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Summary of Significant Accounting Policies
 12 Months Ended
Dec. 31, 2011
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

(1)       Summary of Significant Accounting Policies

 

UFP Technologies, Inc. (“the Company”) is an innovative designer and custom converter of foams, plastics, and natural fiber products principally serving the medical, automotive, aerospace and defense, computer and electronics, consumer, and industrial markets. The Company was incorporated in the State of Delaware in 1993.

 

(a)   Principles of Consolidation

 

The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc., its wholly-owned subsidiaries, Moulded Fibre Technology, Inc., Simco Industries, Inc. and its wholly-owned subsidiary Simco Automotive Trim, Inc., and Stephenson & Lawyer, Inc. and its wholly-owned subsidiary, Patterson Properties Corporation. The Company also consolidates United Development Company Limited, of which the Company owns 26.32% (see Note 8). All significant inter-company balances and transactions have been eliminated in consolidation.

 

(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 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 of Financial Instruments

 

Cash and cash equivalents, accounts receivable, accounts payable, and accrued taxes and other expenses 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.

 

(d)   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 measurements 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.

 

The Company has not elected fair value accounting for any financial instruments for which fair value accounting is optional.

 

(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, 2011, and 2010, cash equivalents primarily consisted of money market accounts and certificates of deposit that are readily convertible into cash. The Company utilizes zero-balance disbursement accounts to manage its funds. As such, outstanding checks at the end of a year are recorded as reductions in cash.  Prior to 2011 the Company recorded book overdrafts caused by outstanding checks as an increase to both cash and accounts payable.  Because the Company had sufficient cash on hand at the end of each fiscal year to fund the outstanding checks as they cleared, prior year book overdrafts have been reclassified as a reduction in cash to be consistent with the 2011 presentation.  The outstanding checks at December 31, 2011, 2010, and 2009, were $2,016,839, $2,331,117, and $1,597,085, respectively.

 

The Company maintains its cash in bank deposit accounts, money market funds, and certificates of deposit 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 uncollectible. 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, 2011.

 

(g)   Inventories

 

Inventories include material, labor, and manufacturing overhead and are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

 

The Company periodically reviews the realizability of its inventory for potential 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, 2011.

 

(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 (for financial statement purposes) and, in some cases, accelerated methods (for income tax purposes). Certain manufacturing machines that are dedicated to a specific program — where total units to be produced over the life of the program are estimable — are depreciated using the modified units of production method for financial statement purposes.

 

Estimated useful lives of property, plant, and equipment are as follows:

 

 

 

Shorter of estimated useful life

 

Leasehold improvements

 

or remaining lease term

 

 

 

 

 

Buildings and improvements

 

31.5 years

 

Equipment

 

8-10 years

 

Furniture and fixtures

 

5-7 years

 

 

Property, plant, and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value.

 

(i)    Goodwill

 

Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. The Company’s reporting units include its Component Products segment, Packaging segment (excluding its Molded Fiber operation), and its Molded Fiber operation. 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 assessed qualitative factors as of December 31, 2011, and determined that it was more likely than not that the fair value of both reporting units exceeded their respective carrying amounts.  Factors considered for each reporting unit included financial performance, forecasts and trends, market cap, regulatory and environmental issues, foreign currency, market analysis, recent transactions, macro-economic conditions, industry and market considerations, raw material costs, management stability, and the degree by which the fair value of each reporting unit exceeded its carrying value in 2010 (approximately $37 million or 161% and $7 million or 190% for the Component Products and Molded Fiber reporting units, respectively).  As a result, no goodwill impairment test was performed in 2011.  Based upon tests performed in 2010 and 2009, there was no goodwill impairment as of December 31, 2010, and 2009.

 

(j)    Intangible Assets

 

Intangible assets with an indefinite life are not amortized. Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from 5 to 14 years. Indefinite-lived intangible assets are 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. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that their carrying values may not be recoverable.

 

(k)   Revenue Recognition

 

The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured of collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these criteria, in some cases, requires management’s judgment.

 

(l)    Share-Based Compensation

 

When accounting for equity instruments exchanged for employee services, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

 

Share-based compensation cost that has been charged against income for stock compensation plans is as follows:

 

 

 

Year Ended December 31

 

 

 

2011

 

2010

 

2009

 

Selling, general, and administrative expenses

 

$

1,088,672

 

$

963,710

 

$

900,813

 

 

The compensation expense for stock options granted during the three-year period ended December 31, 2011, was determined as the intrinsic fair market value of the options, using a lattice-based option valuation model with the assumptions noted as follows:

 

 

 

Year Ended December 31

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Expected volatility

 

54.8% to 73.3%

 

65.8% to 83.4%

 

68.8% to 84.6%

 

 

 

 

 

 

 

 

 

Expected dividends

 

None

 

None

 

None

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

0.9% to 2.9%

 

2.0% to 3.2%

 

3.6%

 

 

 

 

 

 

 

 

 

Exercise price

 

Closing price on date of grant

 

Closing price on date of grant

 

Closing price on date of grant

 

 

 

 

 

 

 

 

 

Imputed life

 

4.6 to 7.7 years (output in lattice-based model)

 

4.1 to 7.9 years (output in lattice-based model)

 

4.1 to 7.9 years (output in lattice-based model)

 

 

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 rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

 

The weighted average grant date fair value of options granted during 2011, 2010, and 2009, was $5.75, $3.89, and $1.83, respectively. Tax benefits totaling $699,659, $854,015, and $23,421 were recognized as additional paid-in capital during the years ended December 31, 2011, 2010, and 2009, respectively, since the Company’s tax deductions exceeded the share-based compensation change recognized for stock options exercised.

 

The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was approximately $359,000, $316,600, and $291,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

 

(m)  Deferred Rent

 

The Company accounts for escalating rental payments on a straight-line basis over the term of the lease.

 

(n)   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.

 

(o)   Research and Development

 

On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as incurred. Approximately $0.9 million, $0.9 million, and $0.8 million were expensed in the years ended December 31, 2011, 2010, and 2009, respectively.

 

(p)   Income Taxes

 

The Company’s income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax expense (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.

 

(q)   Segments and Related Information

 

The Company follows the provisions of ASC 280, Segment Reporting, which establish standards for the way public business enterprises report information and operating segments in annual financial statements (see Note 20).