Disaggregated Revenue

The impactfollowing table presents the Company’s revenue disaggregated by the major types of adopting this updategoods and services sold to the Company’s Consolidated Financial Statements will depend on market factors and the timing and intrinsic value of future share-based compensation award vests and exercises. Subsequent to adoption, the Company notes the potential for volatility in its effective tax rate as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly to income tax expense in the Condensed Consolidated Statement of Income.customers (in thousands):

RevisionsContract balances

Certain revisions have been madeTiming 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, 2021 and 2020 (in thousands):

Revenue recognized during the three-month periods ended March 31, 2021 and 2020 from amounts included in deferred revenue at the beginning of the period were approximately $302 thousand and $517 thousand, respectively.

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

The following table presents opening and closing balances of contract assets for the three-month periods ended March 31, 2021 and 2020 (in thousands):

(3)       Supplemental Cash Flow Information

(4)      Receivables and Allowance for Credit Losses

Receivables consist of the following (in thousands):

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 2016 Condensed Consolidated Statementshort-term nature of Cash Flowssuch 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 conformrecord 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. 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, 2021 and 2020 (in thousands):

(5)      Fair Value of Financial Instruments

Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820,Fair Value Measurements and Disclosures, and directly related to the current year presentation relatingamount 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 reservemarket in which transactions for uncertain tax positionsthe asset or liability occur with sufficient frequency and volume to cash paidprovide pricing information on an ongoing basis.

Level 2

Valued based on either directly or indirectly observable prices for capital expenditures. 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 reclassificationfollowing table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):

Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a reservepricing model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for uncertain tax positions resulted in an increase to the change in refundable income taxesfull term of $315,000 and a decrease to the change in accrued expenses of $315,000. A change in presentation of cash paid for capital expenditures resulted in a decrease of $311,000 in both the change in accounts payable and in additions to property, plant and equipment, net. These revisions had no impact on previously reported net income and are deemed immaterial to the previously issued financial statements.

swap agreement.

Company.

(6)      Share-Based Compensation

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

The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2016. 2020. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):

The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensationcompensa‐tion arrangements was approximately $106,000$242 thousand and $67,000, respectively,$348 thousand for the three-monththree-month periods ended September 30, 2017 March 31, 2021 and 2016, and approximately $441,000 and $264,000, respectively,2020, respectively.

The compensation expense for common stock granted during the nine-month periodsthree-month period ended September 30, 2017 and 2016.March 31, 2021, 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-monththree-month period ended September 30, 2017:March 31, 2021:

On June 6, 2017, the Company granted options to its directors for the purchase of 12,336 shares of common stock at that day’s closing price of $27.05. The compensation expense related to these grants was determined as the fair value of the options using the Black Scholes option pricing model based on the following assumptions:

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.

During the nine-month periodsthree-month period ended September 30, 2017 and 2016, March 31, 2020, the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $577,000 and $564,000, respectively,$530 thousand, and the total amount of consideration received by the Company from the exercised options was approximately $802,000 and $529,000, respectively.$415 thousand. At its discretion, the Company allows option holders to surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During both the nine-month periodthree-month periods ended September 30, 2017 thereMarch 31,2021 and 2020, 0 shares were 6,511 shares surrendered at an average market price of $26.45. During the nine-month period ended September 30, 2016 there were no shares surrendered for this purpose.

On February 21, 2017, the Company’s Compensation Committee approved the award of $400,000, payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan. The shares will be issued in December, 2017.Restricted Stock Unit awards

The following table summarizes information about Restricted Stock Units (“RSUs”)RSU activity during the nine-monththree-month period ended September 30, 2017:March 31, 2021:

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.shares and issued to the RSU holder. During the nine-monththree-month periods ended September 30, 2017 March 31, 2021 and 2016, 4,3772020, 14,074 and 3,88911,195 shares were surrendered at an average market price of $24.50$52.46 and $22.82,$49.99, respectively.

As of September 30, 2017, March 31, 2021, the Company had approximately $754,000$3.8 million of unrecognized compensation expense whichthat is expected to be recognized over a period of 3.5 years.

4 years.

(7)      Inventories

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

(8)      Leases

lease payments.

The aggregate future lease payments for leases as of March 31, 2021 are as follows (in thousands):

(9)      Income Per Share

Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during each period.

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

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included in the computation of diluted income per share because the effect would be antidilutive. For both the three- and nine-monththree-month periods ended September 30, 2017, the number ofMarch 31, 2021 and 2020, there were 0 stock awards excluded from the computation of diluted earnings per share for this reason was zero and 27,336, respectively. For the three- and nine-month periods ended September 30, 2016, the number of stock awards excluded from the computation of diluted earnings per share for this reason was 35,193 and 52,377, respectively.

reason.

(10)    Segment Reporting

The Company consists of a single operating and reportable segment.

Revenues from customers outside of the United States are not material. NoNaN customer comprised more than 10% of the Company’s consolidated revenues for the three- and nine-monththree-month periods ended September 30, 2017.March 31, 2021 and 2020. At March 31, 2021 and December 31, 2020, one customer represented approximately 12.4% and 13.3% of gross accounts receivable, respectively. All of the Company’s assets are located in the United States.

The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Aerospace and& Defense, Industrial, and Electronics markets. Net sales by market for the three- and nine-monththree-month periods ended September 30, 2017 March 31, 2021 and 2016, respectively,2020 are as follows (in thousands):

Certain amounts for the three- and nine-month periods ended September 30, 2016 were reclassified between markets to conform to the current period presentation.

(11)    Other Intangible Assets

as follows (in thousands):

(12)    Income Taxes

The determination of income tax expense included in the accompanying unaudited condensed consolidated statements of income principally relates to the Company’s proportionate share of the pre-tax income of its wholly-owned subsidiaries. The determination of income tax expense for interim reporting purposes is based upon the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur.

The Company recorded income tax expense of approximately 33.6%21.4% and 35.0%17.8% of income before income tax expense respectively, for each of the three-monththree-month periods ended September 30, 2017 March 31, 2021 and 2016.2020, respectively. The decreaseincrease in the effective tax rate for the current period isas compared to the prior period was largely due to a tax benefit of approximately $37,000 recorded in the three-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1). The Company recorded a tax expense of approximately 33.3% and 35.4% of income before income tax expense for each of the nine-month periods ended September 30, 2017 and 2016. The decrease in thelower anticipated effective tax rate for the current period isin 2020 due to a tax benefit of approximately $162,000 recorded in the nine-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1); and a tax assessment of approximately $40,000 from one jurisdiction recorded in the first quarter of 2016. The Company notes the potentialcredits available for volatility in its effective tax rate, as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly into income tax expense.

increased research activities.

Forward-looking Statements

Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Management and representatives of UFP Technologies, Inc. (the “Company”) also may from time to time make forward-looking statements. These statements are subject to known and unknown risks, uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about the Company’s prospects,prospects; statements about the potential further impact the novel coronavirus ("COVID-19") pandemic may have on the Company’s business, financial condition and results of operations, including with respect to the different markets in which the Company participates, the demand for its products, the well-being and availability of the Company’s employees, the continuing operation of the Company’s locations, delayed payments by the Company’s customers and the potential for reduced or canceled orders, the Company’s efforts to address the pandemic, including regarding the safety of its employees, the maintenance of its facilities and the sufficiency of the Company’s supply chain, inventory, liquidity and capital resources, including increased costs in connection with such efforts, the impact of the pandemic on the businesses of the Company’s suppliers and customers, and the overall impact the pandemic may have on the Company’s financial results in 2021; statements about the Company’s acquisition strategies and opportunities and the Company’s growth potential and strategies for growth; expectations regarding customer demand; expectations regarding the Company’s liquidity and capital resources, including the sufficiency of its cash reserves and the availability of borrowing capacity to fund operations and/or potential future acquisitions; anticipated revenues and the timing of such revenues; expectations regarding the potential impact of the proposed phase out of LIBOR by the end of 2021; expectations about shifting the Company’s book of business to higher-margin, longer-run opportunities; anticipated trends and potential advantages in the different markets in which the Company competes, including the medical, aerospace and defense, automotive, consumer, electronics, and industrial markets, and aerospace and defense markets, anticipated new customer and vendor contracts,the Company’s plans to expand in certain of its markets; statements regarding anticipated advantages relating to the Company’s decisions to consolidate or expand certain facilities, including the ongoing expansion of its Newburyport facility, and the expected cost savings and efficiencies associated therewith, anticipated advantages and the timing associated with requalification of parts, anticipated advantages of maintaining fewer, larger plants, anticipated advantages the Company expects to realize from its investments and capital expenditures, includingexpenditures; statements regarding anticipated advantages to improvements and alterations at the development of and investments in its molded fiber product lines,Company’s existing plants; expectations regarding the Company’s manufacturing capacity, operating efficiencies, and efficiencies of the Companynew production equipment; statements about new product offerings and the expected timing associated therewith, statements regarding the end of the Company’s automotive door panel program with Mercedes Benz, and the resulting impact to revenues,launches; statements about the Company’s acquisition opportunities and strategies, its participation and growth in multiple markets, its business opportunities,markets; statements about the Company’s growth potential and strategies for growth, anticipated revenues and the timing of such revenues,business opportunities; and any indication that the Company may be able to sustain or increase its sales, and earnings or earnings per share, or its sales, and earnings or earnings per share growth rates.

Investors are cautioned that such forward-looking statements involve risks and uncertainties that could adversely affect the Company’s business and prospects, and otherwise cause actual results to differ materially from those anticipated by such forward-looking statements, or otherwise, including without limitationlimitation: the severity and duration of the COVID-19 pandemic and its impact on the markets in which the Company participates, including its impact on the Company’s customers, suppliers and employees, as well as the U.S. and worldwide economies; the timing, scope and effect of further governmental, regulatory, fiscal, monetary and public health responses to the COVID-19 pandemic; risks and uncertainties associated with the COVID-19 pandemic and its impact on the Company’s business, financial condition and results of operations, including risks relating to decreased, including substantially decreased, demand for the Company’s products; risks relating to the potential closure of any of the Company’s facilities or the unavailability of key personnel or other employees; risks that the Company’s inventory, cash reserves, liquidity or capital resources may be insufficient; risks relating to delayed payments by our customers and the potential for reduced or canceled orders; risks relating to the increased costs associated with the Company’s efforts to respond to the pandemic; risks associated with the identification of suitable acquisition candidates and the successful, efficient execution of acquisition transactions, andthe integration of any such acquisition candidates, the value of those acquisitions to our customers and shareholders, and the financing of such acquisitions; risks related to our indebtedness and compliance with covenants contained in our financing arrangements, and whether any available financing may be sufficient to address our needs; risks related to the proposed phase out of LIBOR by the end of 2021;risks associated with efforts to shift the Company’s book of business to higher-margin, longer-run opportunities; risks associated with the Company’s entry into and growth in certain markets; risks and uncertainties associated with plant closuresseeking and consolidationsimplementing manufacturing efficiencies and expected efficiencies from consolidating manufacturing,implementing new production equipment; risks and uncertainties associated with growth of the requalification of parts, the risk that we may not be ableCompany’s business and increases to finalize anticipated new customer contracts,sales, earnings and earnings per share; and risks associated with the implementation of new production equipmentproduct and requalification or recertification of transferred equipment in a timely, cost-efficient manner, and risks that any benefits from such new equipment may be delayed or not fully realized, or that the Company may be unable to fully utilize its expected production capacity.program launches. Accordingly, actual results may differ materially.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts, and projections, and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our current beliefs, estimates and assumptions and are only as of the date of this Report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2020, as well as the risks and uncertainties discussed elsewhere in this Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.

Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFP Technologies, Inc. and its consolidated subsidiaries.

Overview

UFP Technologies, Inc. (the “Company”) is an innovative designer and custom convertermanufacturer of components, subassemblies, products and packaging primarily for the medical market. Utilizing highly specialized foams, films and plastics, the Company converts raw materials through laminating, molding, radio frequency welding and natural fiber materials, principally servingfabricating techniques. The Company is diversified by also providing highly engineered solutions to customers in the Medical, Consumer, Automotive, Aerospaceaerospace & defense, automotive, consumer, electronics and Defense, Industrial and Electronicsindustrial markets. The Company consists of a single operating and reportable segment.

The Company had a slight increase in sales through the first nine months of 2017, largely fueled by continued growth in sales to customers in the medical market, partially offset by declined sales to customer in the automotive market. The Company improved gross margins for the nine-month period ended September 30, 2017 to 25.0% from 24.1% in the first nine months of 2016 as the Company has become much more efficient in manufacturing particularly in those plants impacted by recent consolidations. Absent non-recurring restructuring and material overcharge items, operating income increased by 19% in the first nine months of 2017.

The Company’s previously announced consolidation and relocation efforts were complete as of June 30, 2017. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The Company constantly evaluates ways to enhance operating efficiencies and will consider additional expansions, consolidations, or relocations of operations from time to time.

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

As further summarized below, the COVID-19 pandemic has had, and we believe it will continue to have, negative effects on our business and financial results. Despite the impact of the COVID-19 pandemic, sales for the Company for the three-month period ended March 31, 2021 increased 0.7% to $48.6 million from $48.3 million in the same period last year. Gross margins for the three-month period ended March 31, 2021 decreased to 25.9% from 26.6% in the same period last year. Operating income and net income increased 4.4% and 7.0%, respectively.

Recent Developments

IMPACT OF COVID-19 ON OUR BUSINESS

Through much of 2020, COVID-19 spread across the country to areas in which our products are designed, manufactured, distributed or sold. The spread of COVID-19 and the response to it negatively impacted operating conditions for our business in 2020. Although we expect COVID-19 will continue to have negative impacts on our operating results in future periods, the magnitude and duration of the continuing impact is uncertain.

To stall the spread of COVID-19, authorities in states in which we do business implemented numerous measures, including social distancing guidelines, travel bans and restrictions, quarantines, curfews, stay-at-home orders, and business shutdowns. These measures have impacted and will likely further impact us, our customers, consumers, employees, suppliers and other third parties with whom we do business. It is uncertain how these and any future measures in response to the pandemic will impact our business, including whether and to what extent they will result in further changes in demand for our products or further increases in operating costs. The timing of distribution and the effectiveness of recently introduced vaccines is also uncertain. Our top priorities continue to be ensuring the health and safety of our workforce and serving our various constituencies with as little disruption as possible.

Our operations expose us to risks associated with the COVID-19 pandemic. The COVID-19 pandemic has impacted the cost of manufacturing our goods, including higher labor costs, maintenance costs and manufacturing inefficiencies due to employee absenteeism and significantly enhanced cleaning and sterilization. Elective medical procedures and exams have been delayed or canceled, there has been a significant reduction in physician office visits, and hospitals have postponed or canceled capital purchases. We believe that these responses negatively impacted demand for the Company’s components for medical devices. Additionally, many of our customers in the automotive markets experienced closures of their businesses in connection with the pandemic. Such closures negatively impacted the demand for our automobile component products particularly in the second quarter. Any continued reduced demand for our products, including reduced need for components for medical devices as well as continued economic uncertainty, could adversely and materially affect our business, financial condition and results of operations, as well as those of our customers.

To ensure the health and safety of our employees and to comply with governmental orders, since March 2020 we have required or enabled certain employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shifted schedules to facilitate social distancing and sterilization for those who continue to work in our facilities; enhanced cleaning and disinfecting procedures at our facilities; required face coverings and worked to procure and distributed personal protective equipment; implemented health checks and visitor protocols and restricted travel.

In response to the economic uncertainties resulting from the COVID-19 pandemic, we initiated and at present are continuing certain cost-cutting measures, including restrictions on travel and labor cost reduction measures (including employee terminations).

Although the impact of the pandemic on our business and financial results will depend on future developments that are highly uncertain and cannot be predicted, and which may vary by market, we have a strong liquidity position, solid balance sheet, and access to capital which we expect will enable us to effectively manage through the COVID-19 pandemic.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments and estimated income tax payments that we expect to defer to future periods. Accordingly, the Company deferred social security payments of approximately $1.6 million through December 31, 2020. Fifty percent of this amount is required to be paid by December 31, 2021 and the remaining balance is required to be paid by December 31, 2022. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the CARES Act may have on our business and financial results.

Results of Operations

Sales

Sales for the three-month period ended September 30, 2017 decreased approximately 4.1% to $35.7 million compared to $37.2 million in the same period in 2016. The decrease in sales during the three-month period ended September 30, 2017 was primarily due to decreases in sales to customers in the automotive and electronics markets of approximately 25.5% and 9.2%, respectively. These decreases were partially offset by increases in sales to customers in the aerospace and defense and consumer markets of approximately 6.6% and 6.3%, respectively. The decline in sales to customers in the automotive market was primarily due to soft demand for interior trim components in certain legacy programs. The Company has been notified that the remaining portion of its southeast automotive door panel program for Mercedes Benz, which began in 2004, will end with modest sales anticipated into the first quarter of 2018. The Company estimates sales for the program will total approximately $3.0 million in 2017 and will be modest in 2018. The decline in sales to customers in the electronics market was primarily due to reduced demand for protective packaging. The increase in sales to customers in the aerospace and defense market was primarily due to increased demand for components from our government contractor customers. The increase in sales to customers in the consumer market was primarily due to higher demand for molded fiber protective packaging. Sales to customers in the medical market grew at 1% for the quarter—a rate slower than recent historical levels—as two large customers in this market added second suppliers to meet their internal risk mitigation requirements and certain customers ordered less due to storm related disruptions to their business.

Sales for the nine-month period ended September 30, 2017March 31, 2021 increased approximately 0.9%0.7% to $110.6$48.6 million from sales of $109.6$48.3 million for the same period in 2016.2020. The increase in sales for the nine-month period ended September 30, 2017 wasis primarily due to increases in sales to customers in the medical marketAerospace & defense and Consumer markets of approximately 7.9%68.2% and 62.1%, respectively, partially offset by decreasesa decrease in sales to customers in the automotive and industrial marketsMedical market of approximately 12.0% and 9.6% respectively. The increase in sales to customers in the medical market was primarily due to strong demand for our customers’ products as well as selective price increases. The decline in sales to customers in the automotive market was primarily due to soft demand for interior trim components in certain legacy programs. The decline in sales to customers in the industrial market was primarily due to a credit issue at one of our customers within this market.11.5%.

Gross Profit

Gross profit as a percentage of sales (“gross margin”) increaseddecreased to 23.0%25.9% for the three-month period ended September 30, 2017,March 31, 2021, from 22.7%26.6% for the same period in 2016.2020. As a percentage of sales, material and labor costs collectively decreased 0.8%0.5%, while overhead increased 0.5%1.1%. The decrease in collective material and labor costs as a percentage of sales is primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives. The increase in overhead as a percentage of sales is primarily due to fixed overhead costs measured against reduced sales.

Gross margin increased to 25.0% for the nine-month period ended September 30, 2017, from 24.1% for the same period in 2016. As a percentage of sales, material and labor costs collectively decreased 1.6%, while overhead increased 0.7%. The decrease in collective material and labor costs as a percentage of sales iswas primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives, strategic price increases and a reduction in direct labor partially offset by an improvementunfavorable change in the overall book of business.mix. The increase in overhead isas a percentage of sales was primarily due to an increase in indirect labor costs of approximately $700,000 due largely to hires madeincreases in the second halfcost of 2016 to support growth.shipping supplies and outbound freight.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) decreased approximately 5.5%5.7% to $5.7$7.3 million for the three-month period ended September 30, 2017March 31, 2021, from $6.0$7.8 million for the same period in 2016.2020 primarily due to labor reductions as well as decreases in company-wide travel and entertainment. As a percentage of sales, SG&A decreased to 16.0%15.0% for the three-month period ended September 30, 2017March 31, 2021, from 16.2%16.1% for the same three-month period in 2016.2020. The decrease in SG&A for the three-month period ended September 30, 2017 isMarch 31, 2021 primarily due to labor reductions as well as decreases in generalcompany-wide travel and administrative payroll and recruiting costs.entertainment.

SG&A decreased approximately 1.8% to $18.1 million for the nine-month period ended September 30, 2017 from $18.4 million for the same period in 2016. As a percentage of sales, SG&A decreased to 16.3% for the nine-month period ended September 30, 2017 from 16.8% for the same nine-month period in 2016. The decrease in SG&A for the nine-month period ended September 30, 2017 is primarily due to reductions in consulting and recruiting expenses. The decrease in SG&A as a percentage of sales is primarily due to reductions in general and administrative payroll, consulting and recruiting expenses measured against higher sales.

Restructuring Costs

For the three-month period ended September 30, 2017 the Company did not incur any restructuring costs compared to approximately $25,000 for the same period in 2016.

Additional information regarding restructuring costs can be found in Note 11 of the Notes to Interim Condensed Consolidated Financial Statements.

Material Overcharge Settlement

The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that was settled during the second quarter of 2016. The suit was filed to recover damages and obtain injunctive relief for Defendants’ alleged violations of the federal antitrust laws with respect to the fixing of prices of polyurethane foam sold from January 1, 1999 through August 2010. During the three- and nine-month periods ended September 30, 2017, the Company received settlement amounts of $0 and approximately $121,000, respectively. During the three- and nine-month periods ended September 30, 2016, the Company received settlement amounts of approximately $1.7 million and $2.1 million, respectively. The settlement amounts for the three- and nine-month periods ended September 30, 2017 and 2016 are recorded as “Material overcharge settlement” in the operating income section of the Condensed Consolidated Statements of Income.

Interest Income and Expense

The Company had netNet interest expense was approximately $16 thousand for both the three-month periods ended March 31, 2021 and 2020.

Other (Income) Expense

Other income ofwas approximately $51,000$10 thousand and $25,000other expense was approximately $327 thousand for the three-month periods ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The Company hadOther expense was primarily generated by changes in the fair value of the swap liability, which is driven by anticipated future interest rate changes, offset by net interest income of approximately $108,000 and $51,000 forcash settlement amounts related to the nine-month periods ended September 30, 2017 and 2016, respectively. The increase in net interest income is primarily due to an increase in interest earned on money market accounts and certificates of deposit and decreasing interest costs on the Company’s term loans.swap.

Income Taxes

The Company recorded tax expense of approximately 33.6%21.4% and 35.0%17.8% of income before income tax expense, respectively, for each of the three-month periods ended September 30, 2017March 31, 2021 and 2016.2020. The decreaseincrease in the effective tax rate for the current period isas compared to the prior period was largely due to a tax benefit of approximately $37,000 recorded in the three-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1). The Company recorded a tax expense of approximately 33.3% and 35.4% of income before income tax expense for each of the nine-month periods ended September 30, 2017 and 2016. The decrease in thelower anticipated effective tax rate for the current period isin 2020 due to a tax benefit of approximately $162,000 recorded in the nine-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1); and a tax assessment of approximately $40,000 from one jurisdiction recorded in the first quarter of 2016. The Company notes the potentialcredits available for volatility in its effective tax rate, as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly into income tax expense. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has considered both positive and negative available evidence in its determination that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance at September 30, 2017. The Company will continue to assess whether the deferred tax assets will be realizable and, when appropriate, will record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.increased research activities.

Liquidity and Capital Resources

The Company generally funds its operating expenses, capital requirements, and growth plan through internally generated cash and bank credit facilities.

Cash Flows

Net cash provided by operations for the nine-monththree-month period ended September 30, 2017March 31, 2021 was approximately $13.0$3.3 million and was primarily a result of net income generated of $6.5approximately $4.2 million, depreciation and amortization of approximately $4.2$2.1 million, share-based compensation of $0.8approximately $0.5 million, an increase in deferred taxes of approximately $0.3 million, a decreasean increase in inventoryincome taxes payable of approximately $1.0$0.8 million, due primarily to management initiatives, an increase in accounts payable of approximately $0.4$1.6 million, due to the timing of vendor payments in the ordinary course of business, an increase in accrued expenses of approximately $0.7 million due to compensation accruals and an increase inof other long-term liabilities of $0.2approximately $0.3 million. These cash inflows and adjustments to income were partially offset by an increase in accounts receivable of approximately $0.8$3.6 million due to higher sales in the timinglast two months of customer collections,the first quarter of 2021 as compared to the same period in the fourth quarter of 2020 , an increase in refundable income taxesinventory of approximately $0.2$1.4 million anddue to restocking to historical levels, an increase in prepaid expenses of approximately $0.1 million, an increase in other assets of approximately $0.2 million, a decrease in accrued expenses of approximately $1.1 million due to the payment of accrued compensation, and a decrease in deferred revenue of approximately $0.1 million.

Net cash used in investing activities during the nine-monththree-month period ended September 30, 2017March 31, 2021 was approximately $6.9$1.4 million and was primarily the result of additions of manufacturing machinery and equipment andacross the expansion of the Newburyport, Massachusetts plant.Company.

Net cash used in financing activities was approximately $0.2$0.7 million during the nine-monththree-month period ended September 30, 2017, representing cash used to service term debtMarch 31, 2021, resulting primarily from payments of approximately $0.7 million and to pay statutory withholding for stock options exercised and restricted stock units vested of approximately $0.1 million, partially offset by net proceeds received upon stock options exercises of approximately $0.6 million.vested.

Outstanding and Available Debt

TheOn February 1, 2018, the Company, maintainsas the borrower, entered into an unsecured $40$70 million revolving credit facilityAmended and Restated Credit Agreement (the “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 Amended and Restated Credit Agreement amended and restated the Company’s prior credit facility callsagreement.

On December 31, 2020, the Company, as the borrower, and Bank of America, N.A., as administrative agent and sole lender, entered into a First Amendment (the “First Amendment”) to the Company’s Amended and Restated Credit Agreement, dated February 1, 2018 (as amended, the “Restated Credit Agreement”).

The First Amendment amended the Restated Credit Agreement by (i) extending the scheduled maturity date from February 1, 2023 to December 31, 2025, and (ii) creating procedures and guidelines for establishing a successor benchmark rate if LIBOR ceases to be available during the term of the revolving credit facility. The Restated Credit Agreement called for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. The First Amendment calls for interest of LIBOR plus a margin that ranges from 1.25% to 1.75% or, at the discretion of the Company, the bank’s prime rate plus a margin that ranges from zero to 0.25%. In both cases the applicable margin isremains dependent upon Company performance. The First Amendment also added certain representations and covenants concerning compliance by the Company with legal requirements.

The credit facilities under the Restated Credit Agreement consist of a $20 million unsecured term loan to the Company and an unsecured revolving credit facility, under which the Company may borrow up to $50 million. The proceeds of the Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. The Company’s obligations under the Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.

Under the credit facility,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 Company’s $40 million credit facility maturesRestated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on November 30, 2018.

certain payments, permitted indebtedness and permitted investments. As of September 30, 2017,March 31, 2021 and December 31, 2020 there were no amounts outstanding; the applicable interest rate was approximately 1.11% and the Company had no borrowings outstandingwas in compliance with all financial covenants under the credit facility. Included in the credit facilityRestated Credit Agreement. As of March 31, 2021 and December 31, 2020, there were approximately $300,000$0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies. As of September 30, 2017,

Derivative Financial Instruments

The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on 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 was in compliance with all covenantsto credit risk and market risk. Credit risk is the failure of the counterparty to perform under the credit facility.

In 2012,terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, financedwhich creates credit risk for the purchaseCompany. When the fair value of two molded fiber machines through five-year term loansa derivative contract is negative, the Company owes the counterparty and, therefore, 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 matureresults from a change in October 2017.interest rates. The annualCompany assesses interest rate risk by 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 expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is fixed at 1.83% andprudent to limit the loans are secured by the related molded fiber machines. Asvariability of September 30, 2017, the outstanding balancea portion of its interest payments. To meet this objective, in connection with the term loan facilityunder the 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 agreement was established to modify the Company’s interest rate exposure by converting the interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. As the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $84,000.$10.7 million at March 31, 2021. The fair value of the swap as of March 31, 2021 and 2020 was approximately $(385) thousand and $(624) thousand, respectively, and is included in other liabilities on the condensed consolidated balance sheets. Changes in the fair value and net cash settlement amounts related to the swap are recorded in other expense on the condensed consolidated statements of income and resulted in income of $10 thousand and expense of $327 thousand during the three-month periods ended March 31, 2021 and 2020, respectively.

Future Liquidity

The Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations. The Company’s principal sources of funds are its operations and its revolvingamended and restated credit facility. The Company generated cash of approximately $13.0$3.3 million fromin operations during the nine-month periodthree months ended September 30, 2017;March 31, 2021; however, the Company cannot guarantee that its operations will generate cash in future periods. The Company’s longer-term liquidity is contingent upon future operating performance.performance and draws on the revolving credit facility are possible. Further, the continued economic uncertainty resulting from the COVID-19 pandemic could affect the Company’s long-term ability to access the public markets and obtain necessary capital in order to properly capitalize and continue operations.

Throughout fiscal 2017,2021, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The Company may consider additional acquisitions of companies, technologies, or products that are complementary to its business. The Company believes that its existing resources, including its revolving credit facility, together with cash expected to be generated from operations, and funds expected to be available to it through any necessary equipment financings and additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.

The Company may also require additional capital in the future to fund capital expenditures, acquisitions or other investments. These capital requirements could be substantial. The Company anticipates that any future expansion of its business will be financed through existing resources, cash flow from operations, the Company's revolving credit facility, or other new financing. The Company cannot guarantee that it will be able to meet existing financial covenants or obtain other new financing on favorable terms, if at all. The Company's liquidity will be impacted to the extent additional stock repurchases are made under the Company's stock repurchase program.

Stock Repurchase Program

The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and includes treasury stock as a component of stockholders’ equity. On June 16, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. Under the program, the Company is authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. The stock repurchase program will end upon the earlier of the date on which the plan is terminated by the Board or when all authorized repurchases are completed. The timing and amount of stock repurchases, if any, will be determined based upon our evaluation of market conditions and other factors. The stock repurchase program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the program. The Company did not repurchase any shares of its common stock under this program in the first ninethree months of 2017. Through September 30, 2017, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000.2021. At September 30, 2017,March 31, 2021 approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.

Commitments and Contractual Obligations

There have been no material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.

ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Off-Balance-Sheet Arrangements

In addition to operating leases, the Company’s off-balance-sheet arrangements include standby letters of credit which are included in the Company’s revolving credit facility. As of September 30, 2017, there was approximately $300,000 in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.

There have been no material changes in our market risks as previously disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.2020.

ITEM 4:CONTROLS AND PROCEDURES

As of the end of the period covered by this report (the “Evaluation Date”), the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in SECExchange Act Rule 13a-15(e) or 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act, of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

ThereAn evaluation was also performed under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has been nomaterially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. That evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the most recentour latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II:OTHER INFORMATION

ITEM 1:LEGAL PROCEEDINGS

There have been no material changes fromFrom time to time, the risk factors previously disclosedCompany may be a party to various suits, claims and complaints arising in Part 1 - Item 1Athe 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.

ITEM 1A: RISK FACTORS

The Company faces a number of uncertainties and risks that are difficult to predict and many of which are outside of the Company's control. For a detailed discussion of the risks that affect our business, please refer to Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020. There have been no material changes from the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

ITEM 2:UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer’sIssuer’s Purchases of Equity Securities

On June 16, 2015, the Company issued a press release announcing that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. The Company did not repurchase any shares of its common stock under this program in the first ninethree months of 2017.2021. Through September 30, 2017,March 31, 2021, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000.approxi‐mately $587 thousand. At September 30, 2017,March 31, 2021, approximately $9.4 million was available for future repurchases of the Company’sCompany's common stock under this authorization.

ITEM 6:EXHIBITS