UFP Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Interim financial statements are unaudited. UFP Technologies designs and manufactures custom components, products, subassemblies and packaging, primarily for medical customers; it reports one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $51.4m | $49.0m | $98.7m | $91.9m |
| Gross profit | $14.4m | $13.0m | $26.9m | $23.2m |
| Gross margin | 28.0% | 26.5% | 27.2% | 25.2% |
| Operating income | $6.6m | $5.7m | $11.8m | $8.2m |
| Net income | $4.6m | $4.0m | $8.3m | $5.8m |
| Diluted EPS | $0.62 | $0.54 | $1.11 | $0.78 |
Q2 sales increased 4.9% year over year and six-month sales increased 7.4%. Six-month operating income rose approximately 44% and net income approximately 45%. Management attributed margin improvement to manufacturing efficiencies, improved business mix and better absorption of fixed overhead. SG&A rose 5.2% in Q2, mainly due to compensation increases and strategic hires; as a share of sales it was 15.2%, versus 15.1%.
Cash flow, debt and liquidity
- Six-month cash from operations was $12.4m, compared with $7.4m in 2018. Capital expenditures were $2.8m; operating cash flow less capital expenditures was approximately $9.5m.
- Cash increased to $5.2m from $3.2m at year-end 2018. Receivables increased $2.4m, which management linked primarily to stronger sales late in Q2; inventory declined $0.5m.
- Total debt was $17.4m at June 30, 2019, down from $25.1m at December 31, 2018. The company repaid $7.0m on its revolver and $0.7m of term debt during the first half. Cash plus current assets were $57.9m against current liabilities of $20.9m.
- The unsecured credit agreement provides a $20m term loan and a revolving facility of up to $50m, maturing February 2023. The reported borrowing rate was approximately 3.4%; the company said it complied with its covenants. There were $0.7m of standby letters of credit outstanding.
- A $20m interest-rate swap hedges variable-rate exposure; its notional amount was approximately $15.7m at June 30. Its fair value moved from a $64,000 asset at year-end to a $373,000 liability.
Changes and business trends
Medical sales rose 13.1% in Q2 and 16.2% for the first half, supported by Dielectrics and increased demand from legacy UFP medical customers. Aerospace and defense sales rose 33.6% and 37.4%, respectively, which management attributed primarily to increased government spending. Consumer, electronics and industrial sales collectively declined 20.2% in Q2 and 18.6% for the first half, primarily reflecting weaker molded-fiber packaging demand. Dielectrics contributed an additional month of sales in the first half of 2019 compared with the prior-year period.
Lower debt reduced net interest expense: $0.2m in Q2 and $0.4m for the first half, versus $0.4m and $0.6m, respectively, in 2018. Changes in the interest-rate swap’s fair value were recorded in other expense: $0.2m for Q2 and $0.4m for the first half of 2019, compared with small other income in the corresponding 2018 periods.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management plans to add manufacturing capacity and pursue organic growth, and may consider complementary acquisitions. It believes cash from operations and available financing should cover requirements, including capital expenditures, for the next 12 months, while noting future operating cash generation is not assured.
- Management cited risks involving acquisition integration, plant closures or consolidation, part requalification, customer and vendor contracts, product launches, equipment installation and utilization, manufacturing efficiency and margins, acquisitions, and debt covenants. The filing reports no material changes to previously disclosed risk factors.
- Adoption of the new lease standard in January 2019 recorded operating lease right-of-use assets and liabilities; it did not materially affect income or cash flows. Lease liabilities totaled $3.6m at June 30.
- The company reported no material changes outside the ordinary course to contractual obligations and commitments. Its $10m share-repurchase authorization had approximately $9.4m remaining; no shares were repurchased in the first half of 2019.
- Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of growth and margin improvement is sustainable, particularly given the additional Dielectrics sales month and strength in medical and aerospace markets.
- Whether weaker consumer, electronics and industrial demand, including molded-fiber packaging, persists.
- Cash conversion and working-capital trends, especially receivables, and planned capacity-related capital spending.
- Debt repayment, revolver availability, covenant headroom and the effect of interest rates and swap valuation on earnings.
- Progress and costs associated with Dielectrics integration, manufacturing efficiency initiatives, equipment deployment and any future acquisitions.