UFP Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited interim results; dollar amounts below are in millions except per-share data. The company designs and converts foam, plastics, and natural-fiber materials for several end markets and reports one operating segment.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $37.9 | $37.9 | $74.9 | $72.4 |
| Gross profit / margin | $9.9 / 26.2% | $10.3 / 27.1% | $19.5 / 26.0% | $18.0 / 24.9% |
| Operating income | $3.9 | $4.2 | $7.1 | $5.9 |
| Net income | $2.6 | $2.7 | $4.8 | $3.8 |
| Diluted EPS | $0.36 | $0.38 | $0.66 | $0.53 |
Cash flow and liquidity: Six-month operating cash flow was $7.9 million, compared with $1.3 million in 2016; capital expenditures were $4.5 million. Cash increased $3.2 million to $34.5 million. At June 30, current assets were $73.4 million and current liabilities were $9.4 million. The company had no borrowings on its $40 million revolving facility, with approximately $0.4 million of letters of credit outstanding, and was in compliance with its covenants. Molded-fiber term-loan debt was approximately $0.3 million and due to mature in September 2017. Stockholders’ equity was $118.7 million.
Changes and management commentary
- First-half sales rose 3.5%, primarily from 11.5% growth in medical-market sales. Medical represented 48.2% of first-half revenue. Automotive and industrial sales declined 5.2% and 10.9%, respectively.
- First-half gross margin improved to 26.0% from 24.9%, which management attributed mainly to manufacturing efficiencies, selective pricing, and a better overall mix of business. Q2 gross margin fell to 26.2% from 27.1%, partly due to higher overhead and indirect labor.
- First-half net income increased 26.0%; management said the increase was 31% excluding nonrecurring restructuring and material-overcharge settlement items. Q2 net income and operating income were lower year over year despite essentially unchanged sales.
- Management cited soft demand in certain legacy automotive interior-trim programs, credit issues at a large industrial customer, and the phase-out of an aerospace and defense helmet program. The remaining Mercedes-Benz southeast door-panel program is expected to end in Q4 2017; estimated program sales are $2.3 million for 2017 and zero in 2018.
- Facility consolidations and relocations were complete as of June 30, 2017. The company is expanding its Newburyport, Massachusetts facility and plans further capacity investments; its strategy includes organic growth and potential strategic acquisitions.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management believes cash, expected operating cash flow, the revolver, and potential equipment financing or additional borrowing will be sufficient for requirements over the next 12 months, while noting future liquidity depends on operating performance.
- Key risks discussed include execution and timing of facility expansion, equipment installation and transferred-part requalification, realizing expected efficiencies and using planned capacity, customer and market demand, and identifying and integrating acquisitions. The filing reports no material change to previously disclosed risk factors.
- Q2 2017 included $63,000 of restructuring costs and a $121,000 material-overcharge settlement credit; the comparable 2016 periods included $55,000 and $432,000, respectively. Prior-year settlement proceeds also included $1.7 million recorded in Q3 2016. Consolidation-related activities were reported complete.
- The company adopted share-based payment accounting guidance in 2017; related tax benefits may make the effective tax rate volatile. Management had not recorded a valuation allowance against deferred tax assets but said realizability could change if future taxable-income estimates decline.
- The filing states that disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether medical-market growth continues and offsets softness in automotive and industrial markets.
- The revenue and earnings impact of the Mercedes-Benz program ending after 2017, and progress replacing that business.
- Newburyport expansion spending, capacity utilization, and whether expected efficiency gains materialize.
- Collections from the industrial customer with credit issues and the resulting impact on receivables and cash flow.
- Debt repayment at the term loans’ September 2017 maturity, ongoing revolver availability, and future capital needs.
- Deferred-tax-asset realizability and the effect of share-based compensation tax items on the effective tax rate.