UFP Technologies, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 13, 2020. The filing also reports unaudited fourth-quarter results. UFP designs and manufactures custom components, devices, subassemblies, and packaging from specialized foams, films, plastics, composites, and fiber, primarily for medical customers. It reports one operating segment.
Financial performance and position
Amounts are in millions of dollars except per-share data, percentages, and where noted.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $198.4 | $190.5 | +4.2% |
| Gross profit / margin | $54.0 / 27.2% | $48.3 / 25.4% | Margin +1.8 percentage points |
| Operating income / margin | $24.7 / 12.5% | $19.6 / 10.3% | Income +26.0% |
| Net income / net margin | $19.8 / 10.0% | $14.3 / 7.5% | Income +38.0% |
| Diluted EPS | $2.63 | $1.93 | +36.3% |
| Operating cash flow | $31.2 | $21.3 | +$9.9 |
| Capital expenditures | $5.8 | $5.4 | +$0.4 |
- Fourth quarter 2019 sales were $50.3 million versus $50.7 million a year earlier; gross profit was $13.8 million versus $12.7 million, and net income was $5.8 million versus $4.4 million. Diluted EPS was $0.76 versus $0.59.
- At year-end, cash was $3.7 million, working capital was $36.9 million, and total liabilities were $26.8 million. Total assets were $188.8 million and stockholders’ equity was $162.0 million.
- There was no outstanding term-loan or revolving-credit debt at December 31, 2019; the company repaid the remaining term loan during the fourth quarter. Its credit agreement provides a $50 million revolver, maturing February 2023. Approximately $0.7 million of standby letters of credit were outstanding, and the company reported compliance with its covenants.
- Net financing cash use was $25.0 million, principally reflecting $25.1 million in credit-facility repayments. The company invested $5.8 million in property, plant, and equipment.
Material changes versus prior year
- Medical sales rose 16.9% to $128.9 million and represented 65.0% of revenue, compared with 57.9% in 2018. Management cited strong Dielectrics sales and increased demand from legacy medical customers; the comparison included an additional month of Dielectrics sales of approximately $3.1 million.
- Aerospace and defense sales increased 5.0%, attributed to higher government spending. Consumer, electronics, and industrial sales collectively declined 24.1%, primarily due to weaker molded-fiber packaging demand. Automotive sales were essentially flat.
- Management attributed gross-margin improvement to manufacturing efficiencies, a better business mix, fixed-overhead leverage, and targeted cost reductions. SG&A increased 5.8% to $29.3 million, including the extra month of Dielectrics operations, compensation increases, and strategic plant-management hires.
- The effective tax rate decreased to 16.5% from 22.2%, largely due to increased federal and state tax credits. Net interest expense fell to approximately $0.7 million from $1.3 million as debt declined.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recording operating lease right-of-use assets and liabilities; adoption did not materially affect income or cash flows. The interest-rate swap remained outstanding after the associated term loan was repaid and generated a $0.4 million expense in 2019.
Outlook, risks, and other disclosures
- Management planned to add manufacturing capacity in 2020 to improve operating efficiency and continued to pursue organic growth and potential strategic acquisitions. It believed existing resources, operating cash flow, and the revolving facility would be sufficient for cash requirements over the following 12 months. No specific revenue or earnings guidance was provided.
- Backlog was approximately $54.3 million as of February 21, 2020, versus $53.8 million a year earlier. Orders may be canceled or rescheduled, and management cautioned that backlog is not a reliable indicator of future revenue.
- Key risks include reliance on a limited number of customers (top ten were 34.7% of 2019 revenue), cyclical demand, competition and customer insourcing, raw-material and supplier availability and costs, product defects and liability, regulatory and contract compliance, acquisition integration, and credit-facility covenants and interest-rate exposure.
- The filing specifically warns that COVID-19 could disrupt employees, suppliers, customers, supply chains, production, demand, and liquidity. The company’s operations were U.S.-based but depended on a global supply chain.
- Management judged ordinary-course legal matters unlikely to have a material adverse effect. Operating lease commitments totaled $3.3 million; $1.2 million was due within one year. The company paid no dividends in 2019 or 2018.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification points
- Assess whether medical-market growth and the improved gross margin are sustainable, including the effect of the Dielectrics comparison and the continuing decline in molded-fiber-related markets.
- Monitor the operating impact of COVID-19, supply-chain continuity, customer demand, and the realization and timing of the planned capacity investments.
- Review the remaining availability and covenants of the revolver, future capital needs, and the cost or potential settlement of the interest-rate swap, which no longer hedges outstanding term debt.
- Evaluate customer concentration, cancellable backlog, and whether the $54.3 million backlog converts into shipments and revenue.
- Check subsequent filings for updated guidance and results. The 10-K provides no quantified 2020 outlook; fourth-quarter operating income and cash flow are not separately reported in the supplied quarterly summary.