UFP Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in millions except per-share data.
Business context and major transactions
UFP Technologies designs and manufactures components, subassemblies, products and packaging, primarily for medical customers, with additional exposure to automotive, aerospace and defense, consumer, industrial and electronics markets. It reports one operating segment. Results reflect acquisitions of Contech, DAS Medical and Advant Medical, as well as the July 2022 sale of its Molded Fiber business.
- Advant Medical was acquired in March 2022 for approximately $21.2 million; it contributed approximately $13.6 million of revenue and $1.8 million of earnings after acquisition through September 30.
- Molded Fiber and related Iowa real estate were sold in July for approximately $31.4 million, including a working-capital adjustment. The company recorded a $15.6 million gain; $2.6 million of proceeds was held in escrow. Proceeds were used to reduce revolver debt and pay taxes on the gain.
- The Georgetown, Massachusetts facility was sold for approximately $6.7 million, generating a $6.2 million gain. Its operations were absorbed by the nearby Newburyport facility.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $97.0 | $50.7 | $262.6 | $150.0 |
| Gross profit | $25.5 | $12.0 | $67.0 | $38.0 |
| Gross margin | 26.3% | 23.7% | 25.5% | 25.4% |
| Operating income | $26.0 | $5.1 | $44.5 | $16.6 |
| Net income | $19.5 | $3.8 | $33.3 | $12.7 |
| Diluted EPS | $2.56 | $0.50 | $4.37 | $1.67 |
- Sales rose 91.2% in Q3 and 75.1% year to date. Management attributed growth to acquisitions and organic sales growth: medical-market organic growth was 27.6% in Q3 and 21.6% for the nine-month period. Acquired businesses contributed $40.3 million of Q3 sales and $92.9 million year to date.
- Medical sales represented 84.1% of Q3 revenue and 79.4% year to date. One customer accounted for 25.1% of Q3 revenue and 20.5% of nine-month revenue.
- Management attributed higher Q3 gross margin mainly to organic sales leverage over fixed overhead, partly offset by inflation in materials and labor. Nine-month gross margin was nearly unchanged.
- Reported operating income and net income include significant unusual items. Q3 included the $15.6 million Molded Fiber gain and a $3.3 million expense from remeasuring contingent consideration. Nine-month operating income also included the $6.2 million facility-sale gain, the $15.6 million Molded Fiber gain and $9.3 million of contingent-consideration expense. These items affect comparisons with prior periods.
Cash flow, liquidity and debt
- Operating cash flow was negative $0.1 million for the first nine months, versus positive $13.7 million a year earlier, despite $33.3 million of net income. Receivables increased $19.8 million and inventory increased $20.1 million, among other working-capital uses; management cited higher sales, Advant balances and inventory build for expected demand.
- Investing cash flow was positive $4.3 million, including proceeds from the Molded Fiber and facility sales, offset by $20.8 million for Advant and $10.8 million of capital additions. Financing cash flow was negative $5.2 million. Cash declined $1.2 million to $9.9 million.
- At September 30, current assets were $133.8 million and current liabilities $61.0 million (approximately 2.2 current ratio). The balance sheet reports $61.5 million of net receivables, while the receivables note reports $65.1 million; the filing text does not provide a clear reconciliation.
- Debt was $71.0 million: $34.0 million drawn on the $90 million revolver and $37.0 million under the term loan. The company also had $0.7 million of standby letters of credit. The reported interest rate was approximately 4.6%; debt is generally variable-rate. The credit agreement matures December 2026, and the company reported compliance with its covenants. Cash less debt was approximately negative $61.1 million.
- Nine-month interest expense was $1.9 million, versus no interest expense reported in the prior-year income statement, primarily reflecting borrowing for acquisitions. A legacy interest-rate swap had a $6.4 million notional balance, no longer hedged underlying debt and was due to mature February 1, 2023.
Outlook, risks and other disclosures
- No specific revenue or earnings guidance was provided. Management planned continued capacity investment and said existing resources, including the revolver and expected operating cash flow, should fund requirements through the next 12 months. It noted that future liquidity depends on operating performance and that additional capital needs or financing availability cannot be assured.
- Key disclosed risks include inflation and the ability to pass through higher input costs, rising interest rates, supply-chain disruptions, customer order delays or cancellations, acquisition integration and performance, contingent acquisition payments, and compliance with debt covenants. The company identified up to $25 million of combined DAS and Contech contingent payments; the Contech contingent consideration balance of $5.0 million was paid after quarter-end.
- Management reported effective disclosure controls. However, the recently acquired businesses, representing approximately 45.1% of assets and 35.4% of revenue, were excluded from the internal-control assessment under the SEC’s acquired-business guidance. The company reported no material litigation and no material changes to previously disclosed risk factors other than the added credit-facility and adverse-economic-conditions risks.
Important facts for investors to verify
- Reconcile the balance-sheet receivables figure ($61.5 million) with the note’s net receivables figure ($65.1 million).
- Assess earnings excluding the Molded Fiber and facility-sale gains, acquisition costs, and contingent-consideration remeasurement expenses.
- Monitor conversion of earnings into cash, particularly receivables and inventory, and the ability to fund working capital and capital expenditures.
- Review customer concentration, acquisition integration and performance, and the valuation and timing of remaining earn-out obligations.
- Confirm available revolver capacity, covenant headroom, and exposure to further increases in variable borrowing rates.