UFP Technologies, Inc. — Q3 2012 Form 10-Q
Business context and period: The unaudited filing covers the three and nine months ended September 30, 2012. UFP Technologies makes custom-engineered components and specialty packaging through its Engineered Packaging and Component Products segments, serving markets including medical, automotive, aerospace and defense.
Financial performance
Amounts in dollars; comparisons are with the corresponding 2011 period.
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Net sales | $31.97 million vs. $30.76 million (+3.9%) | $97.59 million vs. $95.77 million (+1.9%) |
| Gross profit / margin | $9.23 million / 28.9%; prior year $8.48 million / 27.6% | $28.12 million / 28.8%; prior year $27.29 million / 28.5% |
| Operating income | $4.07 million vs. $3.26 million (+24.7%) | $12.06 million vs. $11.49 million (+5.0%) |
| Net income attributable to UFP Technologies | $2.60 million vs. $2.44 million (+6.6%) | $7.69 million vs. $7.34 million (+4.8%) |
| Diluted earnings per share | $0.37 vs. $0.35 | $1.09 vs. $1.05 |
| Operating cash flow | Not separately reported for the quarter | $10.82 million vs. $9.61 million |
| Capital expenditures | Not separately reported for the quarter | $8.05 million vs. $2.64 million |
- For the nine-month period, SG&A was $16.07 million, down from $16.63 million; it declined to 16.5% of sales from 17.4%. Net interest expense rose to $43,000 from $19,000, primarily because of lower interest earned on cash.
- At September 30, cash and equivalents were $31.16 million; working capital was approximately $49.9 million. Current assets were $59.79 million and current liabilities $9.86 million.
- Total debt, including current installments, was approximately $5.78 million, down from $6.22 million at December 31, 2011. The company reported $16.9 million of availability under its $17 million revolving facility and compliance with its minimum fixed-charge-coverage covenant.
- Nine-month investing cash outflow was $7.90 million, principally for equipment and software. Approximately $4.0 million of capital spending was progress payments for molded-fiber machinery. Financing cash outflow was $1.61 million; cash increased $1.31 million over the period.
Material changes and management commentary
- Management reported 2% organic sales growth for the first nine months. Medical sales increased about $1.7 million and molded-fiber packaging sales about $2.0 million, partly offset by an approximately $2.0 million decline in automotive sales. Excluding the discontinued portion of the automotive door-panel program, management said sales grew 6.3%.
- Component Products nine-month sales were $66.36 million, up from $64.18 million; Engineered Packaging sales were $31.23 million, slightly below $31.59 million. Segment operating income increased in both segments.
- Management attributed improved gross margin to business mix, operating efficiencies and, in the quarter, the absence of costs associated with the prior-year Alabama plant closure. The 2011 nine-month comparison also included an approximately $834,000 gain on sale of fixed assets, primarily Alabama real estate; about $428,000 of that gain related to noncontrolling interests.
- The effective tax rate was approximately 36% in both 2012 periods, versus 25% for Q3 2011 and 32% for the first nine months of 2011. The prior-year rates benefited from a roughly $385,000 reversal of uncertain-tax-benefit reserves after a favorable IRS audit outcome and expiration of certain statutes of limitation.
- In February 2012, the company purchased the manufacturing building leased from United Development Company Limited (UDT) for $1.35 million, acquired the remaining interest through the transaction, and subsequently dissolved UDT. The transaction did not affect consolidated operating results; $521,972 was recorded as a reduction to additional paid-in capital.
Outlook, risks and unusual items
- On September 18, 2012, the company committed to close its Ventura, California facility and consolidate operations into Rancho Dominguez, California, and El Paso, Texas. It expected approximately $325,000 of one-time pretax restructuring costs and $150,000 of building improvements, principally in Q4 2012; no costs had been incurred by September 30.
- On October 11, 2012, the company entered into approximately $5.0 million of equipment financing for two new molded-fiber machines, with funding expected in Q4. One machine was operational and the other was expected to be installed in Q4.
- Management planned additional manufacturing capacity investments through year-end 2012 and into 2013, and continued to consider strategic acquisitions. It believed cash, operating cash generation, the revolver and expected equipment financing would cover requirements for the next 12 months, while noting future operating cash generation was not assured. No specific earnings or revenue guidance was provided.
- Disclosed risks include economic and end-market demand, customer order cancellations or deferrals, winning new customers and replacing lost business, new-product launches, equipment installation and utilization, acquisition execution, and plant-consolidation costs and efficiencies. Debt bears variable rates based on LIBOR or prime, though management characterized interest-rate market risk as minimal. The company reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether medical and molded-fiber growth can offset the ongoing automotive door-panel program phase-out.
- Whether the new molded-fiber equipment is installed, funded and utilized as planned, and whether the capacity investment earns adequate returns.
- The actual cost, timing and savings from the Ventura closure and consolidation.
- Liquidity and covenant headroom after the approximately $5.0 million equipment loan is funded; the revolving facility was scheduled to mature November 30, 2013.
- How results compare after accounting for the prior-year asset-sale gain and tax-reserve reversal, which affected year-over-year comparisons.