UFP Technologies, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. UFP Technologies designs and converts foam, plastics, composites, and natural-fiber products for medical, automotive, consumer, electronics, industrial, and aerospace and defense markets. It reports one operating segment.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $37.9 million | $36.5 million | $72.4 million | $70.5 million |
| Gross profit | $10.3 million | $10.3 million | $18.0 million | $18.9 million |
| Gross margin | 27.1% | 28.2% | 24.9% | 26.9% |
| Operating income | $4.2 million | $3.5 million | $5.9 million | $6.1 million |
| Net income | $2.7 million | $2.3 million | $3.8 million | $3.9 million |
| Diluted EPS | $0.38 | $0.32 | $0.53 | $0.55 |
Q2 sales rose 3.8% year over year, while gross profit was essentially flat and gross margin fell 1.1 percentage points. Operating income and net income improved, helped in part by lower SG&A and a material-overcharge settlement credit. First-half sales increased 2.7%, but gross margin declined 2.0 points, operating income fell about 2.6%, and net income fell about 3.0%.
Q2 sales growth reflected medical (+12.1%) and consumer (+24.7%) markets, partly offset by aerospace and defense (-31.5%) and electronics (-20.5%). First-half medical and consumer sales grew 12.7% and 25.0%, respectively; aerospace and defense and electronics declined 24.5% and 15.0%. Medical represented 44.8% of first-half sales.
Cash, liquidity, and capital
- First-half operating cash flow was $1.6 million, down from $5.7 million in the prior-year period. Receivables increased $5.5 million, partly reflecting strong June sales; prepaid expenses increased $1.7 million, largely due to upfront insurance payments.
- Capital expenditures were $4.4 million, primarily for manufacturing equipment and renovations at the Newburyport facility. Cash declined to $27.0 million from $29.8 million at year-end 2015.
- Total debt was approximately $1.4 million at June 30, 2016. The company had no borrowings under its $40 million revolving credit facility, which matures November 30, 2018, and reported compliance with its covenants.
- Total assets were $125.0 million and stockholders’ equity was $108.5 million. No shares were repurchased in the first half; $9.4 million remained under the $10 million authorization.
Outlook, commentary, and notable items
- Management said manufacturing inefficiencies and extra labor associated with plant moves and requalifications were beginning to give way to synergies, and expected gradual efficiency improvements as the Northeast consolidation is completed. The Georgetown relocation was expected to finish by September 30, 2016.
- Management anticipated continued medical-market sales growth. The filing provides no numerical revenue or earnings guidance. The company planned further capacity additions and potentially additional Newburyport expansion; it believed available resources would fund requirements for the next 12 months, while noting liquidity depends on future operating performance.
- Consolidations were expected to cost about $2.1 million, with approximately $1.9 million incurred through June 30, 2016; expected annual savings were about $1.0 million. Manufacturing inefficiencies and a one-time $288,000 write-off of obsolete tooling and inventory pressured gross margin.
- A polyurethane-foam antitrust settlement contributed a $423,000 credit to Q2 operating income. The company received a further approximately $1.7 million in July, expected to be recorded in Q3 as the final payment.
- Forward-looking risks include execution and integration of acquisitions, completing plant moves and equipment requalification efficiently, realizing consolidation savings, and using planned production capacity. The filing reported no material changes to previously disclosed risk factors or market risks. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether improving plant efficiencies and the expected $1.0 million annual consolidation savings materialize, and whether remaining consolidation costs are close to estimates.
- Whether Q2 earnings improvement is repeatable apart from the settlement credit, and whether gross-margin pressure continues.
- Whether the July settlement payment was recorded in Q3 as expected and whether the $423,000 Q2 income-statement credit reconciles to the approximately $432,000 cash receipt.
- Whether receivables and prepaid expenses convert to cash, given first-half operating cash flow fell substantially year over year.
- Demand trends in medical and consumer markets relative to continued weakness in aerospace and defense and electronics.