ufpt20210930

ufpt20210930_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 2021

☐ 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)	(I.R.S. 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	UFPT	The NASDAQ Stock Market L.L.C.

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒ 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 ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark 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 ☒

7,531,404 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of October 29, 2021.

UFP Technologies, Inc.

Index

	Page

PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited)	3

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	4

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2020 (unaudited)	6

Notes to Interim Condensed Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	23

Item 4. Controls and Procedures	23

PART II - OTHER INFORMATION	24

Item 1. Legal Proceedings	24

Item 1A. Risk Factors	24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 6. Exhibits	24

Signatures	25

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

	September 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	33,094		$	24,234
Receivables, net		32,456			26,428
Inventories		21,674			18,642
Prepaid expenses and other current assets		3,077			2,560
Refundable income taxes		832			-
Total current assets		91,133			71,864
Property, plant and equipment		122,184			118,388
Less accumulated depreciation and amortization		(69,202	)		(64,633	)
Net property, plant and equipment		52,982			53,755
Goodwill		51,838			51,838
Intangible assets, net		18,776			19,718
Non-qualified deferred compensation plan		4,115			3,724
Finance lease right of use assets		88			100
Operating lease right of use assets		1,555			2,052
Other assets		199			153
Total assets	$	220,686		$	203,204

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,556		$	4,121
Accrued expenses		8,361			7,944
Deferred revenue		1,671			1,887
Finance lease liabilities		15			15
Operating lease liabilities		1,157			1,154
Income taxes payable		-			16
Total current liabilities		18,760			15,137
Deferred income taxes		5,539			5,057
Non-qualified deferred compensation plan		4,053			3,810
Finance lease liabilities		74			86
Operating lease liabilities		436			950
Other liabilities		1,071			1,271
Total liabilities		29,933			26,311
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued		-			-
Common stock, $.01 par value, 20,000,000 shares authorized; 7,560,963 and 7,531,404 shares issued and outstanding, respectively, at September 30, 2021; 7,529,625 and 7,500,066 shares issued and outstanding, respectively, at December 31, 2020		75			75
Additional paid-in capital		33,677			32,484
Retained earnings		157,588			144,921
Treasury stock at cost, 29,559 shares at September 30, 2021 and 29,559 shares at December 31, 2020		(587	)		(587	)
Total stockholders’ equity		190,753			176,893
Total liabilities and stockholders' equity	$	220,686		$	203,204

The accompanying notes are an integral part of these condensed consolidated financial statements.

UFP Technologies, Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2021			2020		2021			2020
Net sales	$	50,723		$	43,299	$	149,977		$	134,220
Cost of sales		38,707			32,771		111,938			100,919
Gross profit		12,016			10,528		38,039			33,301
Selling, general & administrative expenses		6,806			6,791		21,343			21,208
Acquisition Costs		154			-		154			-
(Gain) loss on sale of property, plant & equipment		(21	)		12		(42	)		298
Operating income		5,077			3,725		16,584			11,795
Interest (income) expense, net		16			17		11			66
Other expenses (income)		4			-		(2	)		362
Income before income tax expense		5,057			3,708		16,575			11,367
Income tax expense		1,268			720		3,908			2,170
Net income	$	3,789		$	2,988	$	12,667		$	9,197

Net income per share:
Basic	$	0.50		$	0.40	$	1.68		$	1.23
Diluted	$	0.50		$	0.40	$	1.67		$	1.22
Weighted average common shares outstanding:
Basic		7,531			7,495		7,522			7,480
Diluted		7,597			7,555		7,585			7,547

The accompanying notes are an integral part of these condensed consolidated financial statements.

UFP TECHNOLOGIES, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

Three and Nine Month Periods Ended September 30, 2021
						Additional										Total
	Common Stock					Paid-in			Retained		Treasury Stock					Stockholders'
	Shares			Amount		Capital			Earnings		Shares		Amount			Equity
Balance at December 31, 2020		7,500		$	75	$	32,484		$	144,921		30	$	(587	)	$	176,893
Share-based compensation		34			-		501			-		-		-			501
Net share settlement of restricted stock units		(14	)		-		(738	)		-		-		-			(738	)
Net income		-			-		-			4,163		-		-			4,163
Balance at March 31, 2021		7,520		$	75	$	32,247		$	149,084		30	$	(587	)	$	180,819
Share-based compensation		4			-		620			-		-		-			620
Exercise of stock options		7			-		162			-		-		-			162
Net share settlement of restricted stock units		-			-		(2	)		-		-		-			(2	)
Net income		-			-		-			4,715		-		-			4,715
Balance at June 30, 2021		7,531		$	75	$	33,027		$	153,799		30	$	(587	)	$	186,314
Share-based compensation		-			-		650			-		-		-			650
Net income		-			-		-			3,789		-		-			3,789
Balance at September 30, 2021		7,531		$	75	$	33,677		$	157,588		30	$	(587	)	$	190,753

Three and Nine Month Periods Ended September 30, 2020
						Additional										Total
	Common Stock					Paid-in			Retained		Treasury Stock					Stockholders'
	Shares			Amount		Capital			Earnings		Shares		Amount			Equity
Balance at December 31, 2019		7,446		$	74	$	30,952		$	131,552		30	$	(587	)	$	161,991
Share-based compensation		28			-		537			-		-		-			537
Exercise of stock options		20			1		415			-		-		-			416
Net share settlement of restricted stock units		(11	)		-		(560	)		-		-		-			(560	)
Net income		-			-		-			3,891		-		-			3,891
Balance at March 31, 2020		7,483		$	75	$	31,344		$	135,443		30	$	(587	)	$	166,275
Share-based compensation		6			-		561			-		-		-			561
Exercise of stock options		6			-		59			-		-		-			59
Net share settlement of restricted stock units		-			-		(1	)		-		-		-			(1	)
Net income		-			-		-			2,318		-		-			2,318
Balance at June 30, 2020		7,495		$	75	$	31,963		$	137,761	$	30	$	(587	)	$	169,212
Share-based compensation		-			-		239			-		-		-			239
Net income		-			-		-			2,988		-		-			2,988
Balance at September 30, 2020		7,495		$	75	$	32,202		$	140,749	$	30	$	(587	)	$	172,439

The accompanying notes are an integral part of these consolidated financial statements.

UFP Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2021			2020
Cash flows from operating activities:
Net income	$	12,667		$	9,197
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,209			6,210
(Gain) Loss on disposal of property, plant & equipment		(43	)		298
Share-based compensation		1,771			1,338
Deferred income taxes		482			977
Changes in operating assets and liabilities:
Receivables, net		(6,028	)		1,284
Inventories		(3,032	)		(1,212	)
Prepaid expenses and other current assets		(517	)		(1,396	)
Refundable income taxes		(848	)		(297	)
Other assets		72			76
Accounts payable		3,210			(255	)
Accrued expenses		417			(68	)
Deferred revenue		(216	)		(628	)
Non-qualified deferred compensation plan and other liabilities		(469	)		1,214
Net cash provided by operating activities		13,675			16,738
Cash flows from investing activities:
Additions to property, plant, and equipment		(4,277	)		(3,057	)
Proceeds from sale of fixed assets		51			105
Net cash used in investing activities		(4,226	)		(2,952	)
Cash flows from financing activities:
Proceeds from advances on revolving line of credit		-			5,500
Payments on revolving line of credit		-			(5,500	)
Principal payments on finance lease obligation		(11	)		(7	)
Proceeds from exercise of stock options		162			474
Payment of statutory withholdings for restricted stock units vested		(740	)		(561	)
Net cash used in financing activities		(589	)		(94	)
Net increase in cash and cash equivalents		8,860			13,692
Cash and cash equivalents at beginning of period		24,234			3,743
Cash and cash equivalents at end of period	$	33,094		$	17,435

The accompanying notes are an integral part of these condensed consolidated financial statements.

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, 2020, included in the Company's 2020 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited but, in the opinion of management, include all adjustments (including normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2020 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- and nine-month periods ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2021.

Recent Accounting Pronouncements

There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial statements.

(2)

Revenue Recognition

The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, resulting in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.

Disaggregated Revenue

The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to the Company’s customers (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Net sales of:	2021		2020		2021		2020
Products	$	49,613	$	41,072	$	146,402	$	128,853
Tooling and Machinery		405		887		1,149		2,210
Engineering services		705		1,340		2,426		3,157
Total net sales	$	50,723	$	43,299	$	149,977	$	134,220

Contract balances

Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has contract liabilities included within “deferred revenue” on the condensed consolidated balance sheet.

The following table presents a roll-forward of contract liabilities activity for the nine-month periods ended September 30, 2021 and 2020 (in thousands):

	Contract Liabilities
	Nine Months Ended September 30,
	2021			2020
Deferred revenue - beginning of period	$	1,887		$	2,574
Increases due to consideration received from customers		736			2,255
Revenue recognized		(952	)		(2,883	)
Deferred revenue - end of period	$	1,671		$	1,946

Revenue recognized during the nine-month periods ended September 30, 2021 and 2020 from amounts included in deferred revenue at the beginning of the period were approximately $659 thousand and $1.5 million, respectively.

When invoicing occurs after revenue recognition, the Company has contract assets, included within “receivables” on the condensed consolidated balance sheet.

The following table presents a roll-forward of contract assets activity for the nine-month periods ended September 30, 2021 and 2020 (in thousands):

	Contract Assets
	Nine Months Ended September 30,
	2021			2020
Unbilled receivables - beginning of period	$	271		$	72
Increases due to revenue recognized, not invoiced to customers		1,461			2,223
Decreases due to customer invoicing		(1,509	)		(2,004	)
Unbilled receivables - end of period	$	223		$	291

(3)

Supplemental Cash Flow Information

	Nine Months Ended
	September 30,
	2021		2020
	(in thousands)
Cash paid for:
Interest	$	39	$	55
Income taxes, net of refunds		4,274		1,454

Non-cash investing and financing activities:
Capital additions accrued but not yet paid	$	225	$	225

(4)

Receivables and Allowance for Credit Losses

Receivables consist of the following (in thousands):

	September 30,			December 31,
	2021			2020
Accounts receivable–trade	$	32,978		$	26,912
Less allowance for credit losses		(522	)		(484	)
Receivables, net	$	32,456		$	26,428

The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written-off when determined to be uncollectible. Estimates based on an assessment of anticipated payment and all other historical, current, and future information that is reasonably available are used to determine the allowance.

The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected as of September 30, 2021 and 2020 (in thousands):

	Allowance for Credit Losses
	Nine Months Ended September 30,
	2021			2020
Allowance - beginning of period	$	484		$	486
Provision for expected credit losses		92			182
Amounts written off against the allowance		(54	)		(19	)
Allowance - end of period	$	522		$	649

(5)

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

September 30,

2021

December 31,

2020

Liabilities:

Derivative financial instruments

(261

)

(465

)

Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full term of the swap agreement.

The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, that are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.

(6)

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, 2020. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Share-based compensation related to:	*2021*		*2020*		*2021*		*2020*
Common stock grants	$	100	$	100	$	300	$	300
Stock option grants		52		59		157		173
Restricted Stock Unit Awards ("RSUs")		498		80		1,314		865
Total share-based compensation	$	650	$	239	$	1,771	$	1,338

The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensa‐tion arrangements was approximately $167 thousand and $60 thousand for the three month periods ended September 30, 2021 and 2020, respectively, and approximately $608 thousand and $612 thousand for the nine-month periods ended September 30, 2021 and 2020, respectively.

Common stock grants

The compensation expense for common stock grants during the nine-month period ended September 30, 2021, was determined based on an approved fixed dollar amount with the number of shares to be determined on the date of issuance.

Stock Option grants

The following is a summary of stock option activity under all plans for the nine-month period ended September 30, 2021:

	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, 2020		94,513		$	30.22
Granted		10,716			57.34
Exercised		(6,558	)		24.77
Outstanding at September 30, 2021		98,671		$	33.53		6.06	$	2,769
Exercisable at September 30, 2021		87,955		$	30.63		5.62	$	2,723
Vested and expected to vest at September 30, 2021		98,671		$	33.53		6.06	$	2,769

On June 9, 2021, the Company granted options to its directors for the purchase of 10,716 shares of common stock at that day’s closing price of $57.34. The compensation expense related to these grants was determined as the fair value of the options using the Black-Scholes option pricing model based on the following assumptions:

Expected volatility	33.7	%
Expected dividends	None
Risk-free interest rate	0.8	%
Exercise price	$57.34
Expected term (years)	6.2
Weighted-average grant date fair value	19.60

The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term, and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods correspond‐ing with the expected term of the option. The expected term is estimated based on historical option exercise activity.

During the nine-month periods ended September 30, 2021 and 2020, the total intrinsic value of all options exercised was approximately $164 thousand and $757 thousand, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $162 thousand and $474 thousand, respectively. At its discretion, the Company allows option holders to surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During both the nine-month periods ended September 30, 2021 and 2020, no shares were surrendered for this purpose.

Restricted Stock Unit awards

The following table summarizes information about RSU activity during the nine-month period ended Septem‐ber 30, 2021:

Restricted

Stock Units

Weighted Average
Grant Date
Fair Value

Outstanding at December 31, 2020

93,187

35.03

Awarded

SEC Form 10-Q filed by UFP Technologies, Inc.