UFP Technologies, Inc. — Q1 2022 Form 10-Q
Business context and period. The filing reports unaudited results for the three months ended March 31, 2022, compared with Q1 2021. UFP designs and manufactures components, products, and packaging, primarily for medical customers, and reports one operating segment. The quarter included Advant Medical from its March 16, 2022 acquisition; Contech and DAS Medical were acquired in 2021.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $71.2 million | $48.6 million | +46.6% |
| Gross profit / margin | $17.1 million / 24.1% | $12.6 million / 25.9% | Margin down 1.8 percentage points |
| Operating income | $6.4 million | $5.3 million | +20.0% |
| Net income | $4.9 million | $4.2 million | +16.8% |
| Diluted EPS | $0.64 | $0.55 | +16.4% |
| Net cash from operating activities | $(3.2) million | $3.3 million | Decreased $6.5 million |
Medical-market sales rose 75.1%, to $52.7 million, and represented 74.0% of sales versus 62.0% a year earlier. Management attributed approximately $18.0 million of medical-sales growth to acquisitions and reported organic sales growth of approximately 9.6%. Gross margin pressure reflected inflationary costs, particularly materials; material costs as a percentage of sales increased 6.8%, while labor and overhead collectively decreased 4.9%. SG&A rose 37.0% to $10.0 million, largely due to acquired operations, but declined as a share of sales to 14.1% from 15.0%.
Acquisition-related costs were $775,000 in Q1 2022. Interest expense increased with acquisition-related borrowing. The effective tax rate was 20.2%, compared with 21.4%.
Cash, debt, and liquidity
- Cash and cash equivalents were $3.7 million at March 31, 2022, down from $11.1 million at December 31, 2021.
- Operating cash flow was negative $3.2 million, driven notably by increased inventory ($7.8 million) and receivables ($4.5 million), partly offset by higher accounts payable. Investing cash outflow was $23.0 million, including $20.8 million for Advant, net of acquired cash, and $2.3 million of capital spending. Financing provided $18.7 million.
- Total debt was $95.0 million ($56.0 million revolving borrowings and $39.0 million term debt), versus $75.0 million at year-end. The company had a $130 million credit facility, including a $90 million revolver, and approximately $0.7 million in standby letters of credit. The reported borrowing rate was approximately 1.91%; the company said it complied with its covenants.
- Current assets were $98.4 million and current liabilities $38.8 million at quarter-end. Inventory increased to $43.3 million from $33.4 million at year-end.
Acquisitions, outlook, and risks
Advant was acquired for total consideration of approximately $21.2 million, subject to working-capital adjustment; preliminary allocation included $7.4 million of goodwill. Advant contributed approximately $824,000 of revenue and $63,000 of earnings after acquisition. Preliminary purchase accounting and the reported pro forma results are subject to estimation and are not necessarily indicative of actual results. DAS Medical also has potential earn-out payments of up to $20 million; Contech has an earn-out of up to $5 million.
No quantified earnings or revenue guidance is provided. Management said it planned to add manufacturing capacity and believed existing resources, the revolver, and expected operating cash flow would fund requirements through the next 12 months. It cautioned that future liquidity depends on operating performance and financing availability.
Management cited continuing supply-chain constraints, inflation, labor costs and manufacturing inefficiencies, and uncertainty related to COVID-19. The filing added risks from the Russia-Ukraine war, including supply-chain, commodity-cost, logistics, and cybersecurity exposures. One customer accounted for 15.1% of Q1 2022 revenue, compared with no customer above 10% in Q1 2021. The company reported ordinary-course legal matters that it did not expect to have a material adverse effect. Disclosure controls were deemed effective, but acquired businesses’ internal controls were excluded from the assessment under the SEC’s recently acquired business guidance.
Key facts for investors to verify
- Reconcile the cash-flow discussion: the cash-flow statement reports $3.2 million of cash used in operations, while the liquidity discussion says $4.9 million; $4.9 million is also reported as net income.
- Track whether inflation and supply-chain pressures continue to weigh on gross margin and whether inventory growth converts into sales and cash.
- Monitor acquisition integration, final purchase-price adjustments, earn-outs, and the contribution of acquired businesses to organic growth and profitability.
- Assess leverage, variable-rate borrowing costs, covenant headroom, and available revolver capacity as acquisitions and capital spending continue.
- Monitor dependence on the customer representing 15.1% of quarterly revenue and developments in the geopolitical and cyber-risk environment.