020 we have required or enabled certain employees to work from
home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work
spaces, and shifted schedules to facilitate social distancing and sterilization for those who continue to work in our facilities; enhanced
cleaning and disinfecting procedures at our facilities; required face coverings in accordance with local mandates and procured and
distributed personal protective equipment; implemented health checks and visitor protocols and restricted travel.
The full extent to which the COVID-19 pandemic impacts our business and operations is unknown and will depend on the severity,
location, and duration of the effects and spread of COVID-19, the effectiveness of the vaccine programs and the other actions
undertaken by national, regional and local governments and health officials to contain the virus or treat its effects (including the
ultimate efficacy of vaccine programs on new variants of the virus), the length of the worldwide supply chain disruption and increased
costs and how quickly and to what extent economic conditions improve and operating conditions resume. As certain restrictions are
lifted in various geographical locations throughout the U.S., we will continue to monitor and respond to the impacts that the COVID-19
pandemic has on our business and operations. We have a strong liquidity position, solid balance sheet, access to capital, and the ability
to scale operations which we expect will enable us to effectively manage through the COVID-19 pandemic.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant
provisions, including delaying certain payroll tax payments and estimated income tax payments that we expect to defer to future
periods. Accordingly, the Company deferred social security payments of approximately $1.6 million through December 31, 2020.
Approximately $715 thousand of this amount was paid in December 2021, and the remaining balance of approximately $905 thousand
9
is required to be paid by December 31, 2022. We do not currently expect the CARES Act to have a material impact on our financial
results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the
CARES Act may have on our business and financial results.
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
(Gain) loss on sale of fixed assets
Acquisition costs
Operating income
Total other expense
Income before taxes
Income tax expense
Net income from consolidated operations
2021
2020
2019
100.0%
100.0%
100.0%
75.2%
24.8%
14.3%
0.0%
0.2%
10.3%
0.0%
10.3%
2.6%
7.7%
75.1%
24.9%
15.3%
0.3%
0.0%
9.3%
0.2%
9.1%
1.6%
7.5%
72.8%
27.2%
14.7%
0.0%
0.0%
12.5%
0.5%
12.0%
2.0%
10.0%
2021 COMPARED TO 2020
Sales
Net sales increased 15.0% to $206.3 million for the year ended December 31, 2021, from net sales of $179.4 million in 2020. The
increase in sales was primarily due to increases in sales to customers in the Medical, Consumer, Electronics, Industrial, Automotive, and
Aerospace & Defense markets of 10.2%, 42.2%, 28.3%, 13.6%, 6.8%, and 25.7% respectively. The increase in sales to the Medical market
was partially attributable to sales from the two fourth quarter acquisitions, Contech and DAS Medical, of $4.5 million and $1.4 million,
respectively. Organically, sales to the medical market grew 5.3% in 2021.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) decreased slightly to 24.8% for the year ended December 31, 2021, from 24.9% in 2020.
As a percentage of sales, material and direct labor costs collectively increased approximately 2.3%, while overhead decreased approximately
2.2%. The increase in collective material and labor costs as a percentage of sales was primarily due to inflationary increases in raw material
costs as well as labor rate increases and staffing challenges. The decrease in overhead as a percentage of sales was primarily due to fixed
overhead costs measured against increased sales.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) increased approximately 7.2% to $29.5 million for the year ended December 31, 2021,
from $27.5 million in 2020. As a percentage of sales, SG&A decreased to 14.3%, from 15.3% in 2020. The decrease in SG&A as a percentage
of sales was primarily due to relatively fixed SG&A expenses measure against increased sales. The increase in SG&A was primarily due to
increased compensation programs and travel and entertainment as well as additional SG&A from the fourth quarter acquisitions of Contech
and DAS.
Acquisition Costs
The Company incurred approximately $430 thousand in costs associated with acquisition-related activities, which were charged to expense
for the year ended December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income
statement.
Interest Income and Expense
The Company had net interest expense of approximately $39 thousand and $83 thousand for the years ended December 31, 2021 and
2020, respectively. The decrease in net interest expense was primarily due to interest received from the federal government related to
income tax refunds.
Other Income and Expense
Other income was approximately $26 thousand, and other expense was approximately $366 thousand for years ended December 31, 2021
and 2020, respectively. The changes in other expense are primarily generated by changes in the fair value of the swap liability, which is
driven by anticipated future interest rate changes and a declining nominal amount, offset by net cash settlement amounts related to the
swap.
Income Taxes
The Company recorded income tax expense, as a percentage of income before income tax expense, of 25.1% for the year ended
December 31, 2021 compared to 17.9% for the same period in 2020 The increase in the effective tax rate for the current period was largely
due to lower discrete income tax benefits from share-based compensation and amended tax returns in the year ended December 31, 2021
compared to the same period of 2020. 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.
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2020 COMPARED TO 2019
Sales
Net sales decreased 9.6% to $179.4 million for the year ended December 31, 2020 from net sales of $198.4 million in 2019. The decrease
in sales was primarily due to the impact on demand for product as a result of the COVID-19 pandemic. We believe that the cancellation
or delay of elective medical procedures in connection with the COVID-19 pandemic has had a negative impact on the demand for the
Company’s components for medical devices. We refer you to “Recent Developments—COVID-19” above for additional discussion of
product demand.
Gross Profit
Gross profit as a percentage of sales (“Gross Margin”) decreased to 24.9% for the year ended December 31, 2020, from 27.2% in 2019. As
a percentage of sales, material and direct labor costs collectively decreased approximately 2.2%, while overhead increased approximately
4.4%. The decrease in collective material and labor costs as a percentage of sales was primarily due to gains in manufacturing efficiencies
resulting from continuous improvement initiatives and an improvement in the overall book of business. The increase in overhead as a
percentage of sales was primarily due to fixed overhead costs measured against decreased sales.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) decreased approximately 6.0% to $27.5 million for the year ended December
31, 2020, from $29.3 million in 2019. As a percentage of sales, SG&A increased to 15.3%, from 14.7% in 2019. The decrease in SG&A was
primarily due to decreases in compensation programs and company-wide travel and entertainment. The increase in SG&A as a percentage of
sales was primarily due to relatively fixed SG&A expenses measured against lower sales.
Interest Income and Expense
Net interest expense was approximately $83 thousand and $674 thousand for the years ended December 31, 2020 and 2019, respectively.
The decrease in net interest expense was primarily due to lower debt levels.
Other Expense
Other expense was approximately $366 thousand and $388 thousand for years ended December 31, 2020 and 2019, respectively. Other
expense was primarily generated by changes in the fair value of the swap liability, which is driven by anticipated future interest rate
changes as well as a declining notional amount.
Income Taxes
The Company recorded income tax expense, as a percentage of income before income tax expense, of 17.9% for the year ended
December 31, 2020 compared to 16.5% for the same period in 2019. The increase in the effective tax rate for the current period as
compared to the prior period was largely due to a lower anticipated effective tax rate in 2019 due to credits available for increased
research activities. 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.
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, 2021 was approximately $14.3 million and was primarily a result of net
income generated of approximately $15.9 million, depreciation and amortization of approximately $8.4 million, share-based compensation
of approximately $2.4 million, a decrease in refundable income taxes of approximately $0.9 million, an increase in accounts payable and
accrued expenses of approximately $1.1 million primarily due to increased compensation related liabilities, and an increase in deferred
revenue of approximately $2.3 million primarily due to increased customer deposits on tooling and machinery.
These cash inflows and adjustments to income were partially offset by a decrease in deferred taxes of approximately $1.8 million, an
increase in accounts receivable of approximately $7.8 million due primarily to higher sales in the last two months of 2021 as compared
to 2020, an increase in inventory of approximately $4.5 million due to higher stocking levels for future demand, an increase in prepaid
expenses of approximately $0.5 million, an increase in other assets of approximately $0.7 million, and a decrease in other liabilities of
approximately $1.4 million.
Net cash used in investing activities during the year ended December 31, 2021 was approximately $101.5 million and was primarily the
result of the acquisitions of DAS Medical and Contech Medical, as well as additions of manufacturing machinery and equipment and
various building improvements across the Company.
Net cash provided by financing activities was approximately $74.0 million for the year ended December 31, 2021, representing borrowings
under our credit facility to fund acquisitions of $75.0 million and net proceeds received upon stock options exercises of approximately
$0.2 million, partially offset by payments of statutory withholding for stock options exercised and restricted stock units vested of
approximately $0.9 million and debt issuance costs of $0.2 million.
Outstanding and Available Debt
On December 22, 2021, the Company, as the borrower, entered into a secured $130 million Second Amended and Restated Credit Agreement
(the “Second 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,
originally dated as of February 1, 2018.
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The credit facilities under the Second Amended and Restated Credit Agreement consist of a $40 million secured term loan to the Company
and a secured revolving credit facility, under which the Company may borrow up to $90 million. The Amended and Restated Credit Facilities
mature on December 21, 2026. The proceeds of the Amended and Restated Credit Agreement may be used for general corporate purposes,
including funding the acquisition of DAS Medical, as well as certain other permitted acquisitions. The Company’s obligations under the
Second Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Second Amended and Restated Credit Agreement calls for interest determined by the Bloomberg Short-Term Bank Yield Index rate
(“BSBY”) plus a margin that ranges from 1.25% to 2.0% 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 Second 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 Second Amended and Restated Credit Agreement contains other covenants customary for
transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. At December 31,
2021, the Company had approximately $75 million in borrowings outstanding under the Second Amended and Restated Credit Agreement,
which were used as partial consideration for the DAS Medical acquisition, and also had approximately $0.7 million in standby letters of credit
outstanding, drawable as a financial guarantee on worker’s compensation insurance policies.
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.
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 first 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 previous
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 $8,571,424 at December 31, 2021. The fair value of the swap as of December 31, 2021 was approximately $(176)
thousand and is included in other liabilities. Changes in the fair value and net cash settlement amounts related to the swap are recorded in
other income of approximately $24 thousand and other expense of approximately $366 thousand during the years ended December 31, 2021
and 2020, respectively.
As the Company has paid the remaining balance of the term loan that was associated with the swap in its entirety, 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 Second Amended and Restated Credit Agreement. The Company generated
cash of approximately $14.3 million in operations during the year ended December 31, 2021; 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 and
the availability of draws on the revolving credit facility under the Second Amended and Restated Credit Agreement. Further, the continued
economic uncertainty resulting from the COVID-19 pandemic could affect the Company’s long-term ability to access the public markets and
obtain necessary capital in order to properly capitalize and continue operations.
Throughout fiscal 2022, 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, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next 12 months.
The Company may also require additional capital in the future to fund capital expenditures, acquisitions, or other investments. These capital
requirements could be substantial. The Company anticipates that any future expansion of its business will be financed through existing
resources, cash flow from operations, the Company’s revolving credit facility, or other new financing. The Company cannot guarantee that
it will be able to meet existing financial covenants or obtain other new financing on favorable terms, if at all. The Company’s liquidity will be
impacted to the extent additional stock repurchases are made under the Company’s stock repurchase program.
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
12
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, 2021, 2020, and 2019. At December 31, 2021,
approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.
CRITICAL ACCOUNTING ESTIMATES
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. The Company evaluates its
estimates, including those listed below, on an ongoing basis. The Company bases its estimates on historical experience and on various other
assumptions believed to be reasonable under the circumstances, including current and anticipated worldwide economic conditions, both
in general and specifically in relation to the packaging and component product industries, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this
Report. The Company believes the following critical accounting policies necessitated that significant judgments and estimates be used in the
preparation of its consolidated financial statements.
The Company has reviewed these policies with its Audit Committee.
Valuation of Intangible Assets and Contingent Consideration Liability
We base the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and
assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant
would use. Further, for those arrangements that involve potential future contingent consideration, we record on the date of acquisition a
liability equal to the fair value of the estimated additional consideration we may be obligated to pay in the future. We re-measure this liability
each reporting period and record changes in the fair value through a separate line item within our consolidated statements of operations.
Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount rates, periods, timing,
and amount of projected revenue or timing or likelihood of achieving regulatory, revenue, or commercialization-based milestones. The use of
alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows, discount rates, useful life, or probability
of achieving clinical, regulatory, or revenue-based milestones could result in different purchase price allocations and recognized amortization
expense and contingent consideration expense or benefit in current and future periods.
We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has
occurred that would indicate impairment or adjustment to the remaining useful life. If we determine it is more likely than not that the asset is
impaired based on our qualitative assessment of impairment indicators, we test the intangible asset for recoverability. If the carrying value
of the intangible asset is determined not recoverable, we will write the carrying value down to fair value in the period the impairment is
identified. We calculate fair value of our intangible assets as the present value of estimated future cash flows we expect to generate from the
asset using a risk-adjusted discount rate. The use of alternative assumptions, including estimated cash flows, discount rates, and alternative
estimated remaining useful lives could result in different calculations of impairment.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized
reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes
revenue in accordance with the core principles of 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, which are primarily
product development services, as the services are performed or as otherwise determined based on the substance of the agreement. 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.
Recent Accounting Pronouncements
Refer to Note 1, “Summary of Significant Accounting Policies,” in the accompanying notes to the consolidated financial statements for a
discussion of recent accounting pronouncements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company’s market risk includes “forward-looking statements” that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking statements.
Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates,
and equity prices. At December 31, 2021, the Company’s cash and cash equivalents consisted primarily 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 BSBY plus a margin that ranges from 1.25% to 2.00% 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, 2021, the
applicable interest rate was approximately 1.58%.
13
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, 2021 and 2020, the related consolidated statements of income stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule included 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2021, 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, 2021, 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 14, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
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.
Critical audit matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Preliminary valuation of acquired intangible assets and contingent consideration liabilities
As described further in note 2 to the financial statements, the Company completed the acquisition of Contech Medical on October 12, 2021
for total consideration of $14.5 million in cash and contingent consideration. The identified intangible assets acquired include customer
contract and relationships of $3 million and intellectual property of $2.2 million and the value of the contingent consideration liability was
$4.5 million. The Company also acquired DAS Medical on December 22, 2021 for total consideration of $100.7 million in cash and contingent
consideration. The identified intangible assets acquired include customer contracts and relationships of $36.7 million, intellectual property
of $2.4 million, non-compete agreements of $4.7 million and value of the contingent consideration liability was $5.2 million. We identified
preliminary valuation of the intangible assets acquired and contingent consideration liabilities for the Contech Medical and DAS Medical
acquisitions as a critical audit matter.
The principal considerations for our determination that preliminary valuation of the intangible assets acquired and contingent consideration
liabilities for the Contech Medical and DAS Medical acquisitions is a critical audit matter are that the determination of the preliminary fair
values of such assets and liabilities required management to make significant estimates and assumptions related to forecasted revenues and
operating margins as well as the discount rates used. This required a high degree of auditor judgement and an increased extent of effort,
including professionals with specialized skill and knowledge, in auditing these assumptions made by management.
Our audit procedures related to the preliminary valuation of the intangible assets acquired and contingent consideration liabilities for the
Contech Medical and DAS Medical acquisitions included the following, among others:
• We tested the design and operating effectiveness of controls relating to the determination of preliminary fair values of the intangible
assets and contingent consideration, including controls over the development of assumptions related to revenue growth rates,
operating margins and discount rates, as well as the controls around the appropriateness of the valuation models used.
• We evaluated the valuation methodologies and discount rates utilized by management with the assistance of our valuation
professionals with specialized skill and knowledge.
• We tested the forecasted revenues and operating margins by assessing the reasonableness of management’s forecasts compared to
historical results and forecasted market and industry trends.
GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Boston, Massachusetts
March 14, 2022
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
UFP Technologies, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of UFP Technologies, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31, 2021, 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, 2021,
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, 2021, and our
report dated March 14, 2022 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 (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal controls
over financial reporting of Contech Medical, Inc, and DAS Medical Holdings, LLC, wholly-owned subsidiaries, whose financial
statements reflect combined total assets and revenues constituting 34.5 and 2.9 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2021. As indicated in Management’s
Report, Contech Medical, Inc and DAS Medical Holdings, LLC were both acquired during 2021. Management’s assertion on
the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting
of Contech Medical, Inc and DAS Medical Holdings, LLC.
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 14, 2022
15
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
DECEMBER 31
2021
2020
Cash and cash equivalents
$
$11,117
$
$24,234
Receivables, net
Inventories
Prepaid expenses
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
Finance lease right of use assets
Operating lease right of use assets
Other assets
39,384
33,436
3,383
87,320
126,837
(70,268)
56,569
107,905
67,585
4,327
271
9,053
1,102
26,428
18,642
2,560
71,864
118,388
(64,633)
53,755
51,838
19,718
3,724
100
2,052
153
Total assets
$
334,132
$
203,204
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Finance lease liabilities
Operating lease liabilities
Income taxes payable
Current installments of long-term debt
Total current liabilities
Long-term debt, excluding current installments
Deferred income taxes
Non-qualified deferred compensation plan
Finance lease liabilities
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ equity:
$
10,611
12,700
4,247
58
2,181
909
4,000
34,706
71,000
3,263
4,337
215
6,903
19,262
139,686
$
4,121
7,944
1,887
15
1,154
16
-
15,137
-
5,057
3,810
86
950
1,271
26,311
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized;
7,564,645 and 7,535,086 shares issued and outstanding, respectively
at December 31, 2021; and 7,529,625 and 7,500,066 shares issued
and outstanding, respectively, at December 31, 2020
Additional paid-in capital
Retained earnings
Treasury stock at cost, 29,559 shares at December 31, 2021
and 2020
—
—
75
34,151
160,807
(587)
75
32,484
144,921
(587)
Total stockholders’ equity
194,446
176,893
Total liabilities and stockholders’ equity
$
334,132
$
203,204
The accompanying notes are an integral part of these consolidated financial statements.
16
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Acquisition costs
(Gain) loss on disposal of property, plant and equipment
Operating Income
Interest income
Interest expense
Other income (expense)
Income before income tax provision
Income tax expense
Net income
Net income per common share outstanding:
Years Ended December 31
2021
2020
2019
$ 206,320
$
179,373
$
198,381
155,206
51,114
29,480
430
(14)
21,218
49
(88)
26
21,205
5,319
134,689
44,684
27,493
-
459
16,732
-
(83)
(366)
16,283
2,914
144,422
53,959
29,251
-
-
24,708
-
(674)
(388)
23,646
3,896
$ 15,886
$
13,369
$
19,750
Basic
Diluted
$
2.11
$
2.09
$
$
1.79
1.77
$
$
2.66
2.63
Weighted average common shares outstanding:
Basic
Diluted
7,524
7,615
7,484
7,568
7,424
7,516
The accompanying notes are an integral part of these consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
Years Ended December 31, 2021, 2020 and 2019
Common Stock
Additional
Paid-in
Retained
Treasury Stock
Total
Stockholders’
Shares Amount
Capital
Earnings
Shares
Amount
Equity
Balance at December 31, 2018
7,385
$
74
$ 29,168
$
111,802
30
$ (587)
$ 140,457
Share-based compensation
Exercise of stock options
Net share settlement of restricted
stock units
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
Share-based compensation
Exercise of stock options
Net share settlement of restricted
stock units
Net income
43
26
(15)
-
1
-
-
-
1,806
474
(748)
-
-
-
-
13,369
-
-
-
-
-
-
-
-
1,807
474
(748)
13,369
Balance at December 31, 2020
7,500
$
75
$
32,484
$
144,921
30 $
(587)
$ 176,893
Share-based compensation
Exercise of stock options
Net share settlement of restricted
stock units
Net income
45
7
(17)
-
-
-
-
2,428
162
(923)
-
-
-
-
15,886
-
-
-
-
-
-
-
-
2,428
162
(923)
15,886
Balance at December 31, 2021
7,535
$ 75
$ 34,151
$
160,807
30
$ (587) $
$194,446
The accompanying notes are an integral part of these consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cash flows from operating activities:
Net income from consolidated operations
$ 15,886
$ 13,369
$ 19,750
Years Ended December 31
2021
2020
2019
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
Interest expense on finance leases
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
Other liabilities
8,410
(14)
2,428
3
(1,794)
(7,754)
(4,496)
(557)
893
(681)
102
1,006
2,294
(1,433)
8,268
459
1,807
2
136
2,220
(366)
(256)
295
(73)
(681)
(539)
(687)
1,083
8,172
1,591
-
792
(327)
1,300
(98)
2,006
110
(2,472)
25
67
313
Net cash provided by operating activities
14,293
25,037
31,229
Cash flows from investing activities:
Additions to property, plant and equipment
Acquisition of Contech Medical, net of cash acquired
Acquisition of DAS Medical, net of cash acquired
Proceeds from sale of property, plant and equipment
(5,395)
(9,500)
(86,678)
114
(4,368)
(5,778)
-
-
107
-
4
Net cash used in investing activities
(101,459)
(4,261)
(5,774)
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
Principal payments on finance lease obligations
Proceeds from the exercise of stock options
34,839
40,000
-
(29)
162
Payment of statutory withholding for restricted stock units vested
(923)
Net cash (used in) provided by financing activities
74,049
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
(13,117)
24,234
5,500
(5,500)
-
(11)
474
(748)
(285)
20,491
3,743
(8,000)
(17,143)
705
(512)
(24,950)
505
3,238
Cash and cash equivalents at end of year
$ 11,117
$ 24,234
$ 3,743
The accompanying notes are an integral part of these consolidated financial statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
UFP Technologies, Inc. (“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.
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts and results of operations of UFP Technologies,
Inc. and its wholly-owned subsidiaries, Dielectrics, Inc. (“Dielectrics”), Moulded Fibre Technology, Inc., Contech Medical,
Inc. (“Contech”), DAS Medical Holdings, LLC (“DAS Medical”), and DAS Medical’s wholly-owned subsidiaries, Sterimed, LLC,
One Degree Medical Holdings, LLC, DAS Medical Corporation, and its wholly-owned subsidiary DAS Medical International,
S.R.L., Simco Industries, Inc., and UFP Realty LLC (“UFP Realty”), and UFP Realty’s wholly-owned subsidiaries,. All
significant inter-company 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 the fair value of intangible assets, 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.
(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, 2021 and 2020, the Company did not have any cash equivalents.
The Company maintains its cash in bank deposit accounts that at times exceed federally insured limits. The Company
periodically reviews the financial stability of institutions holding its accounts and does not believe it is exposed to any
significant custodial credit risk on cash.
(f) Accounts Receivable
The Company periodically reviews the collectability of its accounts receivable. Provisions are recorded for accounts that
are potentially 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, 2021.
(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, 2021.
20
(h) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and are depreciated or amortized using the straight-line method over the
estimated useful lives of the assets or the related lease term, if shorter.
Estimated useful lives of property, plant, and equipment are as follows:
Leasehold improvements
Buildings and improvements
Machinery and 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,
2021 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. In performing the most recent “step 1” evaluation of goodwill
impairment, 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 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 our most recent step 1 evaluation, based on 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 changed its annual impairment testing date in 2021 to October 1, in order to allow for sufficient time to
complete its analysis. The Company performed a qualitative assessment (“step 0”) as of October 1, 2021 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 most recent step
1 analysis and the calculated excess fair value over carrying amount, financial performance, forecasts and trends, market
cap, regulatory and environmental issues, macroeconomic conditions, industry and market considerations, raw material
costs, and management stability.
21
The net carrying amounts of goodwill for the years ended December 31, 2020 and 2021 are as follows (in thousands):
December 31, 2020
Acquired in Contech Medical business combination (see Note 2)
Acquired in DAS Medical business combination (See Note 2)
December 31, 2021
Goodwill
$ 51,838
4,278
51,789
$ 107,905
Approximately $104.4 million of goodwill is deductible or has been fully deducted 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,
2021 that required management to perform an impairment analysis.
(k) Revenue Recognition
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue
recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or
services. The Company recognizes revenue in accordance with the core principles of 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, which are primarily product
development services, as the services are performed or as otherwise determined based on the substance of the agreement.
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.
(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 below.
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”),
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. The maximum contractual term of options issued
under this plan is five years.
Through December 31, 2021, 1,298,721 shares of common stock have been issued under the 2003 Incentive Plan, none of
which have been restricted. An additional 97,508 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, 2021, 185,000 options have been granted and
5,500 options are outstanding. At December 31, 2021, 768,052 shares or options are available for future issuance in the 2003
Incentive Plan.
22
Director Plan
Effective July 15, 1998, the Company adopted the 1998 Director Plan, which was amended and renamed on June 3, 2009
as 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 to non-employee members of the Company’s board of directors.
The maximum contractual term of options issued under this plan is 10 years.
Through December 31, 2021, 390,634 options have been granted, and 93,171 options are outstanding. For the year ended
December 31, 2021, 3,660 RSUs are being reserved for outstanding grants of RSUs, and 45,604 shares remained available to
be issued under the Director Plan.
(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.
(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 19).
(p) Treasury Stock
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. The Company did not repurchase any shares of common stock during
the years ended December 31, 2021, 2020 and 2019.
(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 $8.5 million, $8.2 million, and $8.8 million were expensed in the years ended December 31, 2021,
2020 and 2019, respectively.
Recent Accounting Pronouncements
There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial
statements.
23
(2) Acquisitions
Contech Medical
On October 12, 2021 the Company purchased 100% of the outstanding shares of common stock of Contech Medical, Inc., pursuant
to a stock purchase agreement and related agreements, for an aggregate purchase price of $9.5 million in cash, the assumption
of a contingent liability of $0.5 million plus up to an additional $5 million based upon the achievement of certain EBITDA targets
of Contech for the 12-month period ended June 30, 2022. The purchase price was subject to adjustment based upon Contech’s
working capital at closing. 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 1987, Contech is based in Providence, Rhode Island with partner manufacturing in Costa Rica. Contech is a global
leader in the design, development, and manufacture of Class III medical device packaging primarily for catheters and guide wires.
The Company has leased the Providence location from a realty trust owned by the selling shareholders and affiliates. The lease is
for five years with one five-year renewal option.
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):
Fair value of consideration transferred:
Cash paid at closing
Contingent liability (Earn-out)
Other liability
Cash from Contech
Total consideration
Purchase Price Allocation:
Accounts receivable
Inventory
Other current assets
Property, plant and equipment
Customer Contacts & Relationships
Intellectual Property
Non-Compete agreement
Lease right of use assets
Goodwill
Total identifiable assets
Accounts payable
Accrued expenses
Deferred revenue
Lease liabilities
Net assets acquired
$ 9,766
4,543
500
(266)
$ 14,543
$
2,851
2,320
37
1,170
3.043
2,247
86
1,523
4,278
$
17,555
(1,015)
(414)
(60)
(1,523)
$ 14,543
Acquisition costs associated with the transaction were approximately $40 thousand and were charged to expense in the year
ended December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income
statement.
The amount of revenue and net income of Contech recognized since the acquisition date, which is included in the condensed
consolidated statement of income for the year ended December 31, 2021, was approximately $4.5 million and $0.5 million,
respectively.
DAS Medical
On December 22, 2021 the Company purchased 100% of the outstanding membership interests of DAS Medical Holdings, LLC,
(DAS Medical) pursuant to a Securities Purchase Agreement, for a net purchase price of $66.7 million in cash. The purchase price
is subject to adjustment based upon DAS Medical’s working capital at closing, and the purchase price may be increased by up
to $20.0 million in earn-out payments based upon the performance of the business during the four-year period following the
closing. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and
liabilities, as well as to provide for liquidated damages in the event that the Sellers’ representative fails to deliver to the Company
certain audited financial statements of DAS Medical for pre-closing periods. The Purchase Agreement contains customary
representations, warranties, and covenants customary for transactions of this type.
In connection with its entry into the Purchase Agreement, the Company also entered into an Agreement for the Purchase and Sale
of Personal Goodwill (the “Goodwill Agreement”) with the purchase price beneficiaries. Pursuant to the terms of the Goodwill
24
Agreement, on December 22, 2021, the Company purchased from the beneficiaries their personal goodwill, including business
relationships, trade secrets, and knowledge in connection with DAS Medical’s business, for a purchase price of $20 million in cash.
The Company has also entered into Non-Competition Agreements with the beneficiaries, and the Company has agreed to pay
additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments
over the 10 years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of certain key
owners.
Founded in 2010, DAS Medical is headquartered in Atlanta, Georgia, with manufacturing in the Dominican Republic. DAS Medical is
a medical device contract manufacturer specializing in the design, development, and production of single-use surgical equipment
covers, robotic draping systems, and fluid control pouches.
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 preliminary estimates of fair value (in thousands):
Fair value of consideration transferred:
Cash paid at closing
Contingent liability (Earn-out)
Non-Compete agreement
Cash from DAS
Total consideration
Purchase Price Allocation:
Accounts receivable
Inventory
Other current assets
Property, plant and equipment
Customer Contracts & Relationships
Intellectual Property
Non-Compete agreement
Lease right of use assets
Goodwill
Total identifiable assets
Accounts payable
Accrued expenses
Deferred revenue
Lease liabilities
Net assets acquired
$ 95,000
5,188
8,855
(8,316)
$ 100,727
$
2,351
7,978
68
3,314
36,730
2,380
4,697
1,221
51,789
$ 110,528
(5,238)
(3,336)
(6)
(1,221)
$ 100,727
Acquisition costs associated with the transaction were approximately $293 thousand and were charged to expense in the year ended
December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income statement.
The amount of revenue and net income of DAS Medical recognized since the acquisition date, which is included in the condensed
consolidated statement of income for the year ended December 31, 2021, was approximately $1.4 million and $0.1 million, respectively.
The following table contains an unaudited pro forma condensed consolidated statement of operations for the year ended
December 31, 2021, as if both acquisitions had occurred at the beginning of the respective years (in thousands):
Sales
Operating Income
Net Income
Earnings per share:
Basic
Diluted
Years Ended December 31
2021
2020
(Unaudited)
(Unaudited)
$
$
$
$
$
269,932
25,525
20,296
2.67
2.70
$
$
$
$
$
235,328
22,264
18,087
2.42
2.39
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 both acquisitions occurred as presented. In addition, future results may vary significantly
from the results reflected in such pro forma information.
25
(3) 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 19 for further information regarding net sales by market):
Net sales of:
Products
Tooling and Machinery
Engineering services
Total net sales
Years Ended December 31
2021
2020
2019
$
201,248
1,814
3,258
$ 172,299
2,787
4,287
$
193,016
2,730
2,635
$
206,320
$
179,373
$
198,381
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 (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, 2021 and 2020
(in thousands):
Deferred revenue - beginning of period
Acquired in business combinations
Increases due to consideration received from customers
Revenue recognized
Contract Liabilities
Years Ended December 31
$
2021
1,887
69
4,007
(1,716)
$
2020
2,574
2,673
(3,360)
Deferred revenue - end of period
$
4,247
$
1,887
Revenue recognized during the years ended December 31, 2021 and 2020 from amounts included in deferred revenue at the
beginning of the period were approximately $0.8 million and $1.7 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, 2021 and 2020 (in
thousands):
Unbilled Receivables - beginning of period
Increases due to revenue recognized, not invoiced to customers
Decreases due to customer invoicing
Unbilled Receivables - end of period
Contract Assets
Years Ended December 31
2021
271
1,815
(2,012)
74
$
$
2020
72
3,147
(2,948)
271
$
$
26
(4) Supplemental Cash Flow Information
Cash paid for:
Interest
Income taxes, net of refunds
2021
53
5,914
$
Years Ended December 31
2020
2019
(in thousands)
$
71
2,481
Non-cash investing and financing activities:
Capital additions accrued but not yet paid
$
$135
$
225
Accrued contingent consideration
Present value of non-competition payments
Operating lease right of use assets
Operating lease liabilities
9,731
8,855
5,299
(5,299)
-
-
-
-
$
$
664
1,255
213
-
-
-
-
(5) Receivables and Allowance for Credit Losses
Receivables consist of the following (in thousands):
Accounts receivable–trade
Less allowance for credit losses
Receivables, net
December 31
2021
$ 39,903
(519)
$ 39,384
2020
$
26,912
(484)
$ 26,428
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss
allowance methodology for accounts receivable is developed using historical collection experience, current and future economic
and market conditions, and a review of the current status of customers’ trade accounts receivables. Due to the short-term nature
of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts
receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record
the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include
timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and
macroeconomic conditions. Balances are written-off when determined to be uncollectible. Estimates based on an assessment of
anticipated payment and all other historical, current, and future information that is reasonably available are used to determine the
allowance.
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present
the net amount expected to be collected for the years ended December 30, 2021 and 2020 (in thousands):
Allowance - beginning of period
Provision for (reversal of) expected credit losses
Amounts written off against the allowance, net of recoveries
Allowance - end of period
(6) I nventories
Inventories consist of the following (in thousands):
Raw materials
Work in progress
Finished goods
Total Inventory
Allowance for Credit Losses
Years Ended December 31
2021
2020
484
179
(144)
519
$
486
13
(15)
$
484
December 31
2021
22,184
4,205
7,047
$
2020
12,229
1,991
4,422
$
$
$
$
33,436
$
18,642
27
(7) Other Intangible Assets
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2021 and 2020 are as follows (in
thousands):
Intellectual Property
December 31, 2021
Tradename & Brand
Non-Compete
Customer List
Total
Weighted-average amortization period
Gross amount
Accumulated amortization
Net balance
$
11.9 years
4,994
(175)
$ 4,819
9.5 years
$ 5,245
(365)
$ 4,880
20 years
62,328
(4,442)
57,886
$
$
$
$
$
72,567
(4,982)
67,585
December 31, 2020
Tradename & Brand
Non-Compete
Customer List
Total
Weighted-average amortization period
Gross amount
Accumulated amortization
Net balance
10 years
367
(107)
260
$
$
5 years
462
(270)
192
$
$
20 years
22,555
(3,289)
19,266
$
$
$
$
$
23,384
(3,666)
19,718
Amortization expense related to intangible assets was approximately $1.3 million, $1.3 million, and $1.3 million for the years ended
December 31, 2021, 2020 and 2019, respectively. The estimated remaining amortization expense as of December 31, 2021 is as
follows (in thousands):
2022
2023
2024
2025
2026
Thereafter
Total
$ 4 , 1 1 8
4,033
4,026
4,026
4,023
47,359
$ 67,585
(8) 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
Property, plant and equipment
Accumulated depreciation and amortization
2021
$
$
3,191
36,234
4,859
72,963
6,052
3,538
126,837
(70,268)
Net property, plant and equipment
$ 56,569
December 31
2020
$
$
3,191
36,017
3,160
67,880
6,135
2,005
118,388
(64,633)
$ $53,755
Depreciation and amortization expense of Property, Plant and Equipment for the years ended December 31, 2021, 2020 and 2019, were
approximately $7.1 million, $7.0 million, and $6.9 million, respectively.
(9) Indebtedness
On December 22, 2021, the Company, as the borrower, entered into a secured $130 million Second Amended and Restated Credit
Agreement (the “Second 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 Second Amended and Restated Credit Agreement amends and
restates the Company’s prior credit agreement, originally dated as of February 1, 2018.
The credit facilities under the Second Amended and Restated Credit Agreement consist of a $40 million secured term loan to the
Company and a secured revolving credit facility, under which the Company may borrow up to $90 million. The Second Amended
and Restated Credit Agreement matures on December 21, 2026. The secured term loan requires quarterly principal payments of
$1,000,000 commencing on March 31, 2022. The proceeds of the Second Amended and Restated Credit Agreement may be used
for general corporate purposes, including funding the acquisition of DAS Medical, as well as certain other permitted acquisitions.
28
The Company’s obligations under the Second Amended and Restated Credit Agreement are guaranteed by the Subsidiary
Guarantors.
The Second Amended and Restated Credit Agreement calls for interest determined by the Bloomberg Short-Term Bank Yield
Index rate (“BSBY”) plus a margin that ranges from 1.25% to 2.0% 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 Second 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 Second Amended and Restated Credit
Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted
indebtedness and permitted investments. At December 31, 2021, the Company had approximately $75 million in borrowings
outstanding under the Second Amended and Restated Credit Agreement, which were used as partial consideration for the DAS
Medical acquisition, and also had approximately $0.7 million in standby letters of credit outstanding, drawable as a financial
guarantee on worker’s compensation insurance policies. At December 31, 2021, the applicable interest rate was approximately
1.58%, and the Company was in compliance with all covenants under the Second Amended and Restated Credit Agreement. In
conjunction with the Second Amended and Restated Credit Agreement, the Company deferred $161 thousand of debt issuance
costs which are recorded in prepaid expenses on the Consolidated Balance Sheet.
Long-term debt consists of the following (in thousands):
Revolving credit facility
Term loan
Term long-term debt
Current portion
Long-term debt, excluding current portion
December 31
2021
$ 35,000
40,000
75,000
(4,000)
$ 71,000
Future maturities of long-term debt at December 31, 2021 are as follows (in thousands):
Year ended December 31,
Term Loan
credit facility
Total
Revolving
2022
2023
2024
2025
2026
$
4,000
4,000
4,000
4,000
24,000
$
-
-
-
-
$ 35,000
$
4,000
4,000
4,000
4,000
59,000
$ 40,000
$ 35,000
$ 75,000
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.
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 first 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 previous 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 $8,571,424 at December 31,
2021. The fair value of the swap as of December 31, 2021 was approximately $(176) thousand and is included in other liabilities.
Changes in the fair value and net cash settlement amounts related to the swap are recorded in other income of approximately $24
thousand and other expense of approximately $366 thousand during the years ended December 31, 2021 and 2020, respectively.
As the Company has paid the remaining balance of the term loan that was associated with the swap in its entirety, 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.
29
(10) Accrued Expenses
Accrued expenses consist of the following (in thousands):
Compensation
Benefits/self-insurance reserve
Paid time off
Short-term portion of deferred payroll tax
Other
December 31
$
2021
4,878
414
1,620
905
4,883
$
12,700
$
2020
2,443
921
1,538
810
2,232
$ 7,944
(11) Income Tax
The Company’s income tax provision for the years ended December 31, 2021, 2020, and 2019 consists of the following (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Years Ended December 31
2021
2020
2019
$ 5,793
1,320
7,113
(1,399)
(395)
(1,794)
$ 2,223
555
2,778
(28)
164
136
$ 2,920
184
3,104
485
307
792
Total income tax provision
$ 5,319
$ 2,914
$ 3,896
As a result of the Company’s acquisition of DAS Medical, it will be subject to foreign taxes beginning in 2022.
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):
Deferred tax assets:
Reserves
Inventory capitalization
Compensation programs
Equity-based compensation
Lease liability
Intangible assets
Deferred revenue
Other
Gross deferred tax assets
Valuation allowance
December 31
2021
$
$
380
706
1,842
668
2,427
877
365
17
7,282
(17)
2020
351
550
802
524
567
123
2,917
(64)
Net deferred tax assets
$
7,265
$
2,853
Deferred tax liabilities:
Excess of book over tax basis of fixed assets
Goodwill
Right of use asset
Intangible assets
Total deferred tax liabilities
Net long-term deferred tax liabilities
$
(4,481)
(3,628)
(2,419)
-
(10,528)
(3,263)
$
$
(4,527)
(2,795)
(554)
(34)
(7,910)
(5,057)
$
The amounts recorded as deferred tax assets as of December 31, 2021 and 2020 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
$7.3 million at December 31, 2021, that it believes are more likely than not to be realized in the carryforward period. Management
30
reviews the recoverability of deferred tax assets during each reporting period. The Company has provided a valuation allowance
of approximately $17 thousand and $64 thousand at December 31, 2021 and 2020, respectively, for deferred tax assets (net of
federal tax benefit), primarily related to tax credits generated in its 2020 and 2019 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 valuation allowance decreased by $47 thousand during the year ended December 31, 2021, primarily
as a result of state credit utilization.
The Company has approximately $75 thousand of tax credit carryforwards related to the state of Massachusetts that expires in
2022.
The actual tax provision for the years presented differs from the “expected” tax provision for those years, computed by applying
the U.S. federal corporate rate of 21% to income before income tax expense as follows:
Computed “expected” tax rate
Increase (decrease) in income taxes resulting from:
State taxes, net of federal tax benefit
Meals and entertainment
Tax credits
Return to provision adjustments
Unrecognized tax benefits
Excess tax benefits on equity awards
Excess compensation
Other
Change in valuation allowance
Years Ended December 31
2021
21.0%
4.0
-
(1.7)
0.7
-
-
0.7
0.6
(0.2)
2020
21.0%
4.2
0.1
(7.2)
-
-
(1.2)
0.8
0.2
-
2019
21.0%
1.8
0.2
(6.2)
(0.7)
(0.7)
0.6
0.4
0.1
Effective tax rate
25.1%
17.9%
16.5%
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 2019; 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. Certain tax credits in Iowa are currently being audited for the years 2016
through 2019. The Company’s federal tax return is currently being audited for the year 2019. Federal and state tax returns for the
years 2017 through 2020 remain open to examination by the IRS and various state jurisdictions.
At December 31, 2021 and 2020, the Company did not have any gross unrecognized tax benefits (“UTB”) resulting from uncertain
tax positions.
(12) Net Income Per Share
Basic income per share is based upon the weighted average common shares outstanding during each year. Diluted income per
share is based upon the weighted average of common shares and dilutive common stock equivalent shares outstanding during
each year. The weighted average number of shares used to compute both basic and diluted income per share consisted of the
following (in thousands):
Years Ended December 31
2021
2020
2019
Basic weighted average common shares
outstanding during the year
7,524
7,484
7,424
Weighted average common equivalent shares due to
stock options and restricted stock units
91
84
92
Diluted weighted average common
shares outstanding during the year
7,615
7,568
7,516
31
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, 2021, 2020 and 2019, the number of stock awards excluded from the computation was 10,716,
14,892, and 16,536, respectively.
(13) Share-Based Compensation
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). Share-based compensation is included in
selling, general & administrative expenses as follows (in thousands):
Years Ended December 31
Share-based compensation related to:
2021
2020
2019
Common stock grants
Stock option grants
Restricted Stock Unit awards
$
400
$
400
$
400
210
1,818
232
1,175
151
1,040
Total share-based compensation
$ 2,428
$ 1,807
$
1,591
The total income tax benefit recognized in the consolidated statements of income for share-based compensation arrangements
was approximately $780 thousand, $734 thousand, and $653 thousand for the years ended December 31, 2021, 2020 and 2019,
respectively.
Common stock grants
The compensation expense for common stock granted during the three-year period ended December 31, 2021, was determined
based on the market price of the shares on the date of grant.
Stock option grants
The compensation expense for stock options granted during the three-year period ended December 31, 2021, 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
Weighted-average grant date fair value
Years Ended December 31
2020
2019
32.8%
None
0.3%
$43.95
6.1 years
28.9%
None
2.3%
$38.61
6.0 years
$
14.10
$
12.70
2021
33.7%
None
0.8%
$57.34
6.2 years
$
19.60
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 following is a summary of stock option activity for the year ended December 31, 2021:
Weighted Average
Remaining
Aggregate
Shares
Exercise Price
Contractual Life
Intrinsic Value
Under Options
(per share)
(in years)
(in thousands)
Weighted Average
Outstanding December 31, 2020
Granted
Exercised
94,513
10,716
(6,558)
$
30.22
57.34
24.77
Outstanding December 31, 2021
98,671
$ 33.53
Exercisable at December 31, 2021
87,955
$ 30.63
-
-
-
5.81
5.37
-
-
-
$ 3,624
$
3,486
Vested and expected to vest at
December 31, 2021
98,671
$ 33.53
5.81
$
3,624
32
During the years ended December 31, 2021, 2020 and 2019, the total intrinsic value of all options exercised (i.e., the difference
between the market price and the price paid by the employees to exercise the options) was approximately $0.2 million, $0.8
million, and $1.0 million, respectively, and the total amount of consideration received from the exercise of these options was
approximately $0.2 million, $0.5 million, and $0.7 million, respectively. At its discretion, the Company allows option holders to
surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During the years ended
December 31, 2021, 2020 and 2019, no shares were surrendered for this purpose.
Restricted Stock Unit awards (“RSUs”)
The Company grants RSUs to its directors, 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, 2021:
Restricted Stock Units
Award Date Fair Value
Weighted Average
Outstanding at December 31, 2020
Awarded
Shares vested
Forfeitures
Outstanding at December 31, 2021
93,187
48,483
(39,214)
(1,288)
101,168
$ 35.03
50.12
32.86
49.21
$ $41.78
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, 2021,
14,190 shares were redeemed for this purpose at an average market price of $52.55. During the years ended December 31, 2020 and
2019, 11,423 and 8,341 shares were redeemed for this purpose at an average market price of $49.91 and $33.69, respectively.
The following summarizes the future share-based compensation expense the Company will record as the equity securities granted
through December 31, 2021, vest (in thousands):
2022
2023
2024
Total
(14) Leases
Options
Restricted
Stock Units
$
$41
$
1,370
$
-
-
898
116
Total
1,411
898
116
$
41
$
2,384
$
2,425
The Company has operating and finance 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 accounts 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. 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 right of use (“ROU”)
assets or 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 and finance lease ROU assets and operating and finance 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 lease liabilities represent
the Company’s obligation to make lease payments arising from the lease. ROU assets and 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 it will exercise that option. ROU assets are also
adjusted for any deferred or accrued rent. As the Company’s 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.
33
Lease Cost:
Finance lease cost:
Amortization of right of use assets
Interest on lease liabilities
Operating lease cost
Variable lease cost
Short-term lease cost
Total lease cost
Cash paid for amounts included in
measurement of lease liabilities:
Operating cash flows from operating leases
Financing cash flows from finance leases
ROU assets obtained in exchange for finance lease obligations
Weighted-average remaining lease term (years):
Finance
Operating
Weighted-average discount rate:
Finance
Operating
Year Ended December 31
($ in thousands)
2021
2020
$
27
3
1,263
263
43
$
10
2
1,207
215
28
$
1,599
$
1,462
$
1,284
29
198
$
1,212
11
110
4.54
3.95
2.10%
2.63%
6.33
1.78
2.26%
4.37%
The aggregate future lease payments for leases as of December 31, 2021 and 2020 were as follows (in thousands):
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: Interest
December 31, 2021
Finance
$
63
Operating
$ 2,212
63
63
63
29
6
287
(14)
1,297
1,230
1,100
831
3,298
9,968
(884)
Present value of lease liabilities
$
273
$ 9,084
Rent expense amounted to approximately $1.4 million, $1.3 million, and $1.2 million in 2021, 2020 and 2019, respectively.
(15) Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
Accrued contingent consideration (earn-out)
Present value of non-competition payments
Other
December 31
2021
$ 9,731
8,855
676
$
2020
-
1,271
Present value of lease liabilities
$ 19,262
$
1,271
(16) 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 14 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
(c) Contingent Consideration – In conjunction with both the Contech Medical and DAS Medical acquisitions in the fourth quarter
of 2021, the Company incurred liabilities for certain contingent consideration related to the valuation of earn-out payments
based upon the performance of the business. Also in conjunction with the DAS Medical acquisition, the Company incurred a
liability for contingent consideration related to the present value of non-competition payments. We re-measure contingent
liabilities each reporting period and record changes in the fair value through a separate line item within our consolidated
statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from
changes in discount rates, periods, timing, and amount of projected revenue or timing or likelihood of achieving regulatory,
revenue, or commercialization-based milestones. The use of alternative valuation assumptions, including estimated revenue
projections, growth rates, cash flows, discount rates, useful life or probability of achieving clinical, regulatory, or revenue-
based milestones could result in different purchase price allocations and recognized amortization expense and contingent
consideration expense or benefit in current and future periods.
(17) 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 $0.6
million, $0.9 million, and $1.0 million for the years 2021, 2020 and 2019, 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, 2021 and 2020, the balance of the deferred compensation liability
totaled approximately $4.3 million and $3.8 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 $4.3 million and $3.7 million as of December 31, 2021 and 2020, respectively.
(18) 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
Liabilities:
December 31, 2021
December 31, 2020
Derivative financial instruments
$
176
$
465
Level 3
December 31, 2021
December 31, 2020
Purchase price contingent consideration (Note 2):
Accrued contingent consideration (earn-out)
$
Present value of non-competition payments
9,7 3 1
8,855
$
-
35
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.
In connection with the acquisitions discussed in Note 2, “Acquisitions,” the Company is required to make contingent payments,
subject to the entities achieving certain financial performance thresholds. The contingent consideration payments for both
acquisitions combined are up to $25 million. The fair value of the liabilities for the contingent consideration payments recognized
upon the acquisition as part of the purchase accounting opening balance sheets totaled approximately $9.7 million and was
estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used
in this calculation were management’s financial forecasts, discount rate, and various probability factors. The ultimate settlement of
contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability
is considered to be a Level 3 financial liability that is re-measured each reporting period. The change in fair value of contingent
consideration for the acquisition is included in change in fair value of contingent consideration in the consolidated statements of
operations.
Also in connection with the DAS Medical acquisition, the Company has entered into Non-Competition Agreements with the
beneficiaries, and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements,
including an aggregate of $10.0 million in payments over the 10 years following the closing of the DAS Medical acquisition for
the 10-year noncompetition covenants of certain key owners. The present value of the Non-Competition Agreements totaled
approximately $8.9 million. This liability is considered to be a Level 3 financial liability that is re-measured each reporting
period. The change in fair value of contingent consideration for the acquisition is included in change in fair value of contingent
consideration in the consolidated statements of operations.
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.
(19) 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 years ended December 31, 2021, 2020 and 2019. At December 31, 2021 and 2020, one customer
represented approximately 9.6% and 13.3% of gross accounts receivable, respectively. A significant majority of the Company’s
assets are located in the United States.
The Company’s custom products are primarily sold to customers within the Medical, Consumer, Aerospace & Defense, Automotive,
Industrial, and Electronics markets. Sales by market for the years ended December 31, 2021, 2020 and 2019 are as follows (in
thousands):
Market
Medical
Consumer
Aerospace & Defense
Automotive
Industrial
Electronics
2021
2020
2019
Net Sales
%
Net Sales
%
Net Sales
%
$
132,520
64.2%
$
120,258
67.2%
$
128,915
26,048
12.6%
16,103 7.8%
15,596 7.6%
8,661 4.2%
7,392 3.6%
18,316 10.2%
12,810 7.1%
17,669
13,778
14,607 8.1%
20,004
10.1%
7,622 4.2%
5,760 3.2%
9,607
8,408
4.8%
4.2%
65.1%
8.9%
6.9%
Net Sales
$ 206,320 100.0%
$ 179,373 100.0%
$ 198,381
100.0%
Certain amounts for the years ended December 31, 2020 and 2019 were reclassified between markets to conform to the current year presentation.
36
(20) Quarterly Financial Information (unaudited)
Summarized quarterly financial data is as follows (in thousands, except per share data):
2021
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
2020
Net sales
Gross profit
Net income
Basic net income per share
Diluted net income per share
Q1
Q2
Q3
Q4
$
50,655
$
50,723
$
56,343
$ 48,599
12,609
4,163
0.55
0.55
Q1
13,414
4,715
0.63
0.62
Q2
12,016
3,789
0.50
0.50
Q3
$ 48,277
$
42,644
$
43,299
$
12,823
3,891
0.52
0.52
9,949
2,318
0.31
0.31
10,528
2,988
0.40
0.40
13,075
3,219
0.43
0.42
Q4
45,153
11,384
4,172
0.56
0.55
37
STOCK PERFORMANCE GRAPH
The following graph compares cumulative total stockholder return on our Common Stock since December 31, 2016, with the cumulative
total return of the (1) NASDAQ US Benchmark (TR), (2) SIC Code 3841 Surgical and Medical Instruments and Apparatus, (3) GICS
15103020 Paper Packaging, (4) GICS 35101010 Health Care Equipment 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 2022 Annual Meeting of Stockholders. This graph assumes the investment of $100 on December 31, 2016, in our
Common Stock, and for comparison the companies that comprise each of (1) the NASDAQ US Benchmark (TR), (2) SIC Code 3841
Surgical and Medical Instruments and Apparatus, (3) GICS 15103020 Paper Packaging, (4) GICS 35101010 Health Care Equipment 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.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
DECEMBER 2021
2016
2017
2018
2019
2020
2021
UFP Technologies, Inc.
NASDAQ US Benchmark (TR)
GICS 35101010 Health Care equipment
GICS 15103020 Paper Packaging
SIC Code 3841
Peer Group
300
250
200
150
100
50
0
38
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 potential further impact the novel
coronavirus (“COVID-19”) pandemic may have on the Company’s business, financial condition and results of operations, including with respect
to the different markets in which the Company participates, the demand for its products, the well-being and availability of the Company’s
employees, the continuing operation of the Company’s locations, delayed payments by the Company’s customers and the potential for reduced
or canceled orders, the Company’s efforts to address the pandemic, including regarding the safety of its employees, the maintenance of its
facilities and the sufficiency of the Company’s supply chain, inventory, liquidity and capital resources, including increased costs in connection
with such efforts, the impact of the pandemic on the businesses of the Company’s suppliers and customers, and the overall impact the
pandemic may have on the Company’s financial results in 2022; statements about the Company’s acquisition strategies and opportunities and
the Company’s growth potential and strategies for growth; expectations regarding customer demand; expectations regarding the Company’s
liquidity and capital resources, including the sufficiency of its cash reserves and the availability of borrowing capacity to fund operations and/
or potential future acquisitions; anticipated revenues and the timing of such revenues; 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; statements regarding anticipated advantages the Company expects to realize from its investments
and capital expenditures; statements regarding 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 participation and growth in multiple markets; statements about the
Company’s business opportunities; 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 that could adversely affect the Company’s business
and prospects, and otherwise cause actual results to differ materially from those anticipated by such forward-looking statements, or otherwise,
including without limitation: the severity and duration of the COVID-19 pandemic and its impact on the markets in which the Company
participates, including its impact on the Company’s customers, suppliers and employees, as well as the U.S. and worldwide economies; the
timing, scope and effect of further governmental, regulatory, fiscal, monetary and public health responses to the COVID-19 pandemic; risks and
uncertainties associated with the COVID-19 pandemic and its impact on the Company’s business, financial condition and results of operations,
including risks relating to decreased, including substantially decreased, demand for the Company’s products; risks relating to the potential
closure of any of the Company’s facilities or the unavailability of key personnel or other employees; risks that the Company’s inventory, cash
reserves, liquidity or capital resources may be insufficient; risks relating to delayed payments by our customers and the potential for reduced or
canceled orders; risks relating to the increased costs associated with the Company’s efforts to respond to the pandemic; 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 related
to our indebtedness and compliance with covenants contained in our financing arrangements, and whether any available financing may be
sufficient to address our needs; 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; and risks associated with new product and program launches. Accordingly,
actual results may differ materially.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” and similar expressions intended to identify forward-looking statements.
Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent
uncertainty of estimates, forecasts, and projections, and may be materially better or worse than anticipated. Given these uncertainties, you
should not place undue reliance on these forward-looking statements. Forward-looking statements represent our current beliefs, estimates and
assumptions and are only as of the date of this Report. We expressly disclaim any duty to provide updates to forward-looking statements, and
the estimates and assumptions associated with them, after the date of this Report, in order to reflect changes in circumstances or expectations,
or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of our forward-looking statements
are qualified by these cautionary statements and those set forth in our filings with the Securities and Exchange Commission, including those
set forth under “Risk Factors” in Part I, Item 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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
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
Brooklyn, NY 11219
Newburyport, MA 01950 USA
R. Jeffrey Bailly
do
(978) 352-2200 phone
Chairman, CEO and President
ANNUAL MEETING
The annual meeting of stockholders
PLANT LOCATIONS
Alabama, California, Colorado,
will be held virtually at 10:00 a.m., on
Dominican Republic, Florida, Georgia,
June 8, 2022. Details will be posted to
Iowa, Massachusetts, Mexico, Michigan,
www.ufpt.com.
Rhode Island, Texas
COMMON STOCK LISTING
UFP Technologies’ common stock is
traded on NASDAQ under the symbol
UFPT.
INDEPENDENT PUBLIC
ACCOUNTANTS
Grant Thornton LLP
75 State Street, 13th floor
Boston, MA 02109
Steven G. Cardin
Vice President, Chief Operating
Officer, MedTech
Daniel C. Croteau
Chief Executive Officer
Corza Medical
Cynthia L. Feldmann
Former Partner and
National Chair
Medical Device Industry
KPMG LLP
Jason Holt
Vice President and General
Manager, Advanced Components
Ronald J. Lataille
Sr. Vice President, Treasurer,
and Chief Financial Officer
o
d
d
o
o
Christopher P. Litterio, Esq.
o
General Counsel, Secretary
& Sr. Vice President of
Human Resources
CORPORATE COUNSELS
Lynch Fink Harrington & Gray LLP
6 Beacon Street, Suite 415
Boston, MA 02108
Bodman PLC
201 Big Beaver Road, Suite 500
Troy, MI 48084
ABOUT THIS REPORT
The objective of this report is to
provide existing and prospective
shareholders a tool to understand
Marc D. Kozin
our financial results, what we do as a
Professional Board Member
company and where we are headed
in the future. We aim to achieve
these goals with clarity, simplicity
and efficiency. We welcome your
comments and suggestions.
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.
Thomas Oberdorf
Chairman & CEO
SIRVA, Inc.
Robert W. Pierce, Jr.
Chairman, CEO,
and Co-Owner
Pierce Aluminum Co.
Lucia Luce Quinn
Board Consultant
Genuity Science
Mitchell C. Rock
President, MedTech
d
d
d
d
o
d Directors
o Officers
STOCKHOLDER SERVICES
Stockholders whose shares are held in
street names often experience delays
in receiving company communications
forwarded through brokerage firms or
financial institutions. Any shareholder
or other interested party who wishes
to receive information directly should
call or write the Company. Please
specify your preference for 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, 2021, 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
O P E R AT I N G P R I N C I P L E S
C U S T O M E R S
We believe the primary purpose of our company is to serve our customers.
We seek to “wow” our customers with responsiveness, and great products.
E T H I C S
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.
E M P L O Y E E S
We are dedicated to providing a positive, challenging, and rewarding work
environment for all of our employees.
Q U A L I T Y
We are dedicated to the never-ending process of continuously improving our
quality of products, service, communications, relationships, and commitments.
S I M P L I F I C A T I O N
We seek to simplify our business process through the constant reexamination
of our methods and elimination of all non-value-added activities.
E N T R E P R E N E U R S H I P
We strive to create an environment that encourages autonomous decision-
making and a sense of ownership at all levels of the company.
P R O F I T
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