UFP Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company designs and custom-converts foam, plastic, and fiber products, reporting Engineered Packaging and Component Products segments. Interim financial statements are unaudited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $33.50 million | $29.96 million | $65.00 million | $58.66 million |
| Gross profit | $10.00 million | $9.05 million | $18.81 million | $16.50 million |
| Gross margin | 29.9% | 30.2% | 28.9% | 28.1% |
| Operating income | $4.32 million | $3.67 million | $8.23 million | $6.12 million |
| Net income attributable to UFP | $2.70 million | $2.28 million | $4.91 million | $3.79 million |
| Diluted EPS | $0.39 | $0.34 | $0.70 | $0.57 |
For the six months, operating cash flow was $4.98 million, versus $5.03 million; capital expenditures were $1.00 million. Cash increased to $28.12 million from $24.43 million at year-end. At June 30, total debt was approximately $6.54 million; working capital was approximately $43.6 million. The company reported $16.9 million of revolving-credit availability, subject to collateral levels. The credit facility’s stated interest rate was approximately 1.24%.
Changes and drivers
- Sales rose 11.8% in Q2 and 10.8% in the first half. Management attributed growth primarily to automotive interior trim and, for the half, defense and aerospace products. These gains were partly offset by lower sales following the loss of part of a large medical account.
- Q2 gross margin declined 0.3 percentage points, which management attributed mainly to product mix and higher material costs as a percentage of sales. First-half gross margin improved 0.8 points, reflecting overhead leverage on higher sales.
- First-half operating income benefited from an $833,792 gain on the sale of UDT’s Alabama property. Management said approximately $428,000 of the gain related to non-controlling interests. The gain makes reported operating-income growth a less direct measure of underlying operating improvement.
- SG&A rose 5.6% in Q2 and 9.7% year to date, including costs for operating and information systems, rebranding and marketing, and administrative compensation. SG&A as a share of sales declined slightly year to date.
- Debt declined, including approximately $620,000 of UDT mortgage payoff. First-half investing cash flow was positive $213,000, reflecting about $1.2 million of property-sale proceeds offset by about $1.0 million of capital spending.
Outlook, risks, and other matters
- A substantial portion of a large automotive door-panel program ended June 30. Management expected this to reduce revenue at its Georgia facility by approximately $625,000 per month in the second half of 2011 compared with the same period of 2010.
- The company’s strategy includes organic growth and strategic acquisitions. It expected existing resources, operating cash flow, and available credit to fund requirements, including capital spending, through at least year-end 2011. No specific earnings or revenue guidance was provided.
- Risks cited include economic conditions affecting customers, competition, securing new customers, customer order cancellations or deferrals, new-product execution, acquisition execution and integration, and the automotive program’s end. Management reported no material changes to the risk factors in its 2010 Form 10-K.
- UDT is consolidated as a variable-interest entity; it owns a building leased to UFP, and its creditors have no recourse to UFP’s general credit. One Component Products customer represented 10.4% of first-half consolidated revenue.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether replacement business offsets the expected monthly revenue decline from the ended automotive door-panel program.
- How much first-half operating performance depended on the one-time property-sale gain and related moving allowance.
- Whether receivables and inventories, which increased with sales and production, convert to cash as expected.
- Customer concentration and the status of the large medical account loss, as well as automotive and defense/aerospace demand trends.
- Availability and terms of borrowing under the asset-based revolving facility, and compliance with its fixed-charge coverage covenant.