UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-12648
UFP Technologies, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 04-2314970 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
100 Hale Street, Newburyport, MA 01950, USA
(Address of principal executive offices) (Zip Code)
(978) 352-2200
(Registrant's telephone number, including area code)
_________________________________________
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X ; No ____
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X ; No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | |
| Accelerated filer | ☒ | |
| Non–accelerated filer | ☐ [Do not check if a smaller reporting company] | |
| Smaller reporting company | ☐ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ____; No X
7,348,290 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of May 4, 2018.
UFP Technologies, Inc.
Index
| PART I: | FINANCIAL INFORMATION |
| ITEM 1: | FINANCIAL STATEMENTS |
Condensed Consolidated Balance Sheets
(In thousands, except share data)
|
March 31,
2018 |
December 31,
2017 |
|||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 7,064 | $ | 37,978 | ||||
| Receivables, less allowance for doubtful accounts of $730 at March 31, 2018 and $652 at December 31, 2017 | 29,285 | 21,381 | ||||||
| Inventories | 18,258 | 12,863 | ||||||
| Prepaid expenses | 2,716 | 1,835 | ||||||
| Refundable income taxes | 776 | 1,017 | ||||||
| Total current assets | 58,099 | 75,074 | ||||||
| Property, plant and equipment | 113,935 | 106,716 | ||||||
| Less accumulated depreciation and amortization | (55,148 | ) | (53,064 | ) | ||||
| Net property, plant and equipment | 58,787 | 53,652 | ||||||
| Goodwill | 51,838 | 7,322 | ||||||
| Intangible assets, net | 23,186 | - | ||||||
| Non-qualified deferred compensation plan | 2,126 | 2,015 | ||||||
| Other assets | 188 | 144 | ||||||
| Total assets | $ | 194,224 | $ | 138,207 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 5,412 | $ | 4,180 | ||||
| Accrued expenses | 5,540 | 5,466 | ||||||
| Deferred revenue | 3,130 | 297 | ||||||
| Current portion of long-term debt | 2,857 | - | ||||||
| Total current liabilities | 16,939 | 9,943 | ||||||
| Long-term debt, excluding current portion | 46,429 | - | ||||||
| Deferred income taxes | 2,620 | 2,440 | ||||||
| Non-qualified deferred compensation plan | 2,148 | 2,030 | ||||||
| Other liabilities | 67 | 82 | ||||||
| Total liabilities | 68,203 | 14,495 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value, 1,000,000 shares authorized; zero shares issued or outstanding | - | - | ||||||
| Common stock, $.01 par value, 20,000,000 shares authorized; 7,351,172 and 7,321,613 shares issued and outstanding, respectively at March 31, 2018; 7,309,909 and 7,280,350 shares issued and outstanding, respectively at December 31, 2017 | 73 | 73 | ||||||
| Additional paid-in capital | 27,291 | 26,664 | ||||||
| Retained earnings | 99,244 | 97,562 | ||||||
| Treasury stock at cost, 29,559 shares at March 31, 2018 and 29,559 at December 31, 2017 | (587 | ) | (587 | ) | ||||
| Total stockholders’ equity | 126,021 | 123,712 | ||||||
| Total liabilities and stockholders' equity | $ | 194,224 | $ | 138,207 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
|
Three Months Ended
March 31, |
||||||||
| 2018 | 2017 | |||||||
| Net sales | $ | 42,931 | $ | 37,053 | ||||
| Cost of sales | 32,746 | 27,537 | ||||||
| Gross profit | 10,185 | 9,516 | ||||||
| Selling, general & administrative expenses | 6,592 | 6,316 | ||||||
| Acquisition related costs | 1,069 | - | ||||||
| Gain on sale of fixed assets | (40 | ) | (5 | ) | ||||
| Operating income | 2,564 | 3,205 | ||||||
| Interest income | (25 | ) | (42 | ) | ||||
| Interest expense | 273 | 14 | ||||||
| Other income | (50 | ) | - | |||||
| Income before income tax expense | 2,366 | 3,233 | ||||||
| Income tax expense | 589 | 1,062 | ||||||
| Net income | $ | 1,777 | $ | 2,171 | ||||
| Net income per share: | ||||||||
| Basic | $ | 0.24 | $ | 0.30 | ||||
| Diluted | $ | 0.24 | $ | 0.30 | ||||
| Weighted average common shares outstanding: | ||||||||
| Basic | 7,300 | 7,216 | ||||||
| Diluted | 7,378 | 7,297 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
Three Months Ended
March 31, |
||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,777 | $ | 2,171 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 1,832 | 1,395 | ||||||
| Gain on sale of fixed assets | (40 | ) | (5 | ) | ||||
| Share-based compensation | 237 | 209 | ||||||
| Deferred income taxes | 346 | 78 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables, net | (3,520 | ) | (674 | ) | ||||
| Inventories | (977 | ) | (260 | ) | ||||
| Prepaid expenses | (759 | ) | (588 | ) | ||||
| Refundable income taxes | 241 | 807 | ||||||
| Other assets | (155 | ) | (14 | ) | ||||
| Accounts payable | (290 | ) | 1,513 | |||||
| Accrued expenses | (1,445 | ) | (682 | ) | ||||
| Deferred revenue | 658 | 68 | ||||||
| Non-qualified deferred compensation plan and other liabilities | 103 | 120 | ||||||
| Net cash (used in) provided by operating activities | (1,992 | ) | 4,138 | |||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant, and equipment | (1,494 | ) | (1,463 | ) | ||||
| Acquisition of Dielectrics, net of cash acquired | (76,978 | ) | - | |||||
| Proceeds from sale of fixed assets | 40 | 5 | ||||||
| Net cash used in investing activities | (78,432 | ) | (1,458 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from advances on revolving line of credit | 36,000 | - | ||||||
| Payments on revolving line of credit | (6,000 | ) | - | |||||
| Proceeds from the issuance of long-term debt | 20,000 | - | ||||||
| Principal repayments of long-term debt | (714 | ) | (256 | ) | ||||
| Proceeds from exercise of stock options, net of shares presented for exercise | 368 | 79 | ||||||
| Payment of statutory withholdings for stock options exercised and restricted stock units vested | (144 | ) | (107 | ) | ||||
| Net cash provided by (used in) financing activities | 49,510 | (284 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (30,914 | ) | 2,396 | |||||
| Cash and cash equivalents at beginning of period | 37,978 | 31,359 | ||||||
| Cash and cash equivalents at end of period | $ | 7,064 | $ | 33,755 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
Notes to Interim Condensed Consolidated Financial Statements
| (1) | Basis of Presentation |
The interim condensed consolidated financial statements of UFP Technologies, Inc. (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, included in the Company's 2017 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheet as of March 31, 2018, the condensed consolidated statements of income for the three-month periods ended March 31, 2018 and 2017, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2018 and 2017 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2017 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm, but does not include all of the information and footnotes required for complete annual financial statements.
The preparation of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The results of operations for the three-month period ended March 31, 2018, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2018.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers , which was subsequently updated (“ASC 606”). The Company adopted ASC 606 on January 1, 2018. See Note 2 for further details.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases . Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its consolidated financial position and results of operations.
Revisions
Certain revisions have been made to the December 31, 2017 Condensed Consolidated Balance Sheet to conform to the current year presentation relating to a reclassification of deferred revenue. The reclassification resulted in an increase in deferred revenue and a decrease in accrued expenses in the amount of approximately $297,000. In addition, certain revisions have been made to the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017, also due to a reclassification of deferred revenue. The reclassification resulted in an increase to the change in deferred revenue and a decrease in the change in accrued expenses in the amount of approximately $68,000. These revisions had no impact on previously reported net income and are deemed immaterial to the previously issued financial statements.
| (2) | Revenue Recognition |
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers , using the modified retrospective transition method. Under this method, the Company applied ASC 606 to contracts under which all performance obligations were not complete as of January 1, 2018 and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018 are presented in accordance with ASC 606. Prior period amounts are not adjusted and are reported in accordance with requirements in ASC 605, Revenue Recognition , which is also referred to herein as “legacy GAAP”.
| 6 |
The cumulative effect of the adoption on our condensed consolidated balance sheet, by applying the modified retrospective method as of January 1, 2018, is as follows (in thousands):
| As Reported | As Adjusted | |||||||||||
|
December 31,
2017 |
Cumulative
Adjustments |
January 1,
2018 |
||||||||||
| Assets: | ||||||||||||
| Property, plant and equipment | $ | 106,716 | $ | 1,027 | $ | 107,743 | ||||||
| Accumulated depreciation and amortization | (53,064 | ) | (548 | ) | (53,612 | ) | ||||||
| Net property, plant and equipment | 53,652 | 479 | 54,131 | |||||||||
| Liabilities: | ||||||||||||
| Deferred revenue | 297 | 574 | 871 | |||||||||
| Stockholders' equity: | ||||||||||||
| Retained earnings | 97,562 | (95 | ) | 97,467 | ||||||||
The following reflects the Company’s condensed consolidated balance sheet and condensed consolidated statement of income on an as reported basis and as if we had continued to recognize revenue under legacy GAAP (in thousands):
| March 31, 2018 | ||||||||||||
| As Reported |
Balances
without adoption of ASC 606 |
Difference | ||||||||||
| Assets: | ||||||||||||
| Property, plant and equipment | $ | 113,935 | $ | 112,831 | $ | 1,104 | ||||||
| Accumulated depreciation and amortization | (55,148 | ) | (54,474 | ) | (674 | ) | ||||||
| Net property, plant and equipment | 58,787 | 58,357 | 430 | |||||||||
| Liabilities: | ||||||||||||
| Deferred revenue | 3,130 | 2,613 | 517 | |||||||||
| Stockholders' equity: | ||||||||||||
| Retained earnings | 99,244 | 99,331 | (87 | ) | ||||||||
| For the three months ended March 31, 2018 | ||||||||||||
| As Reported |
Balances
without adoption of ASC 606 |
Difference | ||||||||||
| Net sales | $ | 42,931 | $ | 42,874 | $ | 57 | ||||||
| Cost of sales | 32,746 | 32,697 | 49 | |||||||||
| Gross profit | 10,185 | 10,177 | 8 | |||||||||
| 7 |
The following summarizes the significant changes under ASC 606 as compared to legacy GAAP:
| · | Under legacy GAAP, the Company recognized revenue for certain customer tooling at the time the tooling was complete and accepted by the customer. Under ASC 606, as “control” of this tooling does not transfer to the customer, the related purchase orders do not qualify as an “accounting contract” and as a result the consideration received is recorded as deferred revenue and recognized over the estimated time for which parts are produced on each respective tool (approximately two years). The related costs to produce the tooling are capitalized and depreciated over the estimated useful life of the tool (approximately two years). |
| · | Under legacy GAAP, the Company recognized revenue on long-term agreements with variable pricing at the selling price that was in effect for the current period at the time of shipment. Under ASC 606, the Company will recognize revenue at the weighted average selling price for each part over the term of the agreement for any agreements where the Company estimates that we will not be able to achieve the cost reductions necessary to maintain a consistent margin over the term of the agreement. The Company has a limited number of long-term agreements with variable pricing. |
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, which results in revenue being recognized over the estimated time for which parts are produced on each respective tool. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to our customers (See Note 9 for further information regarding net sales by market):
|
Three Months Ended
March 31, |
|||||||||
| 2018 | 2017 | ||||||||
| (in thousands) | |||||||||
| Net sales of products | $ | 42,440 | $ | 36,657 | |||||
| Net sales of tooling | 491 | 396 | |||||||
| Total net sales | $ | 42,931 | $ | 37,053 | |||||
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, we have deferred revenue, or contract liabilities, included within “deferred revenue” on our condensed consolidated balance sheet.
| 8 |
Revenue recognized during the three months ended March 31, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $314,000. The following table presents opening and closing balances of contract liabilities for the three months ended March 31, 2018 (in thousands):
|
Contract
Liabilities |
|||||
| Deferred revenue - January 1, 2018 | $ | 871 | |||
| Acquired in Dielectrics business combination | 2,175 | ||||
| Increases due to consideration received from customers | 685 | ||||
| Revenue recognized - Q1 2018 | (601 | ) | |||
| Deferred revenue - March 31, 2018 | $ | 3,130 | |||
| (3) | Supplemental Cash Flow Information |
|
Three Months Ended
March 31, |
|||||||||
| 2018 | 2017 | ||||||||
| (in thousands) | |||||||||
| Cash paid for: | |||||||||
| Interest | $ | 114 | $ | 14 | |||||
| Income taxes, net of refunds | - | 79 | |||||||
| Non-cash investing and financing activities: | |||||||||
| Capital additions accrued but not yet paid | $ | 197 | $ | 392 | |||||
| (4) | 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 |
March 31,
2018 |
||||
| Assets: | |||||
| Derivative financial instruments | $ | 50 | |||
Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing model, which utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full term of the swap agreement.
| 9 |
The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, which 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 .
| (5) | 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).
The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2017. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):
|
Three Months Ended
March 31, |
|||||||||
| Share-based compensation related to: | 2018 | 2017 | |||||||
| Common stock grants | $ | 100 | $ | 100 | |||||
| Stock option grants | 15 | 9 | |||||||
| Restricted Stock Unit awards ("RSUs") | 122 | 100 | |||||||
| Total share-based compensation | $ | 237 | $ | 209 | |||||
The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $155,000 and $137,000 for the three-month periods ended March 31, 2018 and 2017 , respectively.
The following is a summary of stock option activity under all plans for the three-month period ended March 31, 2018 :
|
Shares Under
Options |
Weighted
Average Exercise Price (per share) |
Weighted
Average Remaining Contractual Life (in years) |
Aggregate
Intrinsic Value (in thousands) |
|||||||||||||
| Outstanding at December 31, 2017 | 202,379 | $ | 18.23 | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (30,452 | ) | 28.94 | |||||||||||||
| Outstanding at March 31, 2018 | 171,927 | $ | 19.32 | 3.60 | $ | 1,750 | ||||||||||
| Exercisable at March 31, 2018 | 155,677 | $ | 18.48 | 3.60 | $ | 1,715 | ||||||||||
| Vested and expected to vest at March 31, 2018 | 171,927 | $ | 19.32 | 3.60 | $ | 1,750 | ||||||||||
During the three-month period ended March 31, 2018 , the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $514,000, and the total amount of consideration received by the Company from the exercised options was approximately $368,000. During the three-month period ended March 31, 2017 , the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $184,000, and the total amount of consideration received by the Company from the exercised options was approximately $79,000. 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 both of the three month periods ended March 31, 2018 and 2017, there were zero shares surrendered for this purpose.
| 10 |
On February 21 , 2018, the Company’s Compensation Committee approved the award of $400,000, payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan. The shares will be issued in December 2018.
The following table summarizes information about RSUs activity during the three-month period ended March 31, 2018:
|
Restricted
Stock Units |
Weighted Average
Award Date Fair Value |
||||||||
| Outstanding at December 31, 2017 | 57,395 | $ | 21.03 | ||||||
| Awarded | 22,399 | 29.30 | |||||||
| Shares vested | (16,050 | ) | 23.55 | ||||||
| Outstanding at March 31, 2018 | 63,744 | $ | 22.11 | ||||||
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 three-month periods ended March 31, 2018 and 2017, 5,238 and 4,377 shares were surrendered at an average market price of $27.60 and $24.50, respectively.
As of March 31, 2018, the Company had approximately $1.5 million of unrecognized compensation expense that is expected to be recognized over a period of 4 years .
| (6) | Inventories |
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, and consist of the following at the stated dates (in thousands):
|
March 31,
2018 |
December 31,
2017 |
||||||||
| Raw materials | $ | 8,761 | $ | 6,898 | |||||
| Work in process | 3,331 | 1,207 | |||||||
| Finished goods | 6,166 | 4,758 | |||||||
| Total inventory | $ | 18,258 | $ | 12,863 | |||||
| (7) | Preferred Stock |
On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, to the stockholders of record on March 20, 2009. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Share”) of the Company, at a price of $25 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The Rights expire on March 19, 2019.
| (8) | Income Per Share |
Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during each period.
| 11 |
The weighted average number of shares used to compute basic and diluted net income per share consisted of the following (in thousands):
|
Three Months Ended
March 31, |
||||||||
| 2018 | 2017 | |||||||
| Basic weighted average common shares outstanding | 7,300 | 7,216 | ||||||
| Weighted average common equivalent shares due to stock options and RSUs | 78 | 81 | ||||||
| Diluted weighted average common shares outstanding | 7,378 | 7,297 | ||||||
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 income per share because the effect would be antidilutive. For the three-month periods ended March 31, 2018 and 2017 , the number of stock awards excluded from the computation of diluted earnings per share for this reason was 15,000 and 35,193, respectively.
| (9) | Segment Reporting |
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 three-month period ended March 31, 2018. All of the Company’s assets are located in the United States.
The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Electronics, Industrial, and Aerospace and Defense markets. Net sales by market for the three -month periods ended March 31, 2018 and 2017 are as follows (in thousands) :
| Three Months Ended March 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Market | Net Sales | % | Net Sales | % | ||||||||||||
| Medical | $ | 24,138 | 56.2 | % | $ | 17,456 | 47.1 | % | ||||||||
| Consumer | 5,460 | 12.7 | % | 4,441 | 12.0 | % | ||||||||||
| Automotive | 5,356 | 12.5 | % | 6,719 | 18.1 | % | ||||||||||
| Electronics | 2,871 | 6.7 | % | 2,909 | 7.9 | % | ||||||||||
| Industrial | 2,627 | 6.1 | % | 2,468 | 6.7 | % | ||||||||||
| Aerospace & Defense | 2,479 | 5.8 | % | 3,060 | 8.3 | % | ||||||||||
| Net Sales | $ | 42,931 | 100.0 | % | $ | 37,053 | 100.0 | % | ||||||||
Certain immaterial amounts for the three months ended March 31, 2017 were reclassified between markets to conform to the current period presentation.
| (10) | Other Intangible Assets |
The carrying values of the Company’s definite lived intangible assets as of March 31, 2018, are as follows (in thousands):
|
Tradename &
Brand |
Non-
Compete |
Customer
List |
Total | |||||||||||||
| Estimated useful life | 10 years | 5 years | 20 years | |||||||||||||
| Gross amount | $ | 367 | $ | 462 | $ | 22,555 | $ | 23,384 | ||||||||
| Accumulated amortization | (6 | ) | (15 | ) | (177 | ) | $ | (198 | ) | |||||||
| Net balance | $ | 361 | $ | 447 | $ | 22,378 | $ | 23,186 | ||||||||
| 12 |
The weighted-average amortization period for all intangible assets is 19.6 years. Amortization expense related to intangible assets was approximately $198,000 and $79,000 for the three-month periods ended March 31, 2018 and 2017, respectively. The estimated remaining amortization expense as of March 31, 2018 is as follows (in thousands):
| Remainder of: | |||||
| 2018 | $ | 954 | |||
| 2019 | 1,257 | ||||
| 2020 | 1,257 | ||||
| 2021 | 1,257 | ||||
| 2022 | 1,257 | ||||
| Thereafter | 17,204 | ||||
| Total | $ | 23,186 | |||
| (11) | Income Taxes |
The income tax expense included in the accompanying unaudited condensed consolidated statements of income principally relates to the Company’s proportionate share of the pre-tax income of its wholly-owned subsidiaries. The determination of income tax expense for interim reporting purposes is based upon the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur.
The Company recorded tax expense of approximately 24.9% and 32.8% of income before income tax expense, respectively, for each of the three-month periods ended March 31, 2018 and 2017. The decrease in the effective tax rate for the current period is largely due to a change in the statutory federal tax rate for 2018 and share-based payment related tax benefits recorded of approximately $97,000. 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.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), resulting in significant modifications to existing law. The Tax Act effected a reduction in the corporate tax rate from 35% to 21%, and changes to executive compensation limitations under IRC Section 162(m), among other changes. The Company made what it considers to be a reasonable estimate of the impact of the Tax Act in its financials for the year ended December 31, 2017. The Company has not recorded any changes to this estimate for the three month period ended March 31, 2018.
Staff Accounting Bulletin (“SAB”) No. 118 issued by the Securities and Exchange Commission (“SEC”), provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from and interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by the U.S. Department of the Treasury.
| (12) | Indebtedness |
On December 2, 2013, the Company entered into an unsecured $40 million revolving credit facility with Bank of America, N.A. The credit facility called for interest of LIBOR plus a margin that ranged from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranged from 0.25% to zero. In both cases the applicable margin was dependent upon Company performance. Under the credit facility, the Company was subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The credit facility was amended effective December 31, 2014, to modify the definition of “consolidated fixed-charge coverage ratio”. The Company’s $40 million credit facility was to mature on November 30, 2018.
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time to time party thereto. The Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement.
The credit facilities under the Amended and Restated Credit Agreement consist of a $20 million unsecured term loan and an unsecured revolving credit facility, under which the Company may borrow up to $50 million. The Amended and Restated Credit Agreement matures on February 1, 2023. The proceeds borrowed pursuant to the Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of Dielectrics Inc. (“Dielectrics”), as well as certain other permitted acquisitions. The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
| 13 |
The Amended and Restated Credit Agreement calls for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from .25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of March 31, 2018, the applicable interest rate was approximately 2.88% and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
Included in the Amended and Restated Credit Facilities were approximately $0.6 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.
Long-term debt consists of the following (in thousands):
|
March 31,
2018 |
|||||
| Revolving credit facility | $ | 30,000 | |||
| Term loan | 19,286 | ||||
| Total long-term debt | 49,286 | ||||
| Current portion | (2,857 | ) | |||
| Long-term debt, excluding current portion | $ | 46,429 | |||
Derivative Financial Instruments
The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments. By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the Amended and Restated Credit Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap modifies the Company’s interest rate exposure by converting the term loan from a variable rate to a fixed rate in order to hedge against the possibility of rising interest rates during the term of the loan. The notional amount was $19,285,714 at March 31, 2018. The fair value of the swap as of March 31, 2018 was approximately $50,000 and is included in other assets. Changes in the fair value of the swap are recorded in other income/expense and were approximately $50,000 during the three-months ended March 31, 2018.
| 14 |
| (13) | Acquisition |
On February 1, 2018 the Company purchased 100% of the outstanding shares of common stock of Dielectrics Inc., pursuant to a stock purchase agreement and related agreements, for an aggregate purchase price of $80 million in cash. The purchase price was subject to adjustment based upon Dielectrics’ working capital at closing. An additional $250,000 of consideration is due to be paid by the Company as a result of the final working capital adjustment. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses and liabilities. The Purchase Agreement contains customary representations, warranties and covenants customary for transactions of this type.
Founded in 1954 and based in Chicopee, Massachusetts, Dielectrics is a leader in the design, development, and manufacture of medical devices using thermoplastic materials. They primarily use radio frequency and impulse welding to design and manufacture solutions for the medical industry. In addition to the long-standing customer relationships, they bring to the Company a seasoned management team and a profitable book of business. The Company has leased the Chicopee location from a realty trust owned by the selling shareholder and affiliates. The lease is for five years with two five-year renewal options.
The following table summarizes the preliminary 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. The final purchase price allocation may change based on final appraisals, valuations and analysis of the fair value of the acquired assets and assumed liabilities (in thousands):
| Consideration Paid: | |||||
| Cash paid at closing | $ | 80,000 | |||
| Working capital adjustment | 250 | ||||
| Cash from Dielectrics | (3,272 | ) | |||
| Total consideration | $ | 76,978 | |||
| Purchase Price Allocation: | |||||
| Accounts receivable | $ | 4,384 | |||
| Inventory | 4,418 | ||||
| Other current assets | 122 | ||||
| Property, Plant and Equipment | 4,600 | ||||
| Customer list | 22,555 | ||||
| Non-compete | 462 | ||||
| Trade name and brand | 367 | ||||
| Goodwill | 44,516 | ||||
| Total identifiable assets | $ | 81,424 | |||
| Accounts payable | (1,325 | ) | |||
| Accrued expenses | (946 | ) | |||
| Deferred revenue | (2,175 | ) | |||
| Net Assets acquired | $ | 76,978 | |||
Acquisition costs associated with the transaction were approximately $1.1 million and were charged to expense in the three-month period ended March 31, 2018. These costs were primarily for investment banking and legal fees and are reflected on the face of the income statement.
| 15 |
The following table contains an unaudited pro forma condensed consolidated statement of operations for the three month periods ended March 31, 2018 and 2017, as if the Dielectrics acquisition had occurred at the beginning of each of the respective periods (in thousands):
The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred had the Dielectrics acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
The amount of revenue and net income of Dielectrics recognized since the acquisition date, which is included in the condensed consolidated statement of income for the period ended March 31, 2018, was approximately $6.0 million and $1.1 million, respectively.
| ITEM 2: | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-looking Statements
Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements are subject to known and unknown risks, uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about the Company’s prospects, anticipated trends in the different markets in which the Company competes, including the medical, automotive, consumer, electronics, industrial and aerospace and defense markets, anticipated new customer and vendor contracts, statements regarding anticipated advantages relating to the Company’s decisions to consolidate its facilities and the expected cost savings and efficiencies associated therewith, statements regarding the end of the Company’s automotive door panel program with Mercedes Benz, the closure of the Company’s Georgia plant and the resulting impact to revenues, anticipated advantages and the timing associated with requalification of parts, anticipated advantages of maintaining fewer, larger plants, anticipated advantages the Company expects to realize from its investments and capital expenditures, including the development of and investments in its molded fiber product lines, expectations regarding the manufacturing capacity and efficiencies of the Company, statements about the Company’s entry into new contracts, and the timing and anticipated advantages associated therewith, statements about the Company’s acquisition opportunities and strategies, statements about the Company’s acquisition of Dielectrics and the integration of the Dielectrics business, the Company’s participation and growth in multiple markets, its business opportunities, the Company’s growth potential and strategies for growth, anticipated revenues and the timing of such revenues, and any indication that the Company may be able to sustain or increase its sales and earnings or sales and earnings growth rates. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including without limitation risks and uncertainties associated with the identification of suitable acquisition candidates and the successful, efficient execution of acquisition transactions and integration of Dielectrics and any other acquisition candidates, risks and uncertainties associated with plant closures and consolidations, including the closure of the Company’s Georgia plant, and expected efficiencies from consolidating manufacturing, risks and uncertainties associated with the requalification and relocation of parts, the risk that the Company may not be able to finalize anticipated new customer and vendor contracts, risks associated with the implementation of new production equipment and requalification or recertification of transferred equipment in a timely, cost-efficient manner, and risks that any benefits from such new equipment may be delayed or not fully realized, or that the Company may be unable to fully utilize its expected production capacity. Accordingly, actual results may differ materially.
| 16 |
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 estimates and assumptions 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 the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as well as the risks and uncertainties discussed elsewhere in this Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFP Technologies, Inc. and its consolidated subsidiaries.
Overview
UFP Technologies is an innovative designer and custom converter of foams, plastics, composites, and natural fiber products, principally serving the medical, automotive, consumer, aerospace and defense, electronics and industrial markets. The Company consists of a single operating and reportable segment. As previously disclosed, on February 1, 2018, the Company acquired Dielectrics, Inc. pursuant to a stock purchase agreement and related agreements for an aggregate purchase price of $80 million in cash.
Sales for the Company for the three-month period ended March 31, 2018 grew 16% to $42.9 million from $37.1 million in the same period last year largely due to sales of approximately $6 million from Dielectrics. Although Dielectrics made a significant contribution to earnings, the Company expensed approximately $1.1 million in acquisition related expenses and incurred approximately $630,000 in losses at its Georgia plant as a result of the plant closing due to the phase-out of the Company’s door panel program for Mercedes-Benz. As a result, earnings-per-share declined to $0.24 in the current quarter from $0.30 last year. Neither of these two events are expected to impact earnings going forward.
The Company’s current strategy includes further organic growth and growth through strategic acquisitions .
Results of Operations
Sales
Sales for the three-month period ended March 31, 2018 increased approximately 15.9% to $42.9 million from sales of $37.1 million for the same period in 2017. The increase in sales was primarily due to Dielectric’s sales of approximately $6 million, which were all in the medical market. On a market basis, sales to customers in the medical and consumer markets grew 38% and 23%, respectively while sales to customers in the automotive market and aerospace and defense markets declined 20% and 19%, respectively. The increase in sales to customers in the medical market was primarily due to sales by Dielectrics as well as a general increase in demand from UFP customers. The increase in sales to customers in the consumer market was primarily due to sales of molded fiber protective packaging to a new customer. The decline in sales to customers in the automotive market was primarily due to the phase-out of the automotive door panel program for Mercedes-Benz. The decline in sales to customers in the aerospace and defense market was primarily due to the timing of purchase orders from the Company’s customers; the Company does not expect this to be indicative of the order pattern for the balance of the year.
Gross Profit
Gross profit as a percentage of sales (“gross margin”) decreased to 23.7% for the three-month period ended March 31, 2018, from 25.7% for the same period in 2017. As a percentage of sales, material and labor costs collectively increased 0.5%, while overhead increased 1.4%. The increase in collective material and labor costs as well as overhead as a percentage of sales is primarily due to costs incurred at the Company’s Georgia plant which had virtually no sales and approximately $0.5 million in overhead. As previously disclosed, the Company closed the Georgia plant in April 2018, at the end of the Company’s lease.
| 17 |
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased approximately 4.4% to $6.6 million for the three-month period ended March 31, 2018, from $6.3 million for the same period in 2017. As a percentage of sales, SG&A decreased to 15.4% for the three-month period ended March 31, 2018, from 17.0% for the same three-month period in 2017. The increase in SG&A for the three-month period ended March 31, 2018 is primarily due to approximately $679,000 in SG&A expenses from Dielectrics partially offset by approximately $200,000 in lower selling compensation and approximately $75,000 in lower professional fees for the Company in the first quarter of 2018. The decrease in SG&A as a percentage of sales is primarily due to lower SG&A costs at UFP as well as lower SG&A as a percentage of sales at Dielectrics.
Acquisition Costs
The Company incurred approximately $1.1 million in costs associated with the Dielectrics acquisition which were charged to expense in the three-month period ended March 31, 2018. These costs were primarily for investment banking and legal fees and are reflected on the face of the income statement.
Interest Income and Expense
The Company had net interest expense of approximately $248,000 and net interest income of $28,000 for the three-month periods ended March 31, 2018 and 2017, respectively. The increase in net interest expense is primarily due to interest paid on the debt incurred to finance the Dielectrics acquisition.
Income Taxes
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), resulting in significant modifications to existing law. The Tax Act effected a reduction in the corporate tax rate from 35% to 21%, and changed executive compensation limitations under IRC Section 162(m), among other changes. The Company made what it considers to be a reasonable estimate of the impact of the Tax Act in its financials for the year ended December 31, 2017. The Company has not recorded any changes to this estimate for the three month period ended March 31, 2018.
Staff Accounting Bulletin (“SAB”) No. 118 issued by the Securities and Exchange Commission (“SEC”), provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from and interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by the U.S. Department of the Treasury.
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 used in operations for the three-month period ended March 31, 2018 was approximately $2.0 million and was primarily a result of net income generated of $1.8 million, depreciation and amortization of approximately $1.8 million, share-based compensation of $0.2 million, an increase in deferred taxes of $0.3 million, an increase in refundable income taxes of approximately $0.2 million, an increase in deferred revenue of approximately $0.7 million and an increase in other liabilities of approximately $0.1 million. These cash inflows and adjustments to income were offset by an increase in accounts receivable of approximately $3.5 million primarily due to increased sales in the last two months of the first quarter of 2018 over the same period of the fourth quarter of 2017 and the incremental receivables from the Dielectrics acquisition, an increase in inventory of approximately $1.0 million primarily due to in-process customer tooling, an increase in prepaid expenses of approximately $0.8 million due to upfront insurance premium payments and machinery deposits, an increase in other assets of approximately $0.1 million, and a decrease in accounts payable and accrued expenses of approximately $1.7 million due to the timing of vendor payments in the ordinary course of business and payments of year-end variable compensation.
Net cash used in investing activities during the three-month period ended March 31, 2018 was approximately $78.4 million and was primarily the result of the acquisition of Dielectrics and additions of manufacturing machinery and equipment and various building improvements across the Company.
Net cash used in financing activities was approximately $49.5 million during the three-month period ended March 31, 2018, representing borrowings under our credit facility to fund the Dielectrics acquisition of $56.0 million, repayments on our credit facility of approximately $6.7 million and to pay statutory withholding for stock options exercised and restricted stock units vested of approximately $0.2 million, partially offset by net proceeds received upon stock options exercises of approximately $0.4 million.
| 18 |
Outstanding and Available Debt
On December 2, 2013, the Company entered into an unsecured $40 million revolving credit facility with Bank of America, N.A. The credit facility called for interest of LIBOR plus a margin that ranged from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranged from 0.25% to zero. In both cases the applicable margin was dependent upon Company performance. Under the credit facility, the Company was subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The credit facility was amended effective December 31, 2014, to modify the definition of “consolidated fixed-charge coverage ratio”. The Company’s $40 million credit facility was to mature on November 30, 2018.
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time to time party thereto. The Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement.
The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”) consist of a $20 million unsecured term loan to UFP and an unsecured revolving credit facility, under which the Company may borrow up to $50 million. The Amended and Restated Credit Facilities mature on February 1, 2023. The proceeds of the Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of Dielectrics, as well as certain other permitted acquisitions. The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Facilities call for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from .25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments.
Included in the Amended and Restated Credit Facilities were approximately $0.6 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies. As of March 31, 2018, the Company was in compliance with all covenants under the credit facility.
Long-term debt consists of the following (in thousands):
|
March 31,
2018 |
|||||
| Revolving credit facility | $ | 30,000 | |||
| Term loan | 19,286 | ||||
| Total long-term debt | 49,286 | ||||
| Current portion | (2,857 | ) | |||
| Long-term debt, excluding current portion | $ | 46,429 | |||
Future Liquidity
The Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations. The Company’s principal sources of funds are its operations and its amended and restated credit facility. The Company used cash of approximately $2.0 million in operations during the three months ended March 31, 2018 and 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.
| 19 |
Throughout fiscal 2018, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants. The Company may consider additional acquisitions of companies, technologies, or products that are complementary to its business. The Company believes that its existing resources, including its revolving credit facility, together with cash expected to be generated from operations and funds expected to be available to it through any necessary equipment financings and additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.
Stock Repurchase Program
On June 16, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. Under the program, the Company is authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. The stock repurchase program will end upon the earlier of the date on which the plan is terminated by the Board or when all authorized repurchases are completed. The timing and amount of stock repurchases, if any, will be determined based upon our evaluation of market conditions and other factors. The stock repurchase program may be suspended, modified, or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the program. The Company did not repurchase any shares of its common stock under this program in the first three months of 2018. Through March 31, 2018, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000. At March 31, 2018, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.
Commitments and Contractual Obligations
There have been no material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Off-Balance-Sheet Arrangements
In addition to operating leases, the Company’s off-balance-sheet arrangements include standby letters of credit which are included in the Company’s revolving credit facility. As of March 31, 2018, there was approximately $0.6 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.
| ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our market risks as previously disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017.
| ITEM 4: | CONTROLS AND PROCEDURES |
As of the end of the period covered by this report (the “Evaluation Date”), the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in SEC Rule 13a-15(e) or 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Company closed the acquisition of Dielectrics on February 1, 2018, and Dielectrics’ total assets and revenues constituted 43.1% and 14.0%, respectively, of the Company’s consolidated total assets and revenues as shown on our consolidated financial statements as of and for the three months ended March 31, 2018. As the acquisition occurred in the first quarter of fiscal 2018, the Company excluded Dielectrics’ internal control over financial reporting from the scope of the assessment of the effectiveness of the Company’s disclosure controls and procedures. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recently-acquired business may be omitted from the scope in the year of acquisition, if specified conditions are satisfied.
An evaluation was also performed under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Except as described above, that evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) , did not require significant changes in our internal controls and procedures over financial reporting and disclosures. However, the Company made enhancements to existing internal controls and procedures to ensure compliance with the new guidance.
| 20 |
| PART II: | OTHER INFORMATION |
| ITEM 1A: | RISK FACTORS |
There have been no material changes from the risk factors previously disclosed in Part 1 - Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
| ITEM 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer’s 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. The Company did not repurchase any shares of its common stock under this program in the first three months of 2018. Through March 31, 2018, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000. At March 31, 2018, approximately $9.4 million was available for future repurchases of the Company's common stock under this authorization.
| ITEM 6: | EXHIBITS |
__________________
| * | Filed herewith. |
| ** | Furnished herewith. |
| # | Indicates management contract or compensatory plan or arrangement. |
| 21 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UFP TECHNOLOGIES, INC.
| Date: May 10, 2018 | By: | /s/ R. Jeffrey Bailly |
|
R. Jeffrey Bailly Chairman, Chief Executive Officer, President, and Director (Principal Executive Officer) |
||
| Date: May 10, 2018 | By: | /s/ Ronald J. Lataille |
|
Ronald J. Lataille Chief Financial Officer (Principal Financial Officer) |
22
Exhibit 10.3
UFP TECHNOLOGIES, INC.
2003 INCENTIVE PLAN
As Amended and Restated on March 14, 2018
1. Statement of Purpose . The purpose of this 2003 Incentive Plan (hereinafter referred to as the “Plan”) is to benefit UFP TECHNOLOGIES, INC. (the “Company”) through the maintenance and development of its businesses by offering equity-based and other incentives to certain present and future executives and other 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.
2. Administration of the Plan .
(a) Board or Committee Administration . The Plan shall be administered by the Compensation Committee of the Company's Board of Directors (the “Board”) or such other committee thereof consisting of such members (not less than two) of the Board as are appointed from time to time by the Board (the “Compensation Committee”), each of the members of which, at the time of any action under the Plan, shall be (i) a “non-employee director” as then defined under Rule 16b-3 under the Act (or meeting comparable requirements of any successor rule relating to exemption from Section 16(b) of the Act), (ii) an “outside director” as then defined under Section 162(m) of the Internal Revenue Code (“Section 162(m)”) and (iii) an “independent director” as then defined under the rules of the Nasdaq Stock Market (or meeting comparable requirements of any stock exchange on which the Company's Common Stock, $.01 par value (the “Common Stock”) may then be listed). Hereinafter, all references in this Plan to the “Committee” shall mean the Board if no Committee has been appointed. The Committee shall have all necessary powers to administer and interpret the Plan. Such powers of the Compensation Committee include exclusive authority (within the limitations described and except as otherwise provided in the Plan) to select the employees or determine classes of employees to be granted Awards under the Plan, to determine the aggregate amount, type, size, and terms of the Awards to be made to eligible employees, and to determine the time when Awards will be granted. The Compensation Committee may take into consideration recommendations from the appropriate officers of the Company with respect to making the foregoing determinations as to Plan Awards, administration, and interpretation. The Committee shall have full power and authority to adopt such rules, regulations, agreements and instruments for the administration of the Plan and for the conduct of its business as the Committee deems necessary or advisable. The Committee's interpretations of the Plan and all action taken and determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all parties concerned, including the Company, its shareholders and any director or employee of the Company or any Subsidiary.
(b) Committee Actions . The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. A majority of the Committee shall constitute a quorum and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan.
(c) Section 409A . The Committee shall take into account compliance with Section 409A of the Internal Revenue Code in connection with any grant of an Award under the Plan, to the extent applicable.
3. Eligibility . Participation in the Plan shall be limited to executives or other employees (including officers and directors who are also employees) of the Company and its Subsidiaries selected on the basis of such criteria as the Committee may determine. Employees who participate in other incentive or benefit plans of the Company or any Subsidiary may also participate in this Plan. As used herein, the term “employee” shall mean any person employed full time or part time by the Company or a Subsidiary on a salaried basis, and the term “employment” shall mean full-time or part-time salaried employment by the Company or a Subsidiary.
4. Rules Applicable to Awards .
(a) All Awards .
(i) Awards . Awards may be granted in the form of any or a combination of the following: Stock Options; SARs; Restricted Stock; Unrestricted Stock; Stock Unit Awards, other Stock Based Awards; Cash Performance Awards; other Performance Awards; or grants of cash, or loans, made in connection with other Awards in order to help defray in whole or in part the economic cost (including tax cost) of the Award to the Participant.
(ii) Terms of Awards . The Committee shall determine the terms of all Awards subject to the limitations provided herein.
(iii) Performance Criteria . Where rights under an Award depend in whole or in part on satisfaction of Performance Criteria, actions by the Company that have an effect, however material, on such Performance Criteria or on the likelihood that they will be satisfied will not be deemed an amendment or alteration of the Award.
(iv) Vesting, Etc . Without limiting the generality of Section 4(a)(ii), the Committee may determine the time or times at which an Award will vest (i.e., become free of forfeiture restrictions) or become exercisable and the terms on which an Award requiring exercise will remain exercisable.
(b) Awards Requiring Exercise .
(i) Time and Manner of Exercise . Unless the Committee expressly provides otherwise, (A) an Award requiring exercise by the holder will not be deemed to have been exercised until the Committee receives a written notice of exercise (in form acceptable to the Committee) signed by the appropriate person and accompanied by any payment required under the Award; and (B) if the Award is exercised by any person other than the Participant, the Committee may require satisfactory evidence that the person exercising the Award has the right to do so.
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(ii) Exercise Price . The Committee shall determine the exercise price of each Stock Option or SAR; provided, however, that each Stock Option or SAR must have an exercise price that is not less than the fair market value of the Stock subject to the Stock Option, determined as of the date of grant. Except as provided in Section 6, in no event may any Stock Option or SAR previously granted under the Plan (i) be amended to decrease the exercise price or strike price thereof, as the case may be, (ii) be cancelled in conjunction with the grant of any new Stock Option or SAR with a lower exercise price or strike price, as the case may be, (iii) be amended to provide for a cash buyout of the Stock Option or SAR if such Stock Option or SAR is not “in the money,” (iv) be subject to a voluntary surrender and subsequent grant of “in the money” Stock Option or SAR (v) otherwise be subject to any action that would be treated under the NASDAQ rules as a “repricing” of such Stock Option or SAR unless such amendment, cancellation or action is approved by the Company’s shareholders.
(iii) Payment of Exercise Price, If Any . Where the exercise of an Award is to be accompanied by payment, the Committee may determine the required or permitted forms of payment.
(c) Awards Not Requiring Exercise .
(i). Restricted Stock . Restricted Stock awards shall be evidenced by a written agreement in the form prescribed by the Committee in its discretion, which shall set forth the number of shares of Common Stock awarded, the restrictions imposed thereon (which may include, without limitation, restrictions on the right of the grantee to sell, assign, transfer or encumber shares while such shares are subject to other restrictions imposed under this Section 4), the duration of such restrictions; the events (which may, in the discretion of the Committee, include performance-based events or objectives) the occurrence of which would cause a forfeiture of the Restricted Stock in whole or in part; and such other terms and conditions as the Committee in its discretion deems appropriate. If so determined by the Committee at the time of an award of Restricted Stock, the lapse of restrictions on Restricted Stock may be based on the extent of achievement over a specified performance period of one or more performance targets based on performance criteria established by the Committee. Restricted Stock awards shall be effective upon execution of the applicable Restricted Stock agreement by the Company and the Participant. Following a Restricted Stock award and prior to the lapse or termination of the applicable restrictions, the share certificates for such Restricted Stock shall be held in escrow by the Company. Upon the lapse or termination of the applicable restrictions (and not before such time), the certificates for the Restricted Stock shall be issued or delivered to the Participant. From the date a Restricted Stock award is effective, the Participant shall be a shareholder with respect to all the shares represented by such certificates and shall have all the rights of a shareholder with respect to all such shares, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares, subject only to the restrictions imposed by the Committee.
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(ii). Stock Unit Awards . Stock Unit Awards shall be evidenced by a written agreement in the form prescribed by the Committee in its discretion, which shall set forth the number of shares of Common Stock to be awarded pursuant to the Award, the restrictions imposed thereon (which may include, without limitation: restrictions on the right of the grantee to sell, assign, transfer or encumber the Award prior to vesting, and, in the discretion of the Committee, certain continued service requirements and terms under which the vesting of such Awards might be accelerated) and such other terms and conditions as the Committee in its discretion deems appropriate. If so determined by the Committee at the time of the grant of a Stock Unit Award, vesting of the Award may be contingent on achievement over a specified performance period of one or more performance targets based on performance criteria established by the Committee. Stock Unit Awards shall be effective upon execution of the applicable Stock Unit Award Agreement by the Company and the Participant. Upon a determination of satisfaction of the applicable performance-related conditions and satisfaction of the applicable continued service requirements, (and not before such time), shares of Stock shall be issued to the Participant pursuant to the Award. The Participant shall not have any rights of a shareholder of the Company with respect to such shares prior to such issuance.
(iii) Unrestricted Stock and Other Stock-Based Awards . The Committee shall have the authority in its discretion to grant to eligible Participants Unrestricted Stock and other Stock-Based Awards. The Committee shall determine the terms and conditions, if any, of any Other Stock Based Awards made under the Plan.
(iv) Non Stock – Based Awards . The Committee shall have the authority in its discretion to grant to eligible Participants Awards not based on the Stock, including, without limitation, Cash Performance Awards, and other Performance Awards as deemed by the Committee to be consistent with the purposes of the Plan.
5. Limits on Awards under the Plan .
(a) Number of Shares . A maximum of 2,250,000 shares of Common Stock, subject to adjustment as provided in Section 6, may be delivered in satisfaction of Stock-Based Awards under the Plan.
(b) Share Counting Rules . The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. To the extent that an Award expires or is canceled, forfeited, settled in cash or otherwise terminated or concluded without a delivery to the Participant of the full number of shares to which the Award related, the undelivered shares will again be available for grant. Shares withheld in payment of the exercise price or taxes relating to an Award and shares equal to the number surrendered in payment of any exercise price or taxes relating to an Award shall be deemed to constitute shares not delivered to the Participant and shall be deemed to again be available for Awards under the Plan; provided, however, that, where shares are withheld or surrendered more than ten years after the date of the most recent stockholder approval of the Plan or any other transaction occurs that would result in shares becoming available under this Section 5(b), such shares shall not become available if and to the extent that it would constitute a material revision of the Plan subject to stockholder approval under then applicable rules of the national securities exchange on which the Stock is listed or the Nasdaq Stock Market, as applicable.
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(c) Type of Shares . Common Stock delivered by the Company under the Plan may be authorized but unissued Common Stock or previously issued Common Stock acquired by the Company and held in treasury. No fractional shares of Common Stock will be delivered under the Plan.
(d) Other Stock-Based Award Limits . The maximum number of shares of Common Stock subject to Awards that may be granted to any person in any calendar year shall be 150,000. In addition, in no event shall the number of Awards providing for the acquisition of shares of Common Stock for a consideration less than Fair Market Value as of the date of grant or exercise of such Awards granted to all Participants in any Fiscal Year exceed 250,000. For this purpose, Fair Market Value may be determined as of a date not more than two trading days prior to the date of grant or exercise in order to facilitate compliance with the reporting requirements under Section 16 of the Act. Subject to these limitations, each person eligible to participate in the Plan shall be eligible in any year to receive Awards covering up to the full number of shares of Common Stock then available for Awards under the Plan.
(e) Other Award Limits . No more than $1,000,000 may be paid to any individual with respect to any Cash Performance Award or other Performance Award (other than an Award expressed in terms of shares of Common Stock or units representing Common Stock, which shall instead be subject to the limit set forth in Section 5(d) above). In applying the dollar limitation of the preceding sentence: (A) multiple Cash or other Performance Awards to the same individual that are determined by reference to performance periods of one year or less ending with or within the same fiscal year of the Company shall be subject in the aggregate to one $1,000,000 limit, and (B) multiple Cash or other Performance Awards to the same individual that are determined by reference to one or more multi-year performance periods ending in the same fiscal year of the Company shall be subject in the aggregate to separate $1,000,000 limits.
6. Adjustments for Recapitalizations, Mergers, Etc .
(a) Dilution and Other Adjustments . Notwithstanding any other provision of the Plan, in the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares, or other similar corporate change (including a Corporate Event, as defined below), an equitable adjustment shall be made, as determined by the Committee, so as to preserve, without increasing or decreasing, the value of Awards and authorizations, in (i) the maximum number or kind of shares issuable or Awards which may be granted under the Plan, (ii) the maximum number, kind or value of any Plan Awards which may be awarded or paid in general or to any one employee or to all employees in a Fiscal Year, (iii) the performance-based events or objectives applicable to any Plan Awards, (iv) any other aspect or aspects of the Plan or outstanding Awards made thereunder as specified by the Committee, or (v) any combination of the foregoing. Such adjustments shall be made by the Committee and shall be conclusive and binding for all purposes of the Plan.
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(b) Corporate Events . Notwithstanding the foregoing, except as may otherwise be provided in an Award agreement or a written employment agreement between the Participant and the Company which has been approved by the Committee, upon any Corporate Event, in lieu of providing the adjustment set forth in Section 6(a) above, the Committee may, in its discretion, cancel any or all vested and/or unvested Awards as of the consummation of such Corporate Event, and provide that holders of Awards so cancelled will receive a payment in respect of cancellation of their Awards based on the amount of the per share consideration being paid for the Stock in connection with such Corporate Event, less, in the case of Options and other Awards subject to exercise, the applicable exercise price; provided, however, that holders of (i) Options shall only be entitled to consideration in respect of cancellation of such Awards if the per share consideration less the applicable exercise price is greater than zero, and (ii) Performance Awards shall only be entitled to consideration in respect of cancellation of such Awards to the extent that applicable performance criteria are achieved prior to or as a result of such Corporate Event, and shall not otherwise be entitled to payment in consideration of cancelled unvested Awards. Payments to holders pursuant to the preceding sentence shall be made in cash, or, in the sole discretion of the Committee, in such other consideration necessary for a holder of an Award to receive property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to such transaction, the holder of the number of shares of Stock covered by the Award at such time.
7. Miscellaneous Provisions .
(a) The holder of a Plan Award shall have no rights as a Company shareholder with respect thereto unless, and until the date as of which, shares of Common Stock shall have been issued in respect of such Award.
(b) Except as the Committee shall otherwise determine in connection with determining the terms of Awards to be granted or shall thereafter permit, no Plan Award or any rights or interests therein of the recipient thereof shall be assignable or transferable by such recipient except upon death to his or her Designated Beneficiary or by will or the laws of descent and distribution, and, except as aforesaid, during the lifetime of the recipient, a Plan Award shall be exercisable only by, or payable only to, as the case may be, such recipient or his or her guardian or legal representative.
(c) All Awards granted under the Plan shall be evidenced by agreements in such form and containing and/or incorporating such terms and conditions (not inconsistent with the Plan and applicable law) in addition to those provided for herein as the Committee shall approve.
(d) No shares of Common Stock shall be issued, delivered or transferred upon exercise or in payment of any Award granted hereunder unless and until all legal requirements applicable to the issuance, delivery or transfer of such shares have been complied with to the satisfaction of the Committee and the Company, including, without limitation, compliance with the provisions of the Securities Act of 1933, the Act and the applicable requirements of the exchanges on which the Company's Common Stock may, at the time, be listed. The Committee and the Company shall have the right to condition any issuance of shares of Common Stock made to any Participant hereunder on such Participant's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares as the Committee and/or the Company shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions.
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(e) The Company shall have the right to make such provision for the withholding of taxes as it deems necessary. In furtherance of the foregoing, the Company shall have the right to require, as a condition of the distribution of Awards in Common Stock, that the Participant or other person receiving such Common Stock either (i) pay to the Company at the time of distribution thereof the amount of any federal, state, or local taxes which the Company is required to withhold with respect to such Common Stock or (ii) make such other arrangements as the Company may authorize from time to time to provide for such withholding including without limitation having the number of the units of the Award cancelled or the number of the shares of Common Stock to be distributed reduced by an amount with a value equal to the value of such taxes required to be withheld. Notwithstanding the foregoing, the Committee may, in its discretion, in connection with the grant of any Award of Common Stock, authorize the Company to pay to Participant receiving the Award, a cash gross-up payment in an amount necessary to cover such federal, state or local taxes attributable to such Award and to such cash payment.
(f) No employee or director of the Company or a Subsidiary or other person shall have any claim or right to be granted an Award under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or a Subsidiary, it being understood that all Company and Subsidiary employees who have or may receive Awards under this Plan are employed at the will of the Company or such Subsidiary and in accord with all statutory provisions.
(g) The costs and expenses of administering this Plan shall be borne by the Company and not charged to any Award or to any employee or Participant receiving an Award.
(h) In addition to the terms defined elsewhere herein, the following terms as used in this Plan shall have the following meanings:
“Act” shall mean the Securities Exchange Act of 1934 as amended from time to time.
“Award” shall mean an award described in Section 4(a)(i).
“Business Combination” shall mean (i) the consummation of a reorganization, merger or consolidation or sale or disposition of all or substantially all of the assets of the Company.
“Cash Performance Award” shall mean a Performance Award payable in cash. The right of the Company to extinguish an Award in exchange for cash or the exercise by the Company of such right shall not make an Award otherwise not payable in cash a Cash Performance Award.
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“Change in Control” shall, unless otherwise provided in an Award agreement, or an employee’s effective negotiated employment, change in control, severance or similar arrangement, mean: (i) a Business Combination, unless, in each case following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners of the Common Stock of the Company immediately before the consummation of such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of the transaction owns the Company or all or substantially all of the assets of the Company either directly or indirectly through one or more subsidiaries); and (B) no person or group (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) of the Company or the corporation resulting from the Business Combination) beneficially owns, directly or indirectly, more than 50% of the then outstanding shares of the common stock of the corporation resulting from the Business Combination; (ii) individuals who, as of the date of grant of an Award hereunder constitute the Board of Directors of the Company (the “Incumbent Board”) thereafter cease for any reason to constitute at least a majority of the Board of Directors of the Company, provided, however, that any individual's becoming a director after the date of grant of such Award whose election, or nomination for election by the stockholders of the Company, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though the individual were a member of the Incumbent Board, but excluding, for this purpose, any individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) any person (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) shall become at any time or in any manner the beneficial owner of capital stock of the Company representing more than 50% of the voting power of the Company.
“Corporate Event” means (i) a merger or consolidation involving the Company in which the Company is not the surviving corporation; (ii) a merger or consolidation involving the Company in which the Company is the surviving corporation but the holders of shares of Stock receive securities of another corporation and/or other property, including cash; or (iii) the reorganization or liquidation of the Company.
“Designated Beneficiary” shall mean the person or persons, if any, last designated as such by the Participant on a form filed by him or her with the Company in accordance with such procedures as the Committee shall approve.
“Fair Market Value” of a share of Common Stock of the Company on any date shall mean the closing price of the Common Stock on the trading day coinciding with such date, or if not trading on such date, then the closing price as of the next following trading day. If shares of the Common Stock shall not have been traded on any national exchange or interdealer quotation system for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be determined by the Committee in such other manner as it may deem appropriate.
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“Fiscal Year” shall mean the twelve-month period used as the annual accounting period by the Company and shall be designated according to the calendar year in which such period ends.
“Internal Revenue Code” shall mean the Internal Revenue Code of 1986 and regulations thereunder as amended from time to time. References to particular sections of the Internal Revenue Code shall include any successor provisions.
“ISO” shall mean an incentive stock option under Section 422 of the Internal Revenue Code.
“Participant” shall mean, as to any Award granted under this Plan and for so long as such Award is outstanding, the employee to whom such Award has been granted.
“Performance Award” shall mean an Award subject to Performance Criteria.
“Performance Criteria” shall mean specified criteria the satisfaction of which is a condition for the exercisability, vesting or full enjoyment of an Award. Performance Criterion shall mean: (a) an objectively determinable measure of performance relating to any of the following (determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis, or in combinations thereof): (i) sales; revenues; assets; liabilities; costs; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, amortization or other items, whether or not on a continuing operations or an aggregate or per share basis; comparisons with various stock market indices; return on equity, investment, capital or assets; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; working capital requirements; stock price; stockholder return; sales, contribution or gross margin, of particular products or services; particular operating or financial ratios; customer acquisition, expansion, retention; customer satisfaction; employee satisfaction; economic value added; attainment of strategic and operational initiatives; improvement in or attainment of expense levels or working capital levels, including cash, inventory and accounts receivable; operating margin; year-end cash; operating efficiencies; research and development achievements; manufacturing achievements (including obtaining particular yields from manufacturing runs and other measurable objectives related to process development activities); implementation, completion or attainment of measurable objectives with respect to manufacturing, commercialization, products or projects, production, volume levels, acquisitions and divestitures, recruiting and maintaining personnel; or any combination of the foregoing; or (ii) acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; strategic partnerships or transactions; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) and refinancings; transactions that would constitute a change of control; or any combination of the foregoing, or (b) a subjectively determinable measure of performance. A Performance Criterion measure and targets with respect thereto determined by the Committee need not be based upon an increase, a positive or improved result or avoidance of loss. In determining attainment of a performance goal (A) the Committee may exclude the impact of unusual, non-recurring or extraordinary items attributable to (1) acquisitions or dispositions of stock or assets, (2) any changes in accounting standards or treatments that may be required or permitted by the Financial Accounting Standards Board, Public Company Accounting Oversight Board or adopted by the Company, the Subsidiaries or any applicable division, business segment or business unit after the goal is established, (3) restructuring activities, including, without limitation, plant closings, plant moves or consolidations, (4) disposal of a segment of a business, (5) discontinued operations, (6) unbudgeted capital expenditures, (7) the issuance or repurchase of equity securities and other changes in the number of outstanding shares, and (8) any business interruption event; and (B) the Committee may determine after the start of a Performance Period to exclude such other items, each determined according to Generally Accepted Accounting Principles (to the extent applicable) as identified in the Company’s accounts, financial statements, notes thereto, or management discussion and analysis.
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“Restricted Stock” shall mean an Award of Stock subject to forfeiture to the Company if specified conditions are not satisfied.
“SARs” shall mean rights entitling the holder upon exercise to receive cash or Stock, as the Committee determines, equal to a function (determined by the Committee using such factors as it deems appropriate) of the amount by which the Stock has appreciated in value since the date of the Award.
“Stock” shall mean Common Stock of the Company, par value $.01 per share.
“Stock-based Awards” shall mean such 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 as deemed by the Committee to be consistent with the purposes of the Plan, and shall include, without limitation, all Stock Options, SARs, Restricted Stock, Stock Unit Awards and any Performance Awards consisting of any of the foregoing.
“Stock Options” shall mean options entitling the recipient to acquire shares of Stock upon payment of the exercise price and shall consist of ISO’s and non-statutory options.
“Stock Unit Awards” shall mean an award payable in shares of Stock. A Stock Unit Award may, but shall not be required to include a Performance Award.
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“Subsidiary” shall mean any domestic or foreign corporation, partnership, association, joint stock company, trust or unincorporated organization “affiliated “ with the Company, that is, directly or indirectly, through one or more intermediaries, “controlling”, “controlled by” or “under common control with”, the Company.
“Unrestricted Stock” shall mean an Award of Stock not subject to any restrictions under the Plan.
(i) This Plan shall be governed by the laws of the Commonwealth of Massachusetts and shall be construed for all purposes in accordance with the laws of said Commonwealth except as may be required by the General Corporation Law of Delaware or by applicable federal law.
8. Amendments and Termination; Requisite Shareholder Approval . The Board may at any time terminate or from time to time amend or suspend the Plan in whole or in part in such respects as the Board may deem advisable in order that Awards granted thereunder shall conform to any change in the law, or in any other respect which the Board may deem to be in the best interests of the Company; provided, however, that no amendment of the Plan shall be made without shareholder approval if shareholder approval of the amendment is at the time required by applicable law, or by the rules of the Nasdaq Stock Market or any stock exchange on which Common Stock may be listed. The Board shall have the power to amend the Plan in any manner contemplated by Section 9 deemed necessary or advisable for Awards granted under the Plan to qualify for the exemption provided by Rule 16b-3 (or any successor rule relating to exemption from Section 16(b) of the Act), or to comply with applicable law, and any such amendment shall, to the extent deemed necessary or advisable by the Board, be applicable to any outstanding Awards theretofore granted under the Plan notwithstanding any contrary provisions contained in any Award agreement. In the event of any such amendment to the Plan, the holder of any Award outstanding under the Plan shall, upon request of the Board and as a condition to the exercisability thereof, execute a conforming amendment in the form prescribed by the Board to any Award agreement relating thereto within such reasonable time as the Board shall specify in such request. With the consent of the Participant affected, the Board may amend outstanding agreements evidencing Plan Awards in a manner not inconsistent with the terms of the Plan. Notwithstanding anything contained in this Section 8 or in any other provision of the Plan, unless required by law, no action contemplated or permitted by this Section 8 shall adversely affect any rights of Participants or obligations of the Company to Participants with respect to any Award theretofore made under the Plan without the consent of the affected Participant.
9. Effective Date and Term of Plan . This Plan was adopted on April 8, 2003. The Plan was amended on February 26, 2007, March 22, 2007, February 21, 2008, March 2, 2011, March 7, 2013, March 17, 2016 and March 14, 2018. The Plan shall remain in effect, subject to the right of the Board of Directors to further amend or terminate the Plan at any time pursuant to Section 8 hereof, until all shares subject to it shall have been purchased or acquired according to the Plan’s provisions, provided, however, that no ISO may be granted under the Plan after March 1, 2021.
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EXHIBIT 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, R. Jeffrey Bailly, President and Chief Executive Officer of UFP Technologies, Inc. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of UFP Technologies, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 10, 2018 | /s/ R. Jeffrey Bailly | |
| R. Jeffrey Bailly | ||
| Chairman, Chief Executive Officer, President and Director | ||
| (Principal Executive Officer) |
EXHIBIT 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Lataille, Chief Financial Officer of UFP Technologies, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of UFP Technologies, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 10, 2018 | /s/ Ronald J. Lataille | |
| Ronald J. Lataille | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
EXHIBIT 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officers of UFP Technologies, Inc., a Delaware corporation (the “Company”) do hereby certify that, to the best of such officers’ knowledge and belief, that:
| (1) | The Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Form 10-Q fairly presents, in all materials respects, the financial condition and results of operations of the Company. |
| Date: May 10, 2018 | /s/ R. Jeffrey Bailly | |
| R. Jeffrey Bailly | ||
| Chairman, Chief Executive Officer, President, and Director | ||
| (Principal Executive Officer) | ||
| Date: May 10, 2018 | /s/ Ronald J. Lataille | |
| Ronald J. Lataille | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
A signed original of these written statements required by Section 906 has been provided to UFP Technologies, Inc. and will be retained by UFP Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.