UFP Technologies - 10-Q quarterly report FY2012 Q1

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

For the quarterly period ended  MARCH 31, 2012

OR

For the transition period from      to     

Commission File Number: 001-12648

UFP Technologies, Inc.

(Exact name of registrant as specified in its charter)

172 East Main Street, Georgetown, Massachusetts 01833, 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 o

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o;  No x

6,693,778 shares of registrant’s Common Stock, $.01 par value, were outstanding as of May 1, 2012.

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PART I:               FINANCIAL INFORMATION

ITEM 1:              FINANCIAL STATEMENTS

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

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

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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, 2011, included in the Company’s 2011 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The condensed consolidated balance sheet as of March 31, 2012, the condensed consolidated statements of income for the three-month periods ended March 31, 2012, and 2011, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2012, and 2011, 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 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, 2012, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2012.

(2)                   Supplemental Cash Flow Information

Cash paid for interest and income taxes is as follows:

During the three-month periods ended March 31, 2012, and 2011, the Company permitted the exercise of stock options with exercise proceeds paid with the Company’s stock (“cashless” exercises) totaling $46,620 and $93,879, respectively.

(3)                   Investment in Affiliated Partnership

In prior periods the Company had a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”).  The Company had consolidated the financial statements of UDT for prior periods because it determined that UDT was a VIE.  On February 29, 2012, the Company purchased the manufacturing building that it leased from UDT for $1,350,000, which approximates fair market value.  Since this transaction took place among commonly controlled companies, the building was recorded by the Company at UDT’s carrying value.  Subsequently, UDT was dissolved and its assets were distributed.  Thus, in effect, the Company has acquired the remaining 73.68% ownership interest in UDT, eliminating the VIE.  The non-controlling interests’ portion of the excess of the amount paid for the building over UDT’s carrying value, totaling $535,481, has been recorded in stockholders’ equity as a reduction to additional paid-in capital.  The transaction did not impact the consolidated results of operations.

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Included in the condensed consolidated balance sheet as of December 31, 2011, are the following amounts related to UDT:

(4)                   Fair Value Accounting

The Company has other 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 Company’s current incremental borrowing rate.

(5)                   Share-Based Compensation

Share-based compensation cost is measured at the grant date based on the calculated fair value of the award and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

The Company issues share-based payments through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2011.  The compensation cost charged against income for those plans is as follows:

The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $61,000 and $89,000 for the three-month periods ended March 31, 2012, and 2011, respectively.

The following is a summary of stock option activity under all plans for the three-month period ended March 31, 2012:

During the three-month periods ended March 31, 2012, and 2011, 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 $845,994 and $1,792,155, respectively, and the total amount of consideration received from the exercised options was $80,708 and $128,094, respectively.

During the three-month periods ended March 31, 2012, and 2011, the Company recognized compensation expenses related to stock options granted to directors and employees of  $18,186 and $20,280, respectively.

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On February 17, 2012, the Company’s Compensation Committee approved the award of $300,000 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 on or before December 31, 2012.  The Company has recorded compensation expense associated with the award of $75,000 during the three-month period ended March 31, 2012.

The following table summarizes information about Restricted Stock Units (“RSUs”) activity during the three-month period ended March 31, 2012:

During the three-month periods ended March 31, 2012, and 2011, the Company recorded compensation expense related to RSUs of $93,715 and $122,804, respectively.

At its discretion, the Company allows option and RSU holders to surrender previously owned common stock in lieu of paying the minimum statutory withholding taxes due upon the exercise of options or the vesting of RSUs.  During the three-month periods ended March 31, 2012, and 2011, 39,707and 35,930 shares were surrendered at an average market price of $16.93 and $17.78, respectively.

(6)                    Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of the following at the stated dates:

(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 of common shares and dilutive common stock equivalent shares outstanding during each period.

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The weighted average number of shares used to compute basic and diluted net income per share consisted of the following:

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 have been antidilutive.  For the three-month periods ended March 31, 2012, and 2011, the number of stock awards excluded from the computation was 10,000 and zero.

(9)                    Segment Reporting

The Company is organized based on the nature of the products and services it offers.  Under this structure, the Company produces products within two distinct segments: Engineered Packaging and Component Products.  Within the Engineered Packaging segment, the Company primarily uses polyethylene and polyurethane foams, sheet plastics, and pulp fiber to provide customers with cushion packaging for their products.  Within the Component Products segment, the Company primarily uses cross-linked polyethylene and technical urethane foams to provide customers in the automotive, athletic, leisure, and health and beauty industries with custom-designed products for numerous purposes.

The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements contained in the Company’s annual report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.  The Company evaluates the performance of its operating segments based on operating income.

Inter-segment transactions are uncommon and not material.  Therefore, they have not been reflected separately in the financial table below.  Revenues from customers outside of the United States are not material.  One customer in the Component Products segment comprised 5.1% of the Company’s consolidated revenues for the three-month period ended March 31, 2012.  All of the Company’s assets are located in the United States.

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ITEM 2:         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

This report contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission.  The words “believe,”  “expect,”  “anticipate,” “intend,” “plan,” “estimate,” and other expressions, which are predictions of or indicate future events and trends and that do not relate to historical matters, identify forward-looking statements.  Examples of forward-looking statements included in this report include, without limitation, statements regarding the anticipated performance of the Company, the anticipated impact on the Company and its revenues of the end of a substantial portion of its large automotive door panel program, expected methods of growth for the Company, statements regarding prospects for the markets in which the Company competes, and the overall economy.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance, or achievements expressed or implied by such forward-looking statements.  Other examples of these risks, uncertainties, and other factors include, without limitation, the following: economic conditions that affect sales of the products of the Company’s customers, risks associated with the identification of suitable acquisition candidates and the successful, efficient execution and integration of such acquisitions, the implementation of new production equipment in a timely, cost-efficient manner, risks that any benefits from such new equipment may be delayed or not fully realized, actions by the Company’s competitors, and the ability of the Company to respond to such actions, the ability of the Company to obtain new customers, the ability of the Company to achieve positive results in spite of competition and the conclusion of a substantial portion of its large automotive door panel program, evolving customer requirements, difficulties associated with the roll-out of new products, decisions by customers to cancel or defer orders for the Company’s products that previously had been accepted, the costs of compliance with the requirements of Sarbanes-Oxley, and general economic and industry conditions and other factors.  In addition to the foregoing, the Company’s actual future results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth elsewhere in this report and changes in general economic conditions, interest rates and the assumptions used in making such forward-looking statements.  All of the forward-looking statements are qualified in their entirety by reference to the risk factors and other disclaimers described in the Company’s filings with the Securities and Exchange Commission, in particular its most recent Annual Report on Form 10-K.  The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

UFP Technologies is a producer of innovative custom-engineered components, products and specialty packaging. The Company serves a myriad of markets, but specifically targets opportunities in the medical, automotive, aerospace and defense, computer and electronics, industrial, and consumer markets.

In the first three months of 2012, the Company experienced organic sales growth of 1.4%, reflecting increased demand from all end-use markets except the automotive market.  Sales to the automotive market declined primarily due to the phase-out of a significant portion of the Company’s large door panel program in the Southeast.

In prior periods the Company had a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”).  The Company had consolidated the financial statements of UDT for prior periods because it determined that UDT was a VIE.  On February 29, 2012, the Company purchased the manufacturing building that it leased from UDT for $1,350,000, which approximates fair market value.  Since this transaction took place among commonly controlled companies, the building was recorded by the Company at UDT’s carrying value.  Subsequently, UDT was dissolved and its assets were distributed.  Thus, in effect, the Company has acquired the remaining 73.68% ownership interest in UDT, eliminating the VIE.  The non-controlling interests’ portion of the excess of the amount paid for the building over UDT’s carrying value, totaling $535,481, has been recorded in stockholders’ equity as a reduction to additional paid-in capital.  The transaction did not impact the consolidated results of operations.

Due to a redesigned model vehicle, a substantial portion of a large automotive door panel program ended on June 30, 2011, although the Company is still supplying door panels to the customer for other model vehicles.  Sales of door panels for the discontinued model vehicle were approximately $1.8 million in the three-month period ended March 31, 2011.

The Company’s current strategy includes organic growth and growth through strategic acquisitions.

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The Company requires cash to pay its operating expenses, purchase capital equipment, and to service the obligations listed above.  The Company’s principal sources of funds are its operations and its revolving credit facility.  Although the Company generated cash from operations during the three-month period ended March 31, 2012, it cannot guarantee that its operations will generate cash in future periods.

The Company had no off-balance-sheet arrangements during the three-month period ended March 31, 2012, other than operating leases.

ITEM 3:                                         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of the Company’s market risk includes forward-looking statements that involve risk and uncertainties.  Actual results could differ materially from those projected in the forward-looking statements.  Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices.  At March 31, 2012, the Company’s cash and cash equivalents consisted of bank accounts in U.S. dollars, and their valuation would not be affected by market risk.  The Company has several debt instruments where interest is based upon either the prime rate or LIBOR and, therefore, future operations could be affected by interest rate changes.  However, the Company believes that the market risk of the debt is minimal.

ITEM 4:                                         CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e) or 15d-15(e)).  Based upon that evaluation, they concluded that 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 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II:                                     OTHER INFORMATION

ITEM 1A:                           RISK FACTORS

Information regarding risk factors appears in Part I — Item 2 of this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Forward-Looking Statements” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, in Part I — Item 1A under “Risk Factors.”  There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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ITEM 6:                                         EXHIBITS

The following exhibits are included herein:

SIGNATURES

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.

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