The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
| (1) | Summary of Significant Accounting Policies |
UFP Technologies, Inc. (“the Company”) is a design, engineering, and custom manufacturer of comprehensive solutions for medical devices, sterile packaging, and other highly engineered custom products. The Company is an important link in the medical device supply chain and a valued outsource partner to many of the top medical device manufacturers in the world. The Company’s single-use and single-patient devices and components are used in a wide range of medical devices and packaging for minimally invasive surgery, infection prevention, wound care, wearables, orthopedic soft goods, and orthopedic implants.
The Company is diversified by also providing highly engineered products and components to customers in the automotive, aerospace and defense, consumer, electronics, and industrial markets. Typical applications of its products include military uniform and gear components, automotive interior trim, athletic padding, air filtration, abrasive nail files, and protective cases and inserts.
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts and results of operations of UFP Technologies, Inc. and its wholly-owned subsidiaries, Advant Medical Limited, and its wholly-owned subsidiary Munlu Leighis Advant Teoranta, Advant Costa Rica Limitada, Advant Medical Inc. (collectively “Advant Medical”), Dielectrics, Inc. (“Dielectrics”), Moulded Fibre Technology, Inc. (partial year; entity was sold in July 2022), Contech Medical, Inc. (“Contech”), DAS Medical Holdings, LLC (“DAS Medical”), and DAS Medical’s wholly-owned subsidiaries, Sterimed, LLC, One Degree Medical Holdings, LLC, DAS Medical Corporation, and its wholly-owned subsidiary DAS Medical International, S.R.L., Simco Industries, Inc., and UFP Realty LLC (“UFP Realty”), and UFP Realty’s wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The Company consists of a single operating and reportable segment. The Company has evaluated all subsequent events through the date of this filing.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including allowance for doubtful accounts and the net realizable value of inventory, and the fair value of goodwill, and the fair value of intangible assets, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(c) Fair Value Measurement
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurement or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.
(d) Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the Company’s current incremental borrowing rate.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2022 and 2021, the Company did not have any cash equivalents.
The Company maintains its cash in bank deposit accounts that at times exceed federally insured limits. The Company periodically reviews the financial stability of institutions holding its accounts and does not believe it is exposed to any significant custodial credit risk on cash.
(f) Accounts Receivable
The Company periodically reviews the collectability of its accounts receivable. Provisions are recorded for accounts that are potentially uncollectable. Determining adequate reserves for accounts receivable requires management’s judgment. Conditions impacting the realizability of the Company’s receivables could cause actual asset write-offs to be materially different than the reserved balances as of December 31, 2022.
(g) Inventories
Inventories include material, labor, and manufacturing overhead and are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method.
The Company periodically reviews the realizability of its inventory for potential excess or obsolescence. Determining the net realizable value of inventory requires management’s judgment. Conditions impacting the realizability of the Company’s inventory could cause actual asset write-offs to be materially different than the Company’s current estimates as of December 31, 2022.
(h) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and are depreciated or amortized using the straight-line method over the estimated useful lives of the assets or the related lease term, if shorter.
Estimated useful lives of property, plant, and equipment are as follows:
| Leasehold improvements | Shorter of estimated useful life
or remaining lease term |
| Buildings and improvements (years) | 20 -30 |
| Machinery and equipment (years) | 7 – 15 |
| Furniture, fixtures, computers & software (years) | 3 – 7 |
Property, plant, and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. No events or changes in circumstances arose during the year ended December 31, 2022 that required management to perform an impairment analysis.
(i) Goodwill
Goodwill is tested for impairment annually and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level but can be combined when reporting units within the same segment have similar economic characteris‐tics. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company consists of a single reporting unit. In performing the most recent “step 1” evaluation of goodwill impairment, the Company primarily utilized the guideline public company (“GPC”) method under the market approach and the discounted cash flows method (“DCF”) under the income approach to determine the fair value of the reporting unit for purposes of testing the reporting unit’s carrying value of goodwill for impairment. The GPC method derives a value by generating a multiple of EBITDA through the comparison of the Company to similar publicly traded companies. The DCF approach derives a value based on the present value of a series of estimated future cash flows at the valuation date by the application of a discount rate, one that a prudent investor would require before making an investment in our equity securities.
The Company changed its annual impairment testing date in 2021 to October 1 in order to allow for sufficient time to complete its analysis. As of our most recent step 1 evaluation on October 1, 2022, based on calculations under the above noted approach, the fair value of the reporting unit significantly exceeded the carrying value of the reporting unit. In performing these calculations, management used its most reasonable estimates of the key assumptions discussed above. If the Company’s actual operating results and/or the key assumptions utilized in management’s calculations differ from our expectations, it is possible that a future impairment charge may be necessary.
(j) Intangible Assets
Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from 5 to 20 years. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that their carrying values may not be recoverable. No events or changes in circumstances arose during the year ended December 31, 2022 that required management to perform an impairment analysis.
(k) Revenue Recognition
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, resulting in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.
(l) Share-Based Compensation
When accounting for equity instruments exchanged for employee services, share-based compen‐sation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Forfeitures are expensed as they occur.
(m) Shipping and Handling Costs
Costs incurred related to shipping and handling are included in cost of sales. Amounts charged to customers pertaining to these costs are included in net sales.
(n) Income Taxes
The Company’s income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry‐forwards. Deferred tax expense or benefit results from the net change during the year in deferred tax assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. Should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense.
(o) Segments and Related Information
The Company follows the provisions of Accounting Standards Codification (ASC) 280, Segment Reporting, which establish standards for the way public business enterprises report information and operating segments in annual financial statements (see Note 19).
(p) Treasury Stock
The Company accounts for treasury stock under the cost method, using the first-in, first out cost flow assumption, and includes treasury stock as a component of stockholders’ equity. The Company did not repurchase any shares of common stock during the years ended December 31, 2022, 2021 and 2020.
(q) Research and Development
On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as incurred. Approximately $9.3 million, $8.5 million, and $8.2 million were expensed in the years ended December 31, 2022, 2021 and 2020, respectively.
(r) Foreign Currency Translation
The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of this translation is recorded in the consolidated financial statements as a component of Accumulated Other Comprehensive Income (AOCI). Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company’s foreign subsidiaries.
Recent Accounting Pronouncements
There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial statements.
Revisions
Certain revisions have been made to the December 31, 2021 Condensed Consolidated Balance Sheet to conform to the current year presentation relating to a reclassification of other liabilities (long-term) to accrued expenses (current). The reclassification resulted in an increase in accrued expenses of $4.1 million and a decrease in other liabilities of $4.1 million. These revisions had no impact on previously reported earnings, net income or cash flows and are deemed immaterial to the previously issued financial statements.
| (2) | Acquisitions and Divestiture |
Molded Fiber
On July 26, 2022, pursuant to a share purchase agreement and related agreements, the Company sold its Moulded Fiber Technology, Inc. (“MFT”) and related real estate in Iowa to CKF USA INCORPORATED (“CKF”) (a Delaware Corporation) for approximately $31.5 million (including a working capital adjustment of approximately $0.1 million that decreased the total consideration). The net book value of the assets sold were approximately $15.4 million and the Company recorded a net gain on sale of approximately $15.7 million, which was recorded in the year ended December 31, 2022. $2.6 million of the purchase price is being held in escrow to indemnify CKF against certain claims, losses, and liabilities. The Securities Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type. MFT’s annual revenue was approximately $21.3 million for the year ended December 31, 2021. Proceeds from the sale were used to pay down debt on the Company’s revolving credit facility, as well as income tax obligations on the related gain.
Advant Medical
On March 16, 2022, the Company purchased 100% of the outstanding shares of common stock of Advant Medical, Ltd., Advant Medical Inc. and Advant Medical Costa Rica, Limitada, (together Advant), pursuant to a Stock Purchase Agreement and related agreements, for an aggregate purchase price of €19.0 million in cash along with a working capital adjustment at closing (total consideration in U.S. Dollars amounted to approximately $21.2 million). The purchase price was subject to additional adjustment based upon Advant’s final working capital at closing. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Stock Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type.
Founded in 1993, Advant is headquartered in Galway, Ireland, with operations in Costa Rica and partner manufacturing in Mexico. Advant is a developer and manufacturer of Class I, II, and III medical devices and packaging, primarily for catheters and guide wires.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s estimates of fair value (in thousands):
| Fair value of considerations transferred | | | | |
| Cash paid at closing | | $ | 23,608 | |
| Other liability | | | 395 | |
| Cash from Advant | | | (2,840 | ) |
| Total consideration | | $ | 21,163 | |
| | | | | |
| Purchase price allocation | | | | |
| Accounts receivable | | $ | 2,299 | |
| Inventory | | | 2,410 | |
| Other current assets | | | 213 | |
| Property, plant, and equipment | | | 5,704 | |
| Customer contracts & relationships | | | 2,925 | |
| Intellectual property | | | 2,127 | |
| Non-compete agreement | | | 259 | |
| Lease right of use assets | | | 289 | |
| Other assets | | | 41 | |
| Goodwill | | | 7,140 | |
| Total identifiable assets | | $ | 23,407 | |
| Accounts payable | | | (772 | ) |
| Accrued expenses | | | (668 | ) |
| Income taxes | | | (66 | ) |
| Deferred taxes | | | (449 | ) |
| Lease liabilities | | | (289 | ) |
| Net assets acquired | | $ | 21,163 | |
Acquisition costs associated with the transaction were approximately $789 thousand, of which $759 thousand was charged to expense in the year ended December 31, 2022, and $30 thousand was charged to expense in the year ended December 31, 2021. These costs were primarily for legal, investment banking, and valuation services, as well as stamp duty filings and are reflected on the face of the income statement.
The amount of revenue and earnings of Advant recognized since the acquisition date, which is included in the condensed consolidated statement of income for the year ended December 31, 2022, was approximately $20.0 million and $2.4 million, respectively.
Pro-forma statements
The following table contains an unaudited pro forma condensed consolidated statement of operations for the years ended December 31, 2022, and 2021, as if the Advant acquisition had occurred at the beginning of 2021 (in thousands):
| | | Year Ended December 30, | |
| | | 2022 | | | 2021 | |
| | | (Unaudited) | | | (Unaudited) | |
| Sales | | $ | 358,196 | | | $ | 291,403 | |
| Operating Income | | $ | 56,321 | | | $ | 27,729 | |
| Net Income | | $ | 42,311 | | | $ | 21,805 | |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 5.59 | | | $ | 2.90 | |
| Diluted | | $ | 5.52 | | | $ | 2.86 | |
The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have occurred had the acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
DAS Medical
On December 22, 2021, the Company purchased 100% of the outstanding membership interests of DAS Medical Holdings, LLC, (DAS Medical) pursuant to a Securities Purchase Agreement, for a net purchase price of $66.7 million in cash. The purchase price was subject to adjustment based upon DAS Medical’s final working capital at closing, and the purchase price may be increased by up to $20.0 million in earn-out payments based upon the achievement of certain EBITDA and/or revenue targets of DAS Medical for the years ended December 31, 2022, 2023, 2024 and 2025. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Securities Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type. As a result of the final working capital adjustment, the total consideration was reduced by approximately $115 thousand.
In connection with its entry into the Purchase Agreement, the Company also entered into an Agreement for the Purchase and Sale of Personal Goodwill (the “Goodwill Agreement”) with the purchase price beneficiaries. Pursuant to the terms of the Goodwill Agreement, on December 22, 2021, the Company purchased from the beneficiaries their personal goodwill, including business relationships, trade secrets and knowledge in connection with DAS Medical’s business, for a purchase price of $20 million in cash.
The Company has also entered into Non-Competition Agreements with the beneficiaries and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments over the ten years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of certain key owners.
Founded in 2010, DAS Medical is headquartered in Atlanta, Georgia, with manufacturing in the Dominican Republic. DAS Medical is a medical device contract manufacturer specializing in the design, development and production of single-use surgical equipment covers, robotic draping systems and fluid control pouches.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s estimates of fair value (in thousands):
| Fair value of considerations transferred | | | | |
| Cash paid at closing | | $ | 95,000 | |
| Contingent liability (Earn-out) | | | 5,188 | |
| Non-compete agreements | | | 8,855 | |
| Cash from DAS | | | (8,316 | ) |
| Working capital adjustment | | | (115 | ) |
| Total consideration | | $ | 100,612 | |
| | | | | |
| Purchase price allocation | | | | |
| Accounts receivable | | $ | 2,351 | |
| Inventory | | | 7,570 | |
| Other current assets | | | 68 | |
| Property, plant, and equipment | | | 3,314 | |
| Customer contracts & relationships | | | 36,730 | |
| Intellectual property | | | 2,380 | |
| Non-compete agreement | | | 4,697 | |
| Lease right of use assets | | | 1,221 | |
| Goodwill | | | 51,742 | |
| Total identifiable assets | | $ | 110,073 | |
| Accounts payable | | | (5,238 | ) |
| Accrued expenses | | | (2,995 | ) |
| Deferred revenue | | | (7 | ) |
| Lease liabilities | | | (1,221 | ) |
| Net assets acquired | | $ | 100,612 | |
Acquisition costs associated with the transaction were approximately $448 thousand, of which $155 thousand was charged to expense in the year ended December 31, 2022, and $293 thousand was charged to expense in the year ended December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income statement.
The amount of revenue and net income of DAS Medical recognized since the acquisition date, which is included in the condensed consolidated statement of income for the year ended December 31, 2021, was approximately $1.4 million and $0.1 million, respectively.
Contech Medical
On October 12, 2021, the Company purchased 100% of the outstanding shares of common stock of Contech Medical, Inc., pursuant to a stock purchase agreement and related agreements, for an aggregate purchase price of $9.5 million in cash, the assumption of a contingent liability of $0.5 million plus up to an additional $5 million based upon the achievement of certain EBITDA targets of Contech for the 12-month period ended June 30, 2022. The purchase price was subject to adjustment based upon Contech’s working capital at closing. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type.
Founded in 1987, Contech is based in Providence, Rhode Island with partner manufacturing in Costa Rica. Contech is a global leader in the design, development, and manufacture of Class III medical device packaging primarily for catheters and guide wires. The Company has leased the Providence location from a realty trust owned by the selling shareholders and affiliates. The lease is for five years with one five-year renewal option.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s estimates of fair value (in thousands):
| Fair value of consideration transferred: | | | | |
| Cash paid at closing | | $ | 9,766 | |
| Contingent liability (Earn-out) | | | 4,543 | |
| Other liability | | | 500 | |
| Cash from Contech | | | (266 | ) |
| Total consideration | | $ | 14,543 | |
| | | | | |
| Purchase Price Allocation: | | | | |
| Accounts receivable | | $ | 2,851 | |
| Inventory | | | 2,320 | |
| Other current assets | | | 37 | |
| Property, plant and equipment | | | 1,170 | |
| Customer Contracts & Relationships | | | 3,043 | |
| Intellectual Property | | | 2,247 | |
| Non-Compete agreement | | | 86 | |
| Lease right of use assets | | | 1,523 | |
| Goodwill | | | 4,278 | |
| Total identifiable assets | | $ | 17,555 | |
| Accounts payable | | | (1,015 | ) |
| Accrued expenses | | | (414 | ) |
| Deferred revenue | | | (60 | ) |
| Lease liabilities | | | (1,523 | ) |
| Net assets acquired | | $ | 14,543 | |
Acquisition costs associated with the transaction were approximately $153 thousand, of which $113 thousand was charged to expense in the year ended December 31, 2022, and $40 thousand was charged to expense in the year ended December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income statement.
The amount of revenue and net income of Contech recognized since the acquisition date, which is included in the condensed consolidated statement of income for the year ended December 31, 2021, was approximately $4.5 million and $0.5 million, respectively.
The following table contains an unaudited pro forma condensed consolidated statement of operations for the years ended December 31, 2021, and 2020, as if both acquisitions had occurred at the beginning of 2020 (in thousands):
| | | Year Ended December 31, | |
| | | 2021 | | | 2020 | |
| | | (Unaudited) | | | (Unaudited) | |
| Sales | | $ | 269,932 | | | $ | 235,328 | |
| Operating Income | | $ | 25,878 | | | $ | 22,617 | |
| Net Income | | $ | 20,562 | | | $ | 18,354 | |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 2.73 | | | $ | 2.45 | |
| Diluted | | $ | 2.70 | | | $ | 2.43 | |
The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have occurred had both acquisitions occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to our customers (in thousands) (See Note 19 for further information regarding net sales by market):
| |
|
Years Ended December 31, |
|
| |
|
2022 |
|
|
2021 |
|
|
2020 |
|
| Net sales of: |
|
|
|
|
|
|
|
|
|
|
|
|
| Products |
|
$ |
342,742 |
|
|
$ |
201,248 |
|
|
$ |
172,299 |
|
| Tooling and Machinery |
|
|
6,307 |
|
|
|
1,814 |
|
|
|
2,787 |
|
| Engineering services |
|
|
4,743 |
|
|
|
3,258 |
|
|
|
4,287 |
|
| Total net sales |
|
$ |
353,792 |
|
|
$ |
206,320 |
|
|
$ |
179,373 |
|
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has deferred revenue (contract liabilities) included within “deferred revenue” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract liabilities for the years ended December 31, 2022, and 2021 (in thousands):
| |
|
Contract Liabilities |
|
| |
|
Years Ended |
|
| |
|
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
|
| Deferred revenue - beginning of period |
|
$ |
4,247 |
|
|
$ |
1,887 |
|
| Acquired in business combinations |
|
|
- |
|
|
|
69 |
|
| Increases due to consideration received from customers |
|
|
6,337 |
|
|
|
4,007 |
|
| Revenue recognized |
|
|
(5,330 |
) |
|
|
(1,716 |
) |
| Decrease due to sale of Molded Fiber |
|
|
(575 |
) |
|
|
- |
|
| Deferred revenue - end of period |
|
$ |
4,679 |
|
|
$ |
4,247 |
|
Revenue recognized during the years ended December 31, 2022 and 2021 from amounts included in deferred revenue at the beginning of the period was approximately $2.2 million and $0.8 million, respectively.
When invoicing occurs after revenue recognition, the Company has unbilled receivables (contract assets) included within “receivables” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract assets for the years ended December 31, 2022 and 2021 (in thousands):
| |
|
Contract Assets |
|
| |
|
Years Ended |
|
| |
|
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
|
| Unbilled Receivables - beginning of period |
|
$ |
74 |
|
|
$ |
271 |
|
| Increases due to revenue recognized, not invoiced to customers |
|
|
3,653 |
|
|
|
1,815 |
|
| Decreases due to customer invoicing |
|
|
(3,457 |
) |
|
|
(2,012 |
) |
| Unbilled Receivables - end of period |
|
$ |
270 |
|
|
$ |
74 |
|
| (4) |
Supplemental Cash Flow Information |
| |
Years Ended December 31, |
|
| |
2022 |
|
2021 |
|
2020 |
|
| |
|
|
|
(in thousands) |
|
|
|
|
| Cash paid for: |
|
|
|
|
|
|
|
|
|
| Interest |
$ |
2,721 |
|
$ |
53 |
|
$ |
71 |
|
| Income taxes, net of refunds |
|
13,200 |
|
|
5,914 |
|
|
2,481 |
|
| |
|
|
|
|
|
|
|
|
|
| Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
| Capital additions accrued but not yet paid |
$ |
125 |
|
$ |
135 |
|
$ |
225 |
|
| Accrued contingent consideration |
|
14,568 |
|
|
9,731 |
|
|
- |
|
| Present value of non-competition payments |
|
10,043 |
|
|
9,477 |
|
|
- |
|
| Finance lease right of use assets |
|
- |
|
|
187 |
|
|
108 |
|
| Finance lease liabilities |
|
- |
|
|
(187 |
) |
|
(108 |
) |
| Operating lease right of use assets |
|
329 |
|
|
7,782 |
|
|
- |
|
| Operating lease liabilities |
|
(329 |
) |
|
(7,782 |
) |
|
- |
|
| (5) |
Receivables and Allowance for Credit Losses |
Receivables consist of the following (in thousands):
| |
|
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Accounts receivable–trade |
|
$ |
55,850 |
|
|
$ |
39,903 |
|
| Less allowance for credit losses |
|
|
(733 |
) |
|
|
(519 |
) |
| Receivables, net |
|
$ |
55,117 |
|
|
$ |
39,384 |
|
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written-off when determined to be uncollectible. Estimates based on an assessment of anticipated payment and all other historical, current, and future information that is reasonably available are used to determine the allowance.
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected for the years ended December 31, 2022 and 2021 (in thousands):
| |
|
Allowance for Credit Losses |
|
| |
|
Year Ended December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Allowance - beginning of period |
|
$ |
519 |
|
|
$ |
484 |
|
| Provision for expected credit losses |
|
|
293 |
|
|
|
179 |
|
| Amounts written off against the allowance, net of recoveries |
|
|
(40 |
) |
|
|
(144 |
) |
| Decrease due to sale of Molded Fiber business |
|
|
(39 |
) |
|
|
- |
|
| Allowance - end of period |
|
$ |
733 |
|
|
$ |
519 |
|
Inventories consist of the following (in thousands):
| |
|
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Raw materials |
|
$ |
42,475 |
|
|
$ |
22,184 |
|
| Work in process |
|
|
4,183 |
|
|
|
4,205 |
|
| Finished goods |
|
|
6,878 |
|
|
|
7,047 |
|
| Total Inventory |
|
$ |
53,536 |
|
|
$ |
33,436 |
|
| (7) |
Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021 are as follows (in thousands):
| |
|
2022 |
|
|
2021 |
|
| |
|
|
|
|
|
|
|
|
| Opening balance |
|
$ |
107,905 |
|
|
$ |
51,838 |
|
| Acquired in business combinations (See Note 2) |
|
|
7,140 |
|
|
|
56,067 |
|
| DAS working capital adjustment |
|
|
196 |
|
|
|
- |
|
| DAS opening balance sheet reclassification |
|
|
(243 |
) |
|
|
- |
|
| Sale of Molded Fiber |
|
|
(1,778 |
) |
|
|
- |
|
| Foreign currency translation |
|
|
(192 |
) |
|
|
- |
|
| Ending balance |
|
$ |
113,028 |
|
|
$ |
107,905 |
|
Approximately $106.0 million of goodwill at December 31, 2022, is deductible for tax purposes
The carrying values of the Company’s definite-lived intangible assets as of December 31, 2022 and 2021 are as follows (in thousands):
| December 31, 2022 |
|
Customer
List |
|
|
Intellectual Property / Tradename & Brand |
|
|
Non-
Compete |
|
|
Total |
|
| Weighted-average useful life |
|
20 years |
|
|
11.9 years |
|
|
9.3 years |
|
|
|
|
|
| Gross amount |
|
$ |
65,174 |
|
|
$ |
7,064 |
|
|
$ |
5,497 |
|
|
$ |
77,735 |
|
| Accumulated amortization |
|
|
(7,665 |
) |
|
|
(727 |
) |
|
|
(982 |
) |
|
$ |
(9,374 |
) |
| Net balance |
|
$ |
57,509 |
|
|
$ |
6,337 |
|
|
$ |
4,515 |
|
|
$ |
68,361 |
|
| December 31, 2021 |
|
Customer
List |
|
|
Intellectual Property / Tradename & Brand |
|
|
Non-
Compete |
|
|
Total |
|
| Weighted-average useful life |
|
20 years |
|
|
11.9 years |
|
|
9.5 years |
|
|
|
|
|
| Gross amount |
|
$ |
62,328 |
|
|
$ |
4,994 |
|
|
$ |
5,245 |
|
|
$ |
72,567 |
|
| Accumulated amortization |
|
|
(4,442 |
) |
|
|
(175 |
) |
|
|
(365 |
) |
|
$ |
(4,982 |
) |
| Net balance |
|
$ |
57,886 |
|
|
$ |
4,819 |
|
|
$ |
4,880 |
|
|
$ |
67,585 |
|
Amortization expense related to intangible assets was approximately $4.4 million, $1.3 million, and $1.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. The estimated remaining amortization expense as of December 31, 2022 is as follows (in thousands):
| 2023 |
|
$ |
4,408 |
|
| 2024 |
|
|
4,401 |
|
| 2025 |
|
|
4,401 |
|
| 2026 |
|
|
4,399 |
|
| 2027 |
|
|
4,397 |
|
| Thereafter |
|
|
46,355 |
|
| Total |
|
$ |
68,361 |
|
| (8) |
Property, Plant and Equipment |
Property, plant, and equipment consist of the following (in thousands):
| |
|
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Land and improvements |
|
$ |
4,811 |
|
|
$ |
3,191 |
|
| Buildings and improvements |
|
|
34,446 |
|
|
|
36,234 |
|
| Leasehold improvements |
|
|
5,503 |
|
|
|
4,859 |
|
| Machinery & equipment |
|
|
52,233 |
|
|
|
72,963 |
|
| Furniture, fixtures, computers & software |
|
|
6,401 |
|
|
|
6,052 |
|
| Construction in progress |
|
|
7,272 |
|
|
|
3,538 |
|
| Property, plant and equipment |
|
$ |
110,666 |
|
|
$ |
126,837 |
|
| Accumulated depreciation and amortization |
|
|
(52,594 |
) |
|
|
(70,268 |
) |
| Net property, plant and equipment |
|
$ |
58,072 |
|
|
$ |
56,569 |
|
Depreciation and amortization expense of Property, Plant and Equipment for the years ended December 31, 2022, 2021, and 2020 was approximately $7.5 million, $7.1 million, and $7.0 million, respectively.
On December 22, 2021, the Company, as the borrower, entered into a secured $130 million Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time-to-time party thereto. The Second Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of February 1, 2018.
The credit facilities under the Second Amended and Restated Credit Agreement consist of a $40 million secured term loan to the Company and a secured revolving credit facility, under which the Company may borrow up to $90 million. The Second Amended and Restated Credit Agreement matures on December 21, 2026. The secured term loan requires quarterly principal payments of $1 million that commenced on March 31, 2022. The proceeds of the Second Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of DAS Medical, as well as certain other permitted acquisitions. The Company’s obligations under the Second Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Second Amended and Restated Credit Agreement calls for interest determined by the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus a margin that ranges from 1.25% to 2.0% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the Second Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Second Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness, and permitted investments.
At December 31, 2022, the Company had approximately $55 million in borrowings outstanding under the Second Amended and Restated Credit Agreement, which were used as partial consideration for the DAS Medical and Advant acquisitions, and also had approximately $0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies. At December 31, 2022, the applicable interest rate was approximately 5.2% and the Company was in compliance with all covenants under the Second Amended and Restated Credit Agreement.
Long-term debt consists of the following (in thousands):
| | | December 31, 2022 | |
| Revolving credit facility | | $ | 19,000 | |
| Term loan | | | 36,000 | |
| Total long-term debt | | | 55,000 | |
| Current portion | | | (4,000 | ) |
| Long-term debt, excluding current portion | | $ | 51,000 | |
Future maturities of long-term debt at December 31, 2022 are as follows (in thousands):
| Year ended December 31, | | Term Loan | | | Revolving credit facility | | | Total | |
| 2023 | | $ | 4,000 | | | $ | - | | | $ | 4,000 | |
| 2024 | | | 4,000 | | | | - | | | | 4,000 | |
| 2025 | | | 4,000 | | | | - | | | | 4,000 | |
| 2026 | | | 24,000 | | | | 19,000 | | | | 43,000 | |
| | | $ | 36,000 | | | $ | 19,000 | | | $ | 55,000 | |
Derivative Financial Instruments
The Company used interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on certain of its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, creating credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, in these circumstances the Company is not exposed to the counterparty’s credit risk. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations exposed the Company to variability in interest payments due to changes in interest rates. The Company believed that it was prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the first Amended and Restated Credit Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap modified the Company’s interest rate exposure by converting the previous term loan from a variable rate to a fixed rate in order to hedge against the possibility of rising interest rates during the term of the loan. The notional amount was approximately $5.7 million at December 31, 2022. The fair value of the swap as of December 31, 2022 and 2021 was zero and approximately $(176) thousand, respectively, and is included in other liabilities. Changes in the fair value and net cash settlement amounts related to the swap are recorded in other income of approximately $176 thousand and approximately $24 thousand during the years ended December 31, 2022 and 2021, respectively.
As the Company has paid the remaining balance of the term loan that was associated with the swap in its entirety, there is no longer underlying debt to hedge against with the swap. The changes in the fair value of the swap will continue to be accounted for as a financial instrument until its maturity, on February 1, 2023.
Accrued expenses consist of the following (in thousands):
| |
|
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Compensation |
|
$ |
7,949 |
|
|
$ |
6,498 |
|
| Current portion of contingent consideration |
|
|
5,000 |
|
|
|
4,543 |
|
| Current portion of present value of non-competition payments |
|
|
1,888 |
|
|
|
156 |
|
| Accrued customer rebates |
|
|
3,493 |
|
|
|
1,241 |
|
| Other |
|
|
4,792 |
|
|
|
4,339 |
|
| |
|
$ |
23,122 |
|
|
$ |
16,777 |
|
Certain amounts for the year ended December 31, 2021 were revised to conform to the current year presentation (See Note 1).
The Company’s domestic and foreign net income before provision for income taxes for the years ended December 31, 2022, 2021, and 2020 consists of the following (in thousands):
| | | Years Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | | |
| Domestic | | $ | 34,654 | | | $ | 21,205 | | | $ | 16,283 | |
| Foreign | | | 18,064 | | | | - | | | | - | |
| Total | | | 52,718 | | | | 21,205 | | | | 16,283 | |
The Company’s income tax provision for the years ended December 31, 2022, 2021, and 2020 consists of the following (in thousands):
| | | Years Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Current | | | | | | | | | | | | |
| Federal | | $ | 11,238 | | | $ | 5,793 | | | $ | 2,223 | |
| State | | | 2,309 | | | | 1,320 | | | | 555 | |
| Foreign | | | 1,863 | | | | - | | | | - | |
| Total Current | | | 15,410 | | | | 7,113 | | | | 2,778 | |
| Deferred | | | | | | | | | | | | |
| Federal | | | (3,856 | ) | | | (1,399 | ) | | | (28 | ) |
| State | | | (624 | ) | | | (395 | ) | | | 164 | |
| Foreign | | | (1 | ) | | | - | | | | - | |
| Total Deferred | | | (4,481 | ) | | | (1,794 | ) | | | 136 | |
| Total income tax provision | | $ | 10,929 | | | $ | 5,319 | | | $ | 2,914 | |
The approximate tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows (in thousands):
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Deferred tax assets: | | | | | | | | |
| Reserves | | $ | 450 | | | $ | 380 | |
| Inventory capitalization | | | 305 | | | | 706 | |
| Compensation programs | | | 2,120 | | | | 1,842 | |
| Equity-based compensation | | | 690 | | | | 668 | |
| Lease liability | | | 3,298 | | | | 2,427 | |
| Intangible assets | | | 1,132 | | | | 877 | |
| Deferred revenue | | | 1,115 | | | | 365 | |
| Other | | | 362 | | | | 17 | |
| Gross deferred tax assets | | | 9,472 | | | | 7,282 | |
| Valuation allowance | | | - | | | | (17 | ) |
| Net deferred tax assets | | | 9,472 | | | | 7,265 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Excess of book over tax basis of fixed assets | | | (2,782 | ) | | | (4,481 | ) |
| Goodwill | | | (2,445 | ) | | | (3,628 | ) |
| Right of use asset | | | (3,245 | ) | | | (2,419 | ) |
| Total deferred tax liabilities | | | (8,472 | ) | | | (10,528 | ) |
| Net long-term deferred tax assets (liabilities) | | $ | 1,000 | | | $ | (3,263 | ) |
The amounts recorded as deferred tax assets as of December 31, 2022 and 2021 represent the amount of tax benefits of existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. The Company had gross deferred tax assets of approximately $9.5 million at December 31, 2022, that it believes are more likely than not to be realized in the carryforward period. Management reviews the recoverability of deferred tax assets during each reporting period.
The Company has provided a valuation allowance of zero and $17 thousand at December 31, 2022 and 2021, respectively, for deferred tax assets (net of federal tax benefit).
The actual tax provision for the years presented differs from that derived from using a U.S federal statutory rate of 21% to income before income tax expense as follows:
| | | Years Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| U.S. federal statutory rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
| Increase (decrease) in income taxes resulting from: | | | | | | | | | | | | |
| State taxes, net of federal tax benefit | | | 3.2 | | | | 4.0 | | | | 4.2 | |
| Meals and entertainment | | | - | | | | - | | | | 0.1 | |
| Tax credits | | | (0.7 | ) | | | (1.7 | ) | | | (7.2 | ) |
| Return to provision adjustments | | | - | | | | 0.7 | | | | - | |
| Foreign rate differential | | | (3.7 | ) | | | - | | | | - | |
| GILTI impact | | | 0.8 | | | | - | | | | - | |
| Excess tax benefits on equity awards | | | - | | | | - | | | | (1.2 | ) |
| Excess compensation | | | 0.8 | | | | 0.7 | | | | 0.8 | |
| Other | | | (0.7 | ) | | | 0.6 | | | | 0.2 | |
| Change in valuation allowance | | | - | | | | (0.2 | ) | | | - | |
| Effective tax rate | | | 20.7 | % | | | 25.1 | % | | | 17.9 | % |
The Company’s foreign subsidiary earnings are subject to current U.S. taxation under the Tax Cuts and Jobs Act of 2017, which also repealed U.S. taxation on the subsequent repatriation of those earnings. We intend to repatriate substantially all of our future foreign subsidiary earnings. The repatriation of earnings outside of the U.S. generally does not represent a material net tax impact to the Company. The withholding taxes associated with the Company’s earnings in the Dominican Republic are generally fully creditable against the Company US tax liability and therefore do not produce any incremental tax consequences. The earnings of the Company’s other foreign subsidiaries, and therefore the withholding taxes associated with those earnings, are not material as of December 31, 2022.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, as well as Ireland and Costa Rica. It currently does not have a local filing obligation with respect to its subsidiary in the Dominican Republic. The Company has not been audited by any state for income taxes with the exception of returns filed in Michigan which have been audited through 2004, income tax returns filed in Massachusetts which have been audited through 2007, income tax returns filed in Florida which have been audited through 2019, income tax returns filed in New Jersey which have been audited through 2012, income tax returns in Colorado which have been audited through 2017, and income tax returns in Iowa which have been audited through 2019. The Company’s federal tax return is currently being audited for the years 2019 and 2020. Federal and state tax returns for the years 2019 through 2022 remain open to examination by the IRS and various state jurisdictions. The Company’s non-US tax returns in Ireland and Costa Rica are open back to 2018.
At December 31, 2022 and 2021, the Company did not have any gross unrecognized tax benefits (“UTB”) resulting from uncertain tax positions.
| (12) | Net Income Per Share |
Basic income per share is based upon the weighted average common shares outstanding during each year. Diluted income per share is based upon the weighted average of common shares and dilutive common stock equivalent shares outstanding during each year. The weighted average number of shares used to compute both basic and diluted income per share consisted of the following (in thousands):
| | | Years Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Basic weighted average common shares outstanding during the year | | | 7,564 | | | | 7,524 | | | | 7,484 | |
| Weighted average common equivalent shares due to stock options and restricted stock units | | | 99 | | | | 91 | | | | 84 | |
| Diluted weighted average common shares outstanding during the year | | | 7,663 | | | | 7,615 | | | | 7,568 | |
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would have been antidilutive.
For the years ended December 31, 2022, 2021, and 2020, the number of stock awards excluded from the computation was 9,876, 10,716, and 14,892, respectively.
| (13) | Share-Based Compensation |
The Company issues share-based awards through several plans that are described in detail below.
Incentive Plan
In June 2003, the Company formally adopted the 2003 Incentive Plan (the “Plan”). As amended and restated to date, the Plan is intended to benefit the Company by offering equity-based and other incentives to certain of the Company’s executives and employees who are in a position to contribute to the long-term success and growth of the Company, thereby encouraging the continuance of their involvement with the Company and/or its subsidiaries.
Two types of equity awards may be granted to participants under the Plan: restricted shares or other stock awards. Restricted shares are shares of common stock awarded subject to restrictions and to possible forfeiture upon the occurrence of specified events. Other stock awards are awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of common stock. Such awards may include Restricted Stock Unit Awards (“RSUs”), incentive and non-qualified stock options, performance shares, or stock appreciation rights. The Company determines the form, terms, and conditions, if any, of any awards made under the Plan.
Through December 31, 2022, 1,327,064 shares of common stock were issued under the 2003 Incentive Plan, none of which have been restricted. An additional 98,448 shares are being reserved for outstanding grants of RSUs and other share-based compensation that are subject to various performance and time-vesting contingencies. The Company has also granted awards in the form of stock options under this Plan. Through December 31, 2022, 185,000 options were granted and no options are outstanding. At December 31, 2022, 738,769 shares or options are available for future issuance in the 2003 Incentive Plan.
Director Plan
Effective July 15, 1998, the Company adopted the 1998 Director Plan, which was amended and renamed on June 3, 2009 as the 2009 Non-Employee Director Stock Incentive Plan (the “Director Plan”). The Director Plan was amended on March 7, 2013, to (i) prohibit the repricing of stock options or other equity awards without the consent of the Company’s shareholders, and (ii) prohibit the Company from buying out underwater stock options. The Director Plan was amended on June 8, 2022, to increase the maximum number of shares issuable under the Director Plan from 975,000 to 1,075,000. The Director Plan, as amended, provides for the issuance of stock options and other equity-based securities to non-employee members of the Company’s board of directors.
Through December 31, 2022, 400,510 options were granted, and 93,302 options are outstanding. For the year ended December 31, 2022, 3,882 RSUs are being reserved for outstanding grants of RSUs and 131,846 shares remain available to be issued under the Director Plan.
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). Share-based compensation is included in selling, general & administrative expenses as follows (in thousands):
| | | Years Ended December 31, | |
| Share-based compensation related to: | | 2022 | | | 2021 | | | 2020 | |
| Common stock grants | | $ | 400 | | | $ | 400 | | | $ | 400 | |
| Stock option grants | | | 263 | | | | 210 | | | | 232 | |
| Restricted Stock Unit awards | | | 2,545 | | | | 1,818 | | | | 1,175 | |
| Total share-based compensation | | $ | 3,208 | | | $ | 2,428 | | | $ | 1,807 | |
The total income tax benefit recognized in the consolidated statements of income for share-based compensa‐tion arrangements was approximately $1.3 million, $0.8 million, and $0.7 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Common stock grants
The compensation expense for common stock granted during the three-year period ended December 31, 2022, was determined based on the market price of the shares on the date of grant.
Stock option grants
The compensation expense for stock options granted during the three-year period ended Decem‐ber 31, 2022, was determined as the fair value of the options using the Black Scholes valuation model. The assumptions are noted as follows:
| | | Years Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Expected volatility | | | 34.7 | % | | | 33.7 | % | | | 32.8 | % |
| Expected dividends | | None | | | None | | | None | |
| Risk-free interest rate | | | 2.9 | % | | | 0.8 | % | | | 0.3 | % |
| Exercise price | | $ | 77.28 | | | $ | 57.34 | | | $ | 43.95 | |
| Expected term (years) | | | 6.2 | | | | 6.2 | | | | 6.1 | |
| Weighted-average grant date fair value | | $ | 30.37 | | | $ | 19.60 | | | $ | 14.10 | |
The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term, and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option. The expected term is estimated based on historical option exercise activity.
The following is a summary of stock option activity for the year ended December 31, 2022:
| | | Shares Under Options | | | Weighted Average Exercise Price
(per share) | | | Weighted Average Remaining Contractual Life
(in years) | | | Aggregate Intrinsic Value
(in thousands) | |
| | | | | | | | | | | | | | | | | |
| Outstanding December 31, 2021 | | | 98,671 | | | $ | 33.53 | | | | | | | | | |
| Granted | | | 9,876 | | | | 77.28 | | | | | | | | | |
| Exercised | | | (16,472 | ) | | | 23.72 | | | | | | | | | |
| Outstanding December 31, 2022 | | | 92,075 | | | $ | 39.98 | | | | 5.95 | | | $ | 7,174 | |
| Exercisable at December 31, 2022 | | | 82,199 | | | $ | 35.50 | | | | 5.53 | | | $ | 6,773 | |
| Vested and expected to vest at December 31, 2022 | | | 92,075 | | | $ | 39.98 | | | | 5.95 | | | $ | 7,174 | |
During the years ended December 31, 2022, 2021, and 2020, the total intrinsic value of all options exercised (i.e., the difference between the market price and the price paid by the employees to exercise the options) was approximately $1.2 million, $0.2 million, and $0.8 million, respectively, and the total amount of consideration received from the exercise of these options was approximately $0.4 million, $0.2 million, and $0.5 million, respectively. At its discretion, the Company allows option holders to surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During the year ended December 31, 2022, 1,876 shares were redeemed for this purpose at an average market price of $95.82. During both the years ended December 31, 2021 and 2020, no shares were redeemed for this purpose.
Restricted Stock Unit awards (“RSUs”)
The Company grants RSUs to its directors, executive officers and employees. The stock unit awards are subject to various time-based vesting requirements, and certain portions of these awards are subject to performance criteria of the Company. Compensation expense on these awards is recorded based on the fair value of the award at the date of grant, which is equal to the Company’s closing stock price, and is charged, to expense ratably during the service period. No compensation expense is taken on awards that do not become vested, and the amount of compensation expense recorded is adjusted based on management’s determination of the probability that these awards will become vested.
The following table summarizes informa‐tion about stock unit award activity during the year ended December 31, 2022:
| | | Restricted Stock Units | | | Weighted Average Award Date Fair Value | |
| Outstanding at December 31, 2021 | | | 101,168 | | | $ | 41.78 | |
| Awarded | | | 51,981 | | | | 74.66 | |
| Shares vested | | | (49,575 | ) | | | 41.05 | |
| Forfeitures | | | (1,244 | ) | | | 63.34 | |
| Outstanding at December 31, 2022 | | | 102,330 | | | $ | 56.02 | |
At the Company’s discretion, RSU holders are given the option to net-share settle to cover the required minimum withholding tax, and the remaining amount is converted into the equivalent number of common shares. During the year ended December 31, 2022, 19,425 shares were redeemed for this purpose at an average market price of $67.05. During the years ended December 31, 2021 and 2020, 14,190 and 11,423 shares were redeemed for this purpose at an average market price of $52.55 and $49.91, respectively.
The following summarizes the future share-based compensation expense the Company will record as the equity securities granted through December 31, 2022, vest (in thousands):
| | | Options | | | Restricted
Stock Units | | | Total | |
| 2023 | | $ | 131 | | | $ | 2,186 | | | $ | 2,317 | |
| 2024 | | | - | | | | 1,287 | | | | 1,287 | |
| 2025 | | | - | | | | 150 | | | | 150 | |
| Total | | $ | 131 | | | $ | 3,623 | | | $ | 3,754 | |
The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet.
ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets are also adjusted for any deferred or accrued rent. As the Company's leases do not typically provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
ROU assets and lease liabilities consist of the following (in thousands):
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Operating lease ROU assets | | $ | 12,942 | | | $ | 9,053 | |
| Finance lease ROU assets | | | 211 | | | | 271 | |
| Total ROU assets | | $ | 13,153 | | | $ | 9,324 | |
| | | | | | | | | |
| Operating lease liabilities - current | | $ | 2,458 | | | $ | 2,181 | |
| Finance lease liabilities - current | | | 59 | | | | 58 | |
| Total lease liabilities - current | | $ | 2,517 | | | $ | 2,239 | |
| | | | | | | | | |
| Operating lease liabilities - long-term | | $ | 10,695 | | | $ | 6,903 | |
| Finance lease liabilities - long-term | | | 156 | | | | 215 | |
| Total lease liabilities - long-term | | $ | 10,851 | | | $ | 7,118 | |
| | | Year Ended | |
| | | December 31, | |
| | | ($ in thousands) | |
| | | 2022 | | | 2021 | |
| Lease Cost: | | | | | | | | |
| Finance lease cost: | | | | | | | | |
| Amortization of right of use assets | | $ | 60 | | | $ | 27 | |
| Interest on lease liabilities | | | 5 | | | | 3 | |
| Operating lease cost | | | 2,621 | | | | 1,263 | |
| Variable lease cost | | | 304 | | | | 263 | |
| Short-term lease cost | | | 57 | | | | 43 | |
| Total lease cost | | $ | 3,047 | | | $ | 1,599 | |
| | | | | | | | | |
| Cash paid for amounts included in measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | | $ | 2,452 | | | $ | 1,284 | |
| Financing cash flows from finance leases | | | 63 | | | | 29 | |
| ROU assets obtained in exchange for finance lease obligations | | | - | | | | 198 | |
| | | | | | | | | |
| Weighted-average remaining lease term (years): | | | | | | | | |
| Finance | | | 3.54 | | | | 4.54 | |
| Operating | | | 5.34 | | | | 3.95 | |
| Weighted-average discount rate: | | | | | | | | |
| Finance | | | 2.10 | % | | | 2.10 | % |
| Operating | | | 3.00 | % | | | 2.63 | % |
The aggregate future lease payments for leases as of December 31, 2022 were as follows (in thousands):
| | | December 31, 2022 | |
| | | Finance | | | Operating (a) | |
| 2023 | | $ | 63 | | | $ | 2,492 | |
| 2024 | | | 63 | | | | 2,420 | |
| 2025 | | | 63 | | | | 2,234 | |
| 2026 | | | 28 | | | | 2,012 | |
| 2027 | | | 6 | | | | 1,709 | |
| Thereafter | | | - | | | | 3,611 | |
| Total lease payments | | | 223 | | | | 14,478 | |
| Less: Interest | | | (8 | ) | | | (1,325 | ) |
| Present value of lease liabilities | | $ | 215 | | | $ | 13,153 | |
| | (a) | Future operating lease payments have not been reduced by minimum sublease rentals of approximately $2.1 million due in the future under non-cancelable subleases. |
Rent expense amounted to approximately $2.6 million, $1.4 million, and $1.3 million in 2022, 2021, and 2020, respectively.
| (15) | Other Long-Term Liabilities |
Other long-term liabilities consist of the following (in thousands):
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Accrued contingent consideration (earn-out) | | $ | 9,568 | | | $ | 5,188 | |
| Present value of non-competition payments | | | 8,155 | | | | 9,321 | |
| Other | | | 497 | | | | 676 | |
| | | $ | 18,220 | | | $ | 15,185 | |
Certain amounts for the year ended December 31, 2021 were revised to conform to the current year presentation (See Note 1).
| (16) | Commitments and Contingencies |
| | (a) | Legal – From time to time, the Company may be a party to various suits, claims and complaints arising in the ordinary course of business. In the opinion of management of the Company, these suits, claims and complaints should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations. |
| | (b) | Contingent Consideration – In conjunction with both the Contech Medical and DAS Medical acquisitions in the fourth quarter of 2021, the Company incurred liabilities for certain contingent consideration related to the valuation of earn-out payments based upon the performance of the business. Also in conjunction with the DAS Medical acquisition, the Company incurred a liability for contingent consideration related to the present value of non-competition payments. We re-measure contingent liabilities each reporting period and record changes in the fair value through a separate line item within our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount rates, periods, timing and amount of projected revenue or timing or likelihood of achieving regulatory, revenue or commercialization-based milestones. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows, discount rates, useful life, or probability of achieving clinical, regulatory, or revenue-based milestones could result in different purchase price allocations and recognized amortization expense and contingent consideration expense or benefit in current and future periods. |
| (17) | Employee Benefit Plans |
The Company maintains 401(k) and profit-sharing plans for eligible employees. Contributions to the Plans are made in the form of matching contributions to employee 401(k) deferrals, and until 2020, discretionary profit-sharing amounts determined by the Board of Directors to be funded by March 15 following each fiscal year. Contributions to the Plan were approxi‐mately $0.7 million, $0.6 million, and $0.9 million for the years 2022, 2021, and 2020, respectively.
The Company has a partially self-insured health insurance program that covers all eligible participating employees. The maximum liability is limited by a stop loss of $225 thousand per insured person, along with an aggregate stop loss determined by the number of participants.
The Company has an Executive, Non-qualified “Excess” Plan (“the Plan”), which is a deferred compen‐sa‐tion plan available to certain executives. The Plan permits participants to defer receipt of part of their current compensation to a later date as part of their personal retirement or financial planning. Partici‐pants have an unsecured contractual commitment from the Company to pay amounts due under the Plan.
The compensation withheld from Plan participants, together with gains or losses determined by the participants’ deferral elections is reflected as a deferred compensation obligation to participants and is classified within the liabilities section in the accompanying balance sheets. At December 31, 2022 and 2021, the balance of the deferred compensation liability totaled approximately $4.2 million and $4.3 million, respectively. The related assets, which are held in the form of a Company-owned, variable life insurance policy that names the Company as the beneficiary, are classified within the other assets section of the accompanying balance sheets and are accounted for based on the underlying cash surrender values of the policies and totaled approximately $4.1 and $4.3 million as of December 31, 2022 and 2021, respectively.
| (18) | Fair Value of Financial Instruments |
Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820, Fair Value Measurements and Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:
Level 1
Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3
Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The following table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):
| Level 2 | | December 31, 2022 | | | December 31, 2021 | |
| Liabilities: | | | | | | | | |
| Derivative financial instruments | | $ | - | | | $ | 176 | |
| Level 3 | | | | | | | | |
| Purchase price contingent consideration (Note 2): | | | | | | | | |
| Accrued contingent consideration (earn-out) | | $ | 14,568 | | | $ | 9,731 | |
| Present value of non-competition payments | | | 10,043 | | | | 9,477 | |
Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full term of the swap agreement.
In connection with the acquisitions discussed in Note 2, “Acquisitions,” the Company is required to make contingent payments, subject to the entities achieving certain financial performance thresholds. The contingent consideration payments for both acquisitions combined are up to $25 million. The fair value of the liabilities for the contingent consideration payments recognized upon the acquisition as part of the purchase accounting opening balance sheets totaled approximately $9.7 million and was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in this calculation were managements financial forecasts, discount rate and various probability factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period. The change in fair value of contingent consideration for the acquisition is included in change in fair value of contingent consideration in the consolidated statements of operations.
Also in connection with the DAS Medical acquisition, the Company has entered into Non-Competition Agreements with the beneficiaries and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments over the ten years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of certain key owners. The present value of the Non-Competition Agreements totaled approximately $8.9 million. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period. The change in fair value of contingent consideration for the acquisition is included in change in fair value of contingent consideration in the consolidated statements of operations.
The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, that are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.
The Company consists of a single operating and reportable segment.
Revenues shipped to customers outside of the United States comprised approximately 16% of the Company’s consolidated revenues for the year ended December 31, 2022. One customer comprised approximately 21% of the Company’s consolidated revenues for the year ended December 31, 2022. No customer comprised more than 10% of the Company’s consolidated revenues for the years ended December 31, 2021 and 2020. One customer represented approximately 10% of gross accounts receivable for both years ended December 31, 2022 and 2021. Approximately 17% of all long-lived assets are located outside of the United States.
The Company’s custom products are primarily sold to customers within the Medical, Automotive, Consumer, Aerospace & Defense, Industrial, and Electronics markets. Sales by market for the years ended December 31, 2022, 2021, and 2020 as follows (in thousands):
| | | 2022 | | | 2021 | | | 2020 | |
| Market | | Net Sales | | | % | | | Net Sales | | | % | | | Net Sales | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Medical | | $ | 286,180 | | | | 80.9 | % | | $ | 132,505 | | | | 64.2 | % | | $ | 120,258 | | | | 67.2 | % |
| Automotive | | | 17,487 | | | | 4.9 | % | | | 15,596 | | | | 7.6 | % | | | 14,607 | | | | 8.1 | % |
| Consumer | | | 17,255 | | | | 4.9 | % | | | 26,048 | | | | 12.6 | % | | | 18,316 | | | | 10.2 | % |
| Aerospace & Defense | | | 15,328 | | | | 4.3 | % | | | 16,380 | | | | 7.9 | % | | | 12,810 | | | | 7.1 | % |
| Industrial | | | 10,322 | | | | 2.9 | % | | | 8,413 | | | | 4.1 | % | | | 7,622 | | | | 4.2 | % |
| Electronics | | | 7,220 | | | | 2.1 | % | | | 7,378 | | | | 3.6 | % | | | 5,760 | | | | 3.2 | % |
| Net Sales | | $ | 353,792 | | | | 100.0 | % | | $ | 206,320 | | | | 100.0 | % | | $ | 179,373 | | | | 100.0 | % |
Certain amounts for the year ended December 31, 2021 were reclassified between markets to conform to the current year presentation.
| (20) | Quarterly Financial Information (unaudited) |
Summarized quarterly financial data is as follows (in thousands, except per share data):
| 2022 | | Q1 | | | Q2 | | | Q3 | | | Q4 | |
| Net sales | | $ | 71,242 | | | $ | 94,343 | | | $ | 96,970 | | | $ | 91,237 | |
| Gross profit | | | 17,134 | | | | 24,324 | | | | 25,523 | | | | 23,279 | |
| Net income | | | 4,858 | | | | 8,929 | | | | 19,540 | | | | 8,462 | |
| Basic net income per share | | | 0.64 | | | | 1.18 | | | | 2.58 | | | | 1.12 | |
| Diluted net income per share | | | 0.64 | | | | 1.17 | | | | 2.56 | | | | 1.10 | |
| 2021 | | Q1 | | | Q2 | | | Q3 | | | Q4 | |
| Net sales | | $ | 48,599 | | | $ | 50,655 | | | $ | 50,723 | | | $ | 56,343 | |
| Gross profit | | | 12,609 | | | | 13,414 | | | | 12,016 | | | | 13,075 | |
| Net income | | | 4,163 | | | | 4,715 | | | | 3,789 | | | | 3,219 | |
| Basic net income per share | | | 0.55 | | | | 0.63 | | | | 0.50 | | | | 0.43 | |
| Diluted net income per share | | | 0.55 | | | | 0.62 | | | | 0.50 | | | | 0.42 | |
Schedule II