ufpt20230331

ufpt20230331_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended MARCH 31, 2023

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

For the transition period from ____ to ____

Commission File Number: 001-12648

UFP Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware	04-2314970
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 Hale Street, Newburyport, MA 01950, USA

(Address of principal executive offices) (Zip Code)

(978) 352-2200

(Registrant's telephone number, including area code)

_________________________________________

(Former name, former address, and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

7,614,197 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of May 2, 2023.

UFP Technologies, Inc.

Index

Page

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (unaudited)		3
Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2023 and March 31, 2022 (unaudited)		4
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and March 31, 2022 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and March 31, 2022 (unaudited)		6
Notes to Interim Condensed Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures		25

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

	March 31, 2023			December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	6,503		$	4,451
Receivables, net		60,142			55,117
Inventories		56,649			53,536
Prepaid expenses and other current assets		3,622			3,242
Total current assets		126,916			116,346
Property, plant and equipment, net		59,027			58,072
Goodwill		113,159			113,028
Intangible assets, net		67,346			68,361
Non-qualified deferred compensation plan		4,706			4,148
Right of use assets		14,514			13,153
Deferred income taxes		1,547			1,448
Other assets		3,567			3,636
Total assets	$	390,782		$	378,192

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	20,454		$	19,961
Accrued expenses		16,768			23,122
Deferred revenue		3,582			4,679
Lease liabilities		2,938			2,517
Income taxes payable		4,450			1,682
Current portion of long-term debt		4,000			4,000
Total current liabilities		52,192			55,961
Long-term debt, excluding current installments		56,000			51,000
Deferred income taxes		-			448
Non-qualified deferred compensation plan		4,750			4,167
Lease liabilities		11,873			10,851
Other liabilities		19,483			18,220
Total liabilities		144,298			140,647
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued		-			-
Common stock, $.01 par value, 20,000,000 shares authorized; 7,642,529 and 7,612,970 shares issued and outstanding, respectively, at March 31, 2023; 7,611,244 and 7,581,685 shares issued and outstanding, respectively, at December 31, 2022		76			76
Additional paid-in capital		34,777			36,070
Retained earnings		212,335			202,596
Accumulated other comprehensive loss		(117	)		(610	)
Treasury stock at cost, 29,559 shares at March 31, 2023 and 29,559 shares at December 31, 2022		(587	)		(587	)
Total stockholders’ equity		246,484			237,545
Total liabilities and stockholders' equity	$	390,782		$	378,192

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

UFP Technologies, Inc.

Condensed Consolidated Statements of Income

and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31,
	2023		2022
Net sales	$	97,753	$	71,242
Cost of sales		69,052		54,108
Gross profit		28,701		17,134
Selling, general & administrative expenses		13,006		10,011
Acquisition costs		-		775
Change in fair value of contingent consideration		2,853		-
Loss (Gain) on disposal of property, plant & equipment		1		(12	)
Operating income		12,841		6,360
Interest expense, net		869		327
Other expense (income)		77		(52	)
Income before income tax expense		11,895		6,085
Income tax expense		2,156		1,227
Net income	$	9,739	$	4,858

Net income per share:
Basic	$	1.28	$	0.64
Diluted	$	1.27	$	0.64
Weighted average common shares outstanding:
Basic		7,592		7,544
Diluted		7,681		7,630


Comprehensive Income
Net Income	$	9,739	$	4,858
Other comprehensive income:
Foreign currency translation gain		493		381
Other comprehensive gain		493		381
Comprehensive income	$	10,232	$	5,239

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

UFP TECHNOLOGIES, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

Three Months Ended March 31, 2023
											Accumulated
						*Additional*					*other*								*Total*
	*Common Stock*					*Paid-in*			*Retained*		*comprehensive*			*Treasury Stock*					*Stockholders'*
	*Shares*			*Amount*		*Capital*			*Earnings*		*income (loss)*			*Shares*		*Amount*			*Equity*
Balance at December 31, 2022		7,582		$	76	$	36,070		$	202,596	$	(610	)		30	$	(587	)	$	237,545
Share-based compensation		48			-		1,056			-		-			-		-			1,056
Exercise of stock options net of shares presented for exercise		4			-		109			-		-			-		-			109
Net share settlement of RSU's		(21	)		-		(2,522	)		-		-					-			(2,522	)
Issuance of common stock		-			-		64			-		-			-		-			64
Other comprehensive income		-			-		-			-		493			-		-			493
Net income		-			-		-			9,739		-			-		-			9,739
Balance at March 31, 2023		7,613		$	76	$	34,777		$	212,335	$	(117	)		30	$	(587	)	$	246,484

Three Months Ended March 31, 2022
											Accumulated
						*Additional*					*other*							*Total*
	*Common Stock*					*Paid-in*			*Retained*		*comprehensive*		*Treasury Stock*					*Stockholders'*
	*Shares*			*Amount*		*Capital*			*Earnings*		*income*		*Shares*		*Amount*			*Equity*
Balance at December 31, 2021		7,535		$	75	$	34,151		$	160,807	$	-		30	$	(587	)	$	194,446
Share-based compensation		46			1		691			-		-		-		-			692
Net share settlement of RSU's		(20	)		-		(1,299	)		-		-		-		-			(1,299	)
Other comprehensive income		-			-		-			-		381		-		-			381
Net income		-			-		-			4,858		-		-		-			4,858
Balance at March 31, 2022		7,561		$	76	$	33,543		$	165,665	$	381		30	$	(587	)	$	199,078

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

UFP Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2023			2022
Cash flows from operating activities:
Net income	$	9,739		$	4,858
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,777			3,016
Loss (Gain) on disposal of property, plant & equipment		1			(12	)
Share-based compensation		1,056			692
Change in fair value of contingent consideration		2,853			-
Deferred income taxes		(545	)		(440	)
Changes in operating assets and liabilities:
Receivables, net		(4,863	)		(4,467	)
Inventories		(3,054	)		(7,826	)
Prepaid expenses and other current assets		(377	)		(1,712	)
Other assets		(1,850	)		308
Accounts payable		65			4,105
Accrued expenses		(6,197	)		(3,365	)
Deferred revenue		(1,098	)		793
Income taxes payable		2,765			1,130
Non-qualified deferred compensation plan and other liabilities		451			(296	)
Net cash provided by (used in) operating activities		1,723			(3,216	)
Cash flows from investing activities:
Additions to property, plant, and equipment		(2,179	)		(2,334	)
Acquisition of Advant, net of cash acquired		-			(20,768	)
Acquisition of DAS Medical, working capital adjustment		-			115
Proceeds from sale of fixed assets		2			12
Net cash used in investing activities		(2,177	)		(22,975	)
Cash flows from financing activities:
Proceeds from advances on revolving line of credit		6,000			28,000
Payments on revolving line of credit		-			(7,000	)
Principal payments of long-term debt		(1,000	)		(1,000	)
Principal payments on finance lease obligations		(16	)		(16	)
Proceeds from the exercise of stock options		109			-
Payment of statutory withholdings for restricted stock units vested		(2,522	)		(1,299	)
Net cash provided by financing activities		2,571			18,685
Effect of foreign currency exchange rates on cash and cash equivalents		(65	)		41
Net increase (decrease) in cash and cash equivalents		2,052			(7,465	)
Cash and cash equivalents at beginning of period		4,451			11,117
Cash and cash equivalents at end of period	$	6,503		$	3,652

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

Notes to Interim Condensed Consolidated Financial Statements

(1)

Basis of Presentation

The interim condensed consolidated financial statements of UFP Technologies, Inc. (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022, included in the Company's 2022 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, the condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2023 and 2022, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The results of operations for the three-month period ended March 31, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2023.

Recent Accounting Pronouncements

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

(2)

Acquisition and Divestiture

Molded Fiber

On July 26, 2022, pursuant to a share purchase agreement and related agreements, the Company sold its former wholly owned subsidiary 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. 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 through the first quarter of 2022 were approximately $669 thousand, of which $639 thousand was charged to expense in the quarter ended March 31, 2022 and $30 thousand was charged to expense in the year ended December 31, 2021. These costs were primarily for legal services, valuation services and stamp duty filings and are reflected on the face of the condensed consolidated statements of income and comprehensive income.

The amount of revenue and earnings of Advant recognized since the acquisition date through the first quarter of 2022 was approximately $824 thousand and $63 thousand, respectively, and is included in the condensed consolidated statements of income and comprehensive income for the period ended March 31, 2022.

Pro-forma statements

The following table contains an unaudited pro forma condensed consolidated statement of operations for the three-month period ended March 31, 2022, as if the Advant acquisition had occurred at the beginning of 2022 (in thousands):

	Three-month Period Ended
	March 31, 2022
	(Unaudited)
Sales	$	75,469
Operating income	$	7,023
Net income	$	5,346
Earnings per share:
Basic	$	0.71
Diluted	$	0.70

The above unaudited pro forma information is presented for illustrative purposes only and may not be indica‐tive 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.

(3)

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 upon customer acceptance. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.

Disaggregated Revenue

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

	Three Months Ended
	March 31,
Net sales of:	2023		2022
Products	$	94,692	$	69,505
Tooling and Machinery		1,294		478
Engineering services		1,767		1,259
Total net sales	$	97,753	$	71,242

Contract balances

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

The following table presents opening and closing balances of contract liabilities for the three-month periods ended March 31, 2023 and 2022 (in thousands):

	Contract Liabilities
	Three Months Ended March 31,
	2023			2022
Deferred revenue - beginning of period	$	4,679		$	4,247
Increases due to consideration received from customers		999			1,116
Revenue recognized		(2,096	)		(323	)
Deferred revenue - end of period	$	3,582		$	5,040

Revenue recognized during the three-month periods ended March 31, 2023 and 2022 from amounts included in deferred revenue at the beginning of the period were approximately $1.9 million and $273 thousand, respectively.

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

The following table presents opening and closing balances of contract assets for the three-month periods ended March 31, 2023 and 2022 (in thousands):

	Contract Assets
	Three Months Ended March 31,
	2023			2022
Unbilled Receivables - beginning of period	$	270		$	74
Increases due to revenue recognized, not invoiced to customers		1,379			740
Decreases due to customer invoicing		(1,326	)		(412	)
Unbilled Receivables - end of period	$	323		$	402

(4)

Supplemental Cash Flow Information

Supplemental cash flow information consists of the following (in thousands):

	Three Months Ended
	March 31,
	2023			2022
Cash paid for:
Interest	$	832		$	314
Income taxes, net of refunds		(50	)		210

Non-cash investing and financing activities:
Capital additions accrued but not yet paid	$	347		$	185
Operating lease right of use assets		1,524			289
Operating lease liabilities		(1,560	)		(289	)

(5)

Receivables and Allowance for Credit Losses

Receivables consist of the following (in thousands):

	March 31,			December 31,
	2023			2022
Accounts receivable–trade	$	60,868		$	55,850
Less allowance for credit losses		(726	)		(733	)
Receivables, net	$	60,142		$	55,117

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 three months ended March 31, 2023 and 2022 (in thousands):

	Allowance for Credit Losses
	Three Months Ended March 31,
	2023			2022
Allowance - beginning of period	$	733		$	519
Adjustment for expected credit losses		(6	)		(51	)
Amounts written off against the allowance		(1	)		(23	)
Allowance - end of period	$	726		$	445

(6)

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):

	March 31, 2023		December 31, 2022

Level 3
Purchase price contingent consideration (Note 2):
Accrued contingent consideration (earn-out)	$	17,421	$	14,568
Present value of non-competition payments		7,903		10,043

In connection with the acquisitions of Contech Medical and DAS Medical in 2021, the Company is required to make contingent payments, subject to the entities achieving certain financial performance thresholds. The contingent consideration payments for the 2021 acquisitions combined are up to $25 million, of which $20 million remains to be potentially paid as of March 31, 2023 and December 31, 2022. 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 condensed consolidated statements of income and comprehensive income.

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 $7.9 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 condensed consolidated statements of income and comprehensive income.

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.

(7)

Share-Based Compensation

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

The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2022. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):

	Three Months Ended
	March 31,
Share-based compensation related to:	2023		2022
Common stock grants	$	100	$	100
Stock option grants		94		53
Restricted Stock Unit Awards ("RSUs")		862		539
Total share-based compensation	$	1,056	$	692

The total income tax benefit recognized in the condensed consolidated statements of income and comprehensive income for share-based compensa‐tion arrangements was approximately $839 thousand and $381 thousand for the three-month periods ended March 31, 2023 and 2022, respectively.

Common stock grants

The compensation expense for common stock granted during the three-month period ended March 31, 2023, was determined based on the market price of the shares on the date of grant.

Stock Option grants

The following is a summary of stock option activity under all plans for the three-month period ended March 31, 2023:

	Shares Under Options			Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2022		92,075		$	39.98
Granted		7,935			111.54
Exercised		(3,780	)		28.94
Outstanding at March 31, 2023		96,230		$	46.31		5.68	$	8,038
Exercisable at March 31, 2023		78,419		$	35.81		5.31	$	7,374
Vested and expected to vest at March 31, 2023		96,230		$	46.31	$	5.68	$	8,038

During the three-month periods ended March 31, 2023 and 2022, the total intrinsic value of all options exercised was approximately $371 thousand and $0, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $109 thousand and $0, 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 three-month period ended March 31, 2023, 861 shares were surrendered at an average market price of $127.05. Zero shares were surrendered during the same period in 2022.

Restricted Stock Unit awards

The following table summarizes information about RSU activity during the three-month period ended March 31, 2023:

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2022		102,048		$	56.02
Awarded		44,154			111.54
Shares vested		(48,244	)		53.39
Shares forfeited		(99	)		97.61
Outstanding at March 31, 2023		97,859		$	67.83

At the Company’s discretion, upon vesting, 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 and issued to the RSU holder. During the three-month periods ended March 31, 2023 and 2022, 20,457 and 19,376 shares were surrendered at an average market price of $117.95 and $67.02, respectively.

As of March 31, 2023, the Company had approximately $8.0 million of unrecognized compensation expense that is expected to be recognized over a period of 3 years.

(8)

Inventories

Inventories are stated at the lower of cost (determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):

	March 31,		December 31,
	2023		2022
Raw materials	$	41,106	$	42,475
Work in process		6,113		4,183
Finished goods		9,430		6,878
Total inventory	$	56,649	$	53,536

(9)

Property, Plant and Equipment

Property, plant, and equipment consist of the following (in thousands):

	March 31,			December 31,
	2023			2022
Land and improvements	$	4,832		$	4,811
Buildings and improvements		34,525			34,446
Leasehold improvements		7,182			5,503
Machinery & equipment		52,966			52,233
Furniture, fixtures, computers & software		6,416			6,401
Construction in progress		7,377			7,272
Property, plant and equipment	$	113,298		$	110,666
Accumulated depreciation and amortization		(54,271	)		(52,594	)
Net property, plant and equipment	$	59,027		$	58,072

(10)

Leases

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 pursuant to 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 assumed 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):

	March 31,		December 31,
	2023		2022
Operating lease ROU assets	$	14,318	$	12,942
Finance lease ROU assets		196		211
Total ROU assets	$	14,514	$	13,153

Operating lease liabilities - current	$	2,879	$	2,458
Finance lease liabilities - current		59		59
Total lease liabilities - current	$	2,938	$	2,517

Operating lease liabilities - long-term	$	11,732	$	10,695
Finance lease liabilities - long-term		141		156
Total lease liabilities - long-term	$	11,873	$	10,851

	Three Months Ended
	March 31,
	($ in thousands)
	2023		2022
Lease Cost:
Finance lease cost:
Amortization of right of use assets	$	15	$	15
Interest on lease liabilities		1		1
Operating lease cost		711		652
Variable lease cost		83		70
Short-term lease cost		7		17
Total lease cost	$	817	$	755

Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	683		$	540
Financing cash flows from finance leases		16			16
Weighted-average remaining lease term (years):
Finance		3.29			4.29
Operating		5.06			3.62
Weighted-average discount rate:
Finance		2.10	%		2.10	%
Operating		3.42	%		2.53	%

The aggregate future lease payments for leases as of March 31, 2023 are as follows (in thousands):

		Finance				Operating
Remainder of 2023		$

SEC Form 10-Q filed by UFP Technologies Inc.