UFP Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. UFP Technologies designs and manufactures engineered products, with a significant focus on medical devices and packaging. It reports one operating and reportable segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $97.8 million | $71.2 million | +37.2% |
| Gross profit / margin | $28.7 million / 29.4% | $17.1 million / 24.1% | Margin +5.3 percentage points |
| Operating income | $12.8 million | $6.4 million | +101.9% |
| Net income | $9.7 million | $4.9 million | +100.5% |
| Diluted EPS | $1.27 | $0.64 | +$0.63 |
| Net cash from operating activities | $1.7 million | $(3.2) million | Improved by $4.9 million |
| Capital expenditures | $2.2 million | $2.3 million |
Sales growth reflected approximately 35.8% organic growth, including 48.1% organic growth in medical. Medical sales were $83.8 million, or 85.7% of revenue; one customer accounted for approximately 22% of revenue, up from 15% in Q1 2022.
Gross-margin improvement was attributed to operating efficiencies, leverage from higher sales, and price adjustments for input-cost inflation. SG&A rose 29.9% to $13.0 million, but declined as a share of sales to 13.3% from 14.1%. Interest expense increased to $0.9 million from $0.3 million, primarily due to acquisition-related borrowings. The effective tax rate was 18.1%, versus 20.2%.
Balance sheet and liquidity
- Cash was $6.5 million at March 31, 2023, versus $4.5 million at December 31, 2022. Current assets were $126.9 million and current liabilities $52.2 million.
- Total debt was $60.0 million: $25.0 million drawn on the revolving facility and $35.0 million on the term loan. Debt less cash was approximately $53.5 million. The reported interest rate was approximately 6.1%.
- The credit agreement provides a $90 million revolving facility and a $40 million term loan, with a December 2026 maturity. Approximately $0.7 million of standby letters of credit was outstanding. The company reported covenant compliance.
- Operating cash flow was supported by net income and noncash adjustments, but absorbed cash from higher receivables and inventory and lower accrued expenses and deferred revenue. Financing provided $2.6 million, including $6.0 million of revolver borrowings.
Material changes, outlook, and risks
- Q1 2022 included $0.8 million of acquisition costs; Q1 2023 included no such costs. Q1 2023 also included a $2.9 million expense from remeasurement of contingent acquisition consideration. The contingent consideration liability was $17.4 million at quarter-end, with up to $20 million still potentially payable.
- Sales to markets other than medical declined 25.4%, primarily reflecting the July 2022 sale of the molded-fiber business. The company sold that business for approximately $31.5 million and recorded a gain in 2022.
- Management expects existing resources, operating cash generation, and the revolving facility to meet cash needs, including planned capacity additions, for the next 12 months. It also said it may pursue complementary acquisitions; no numerical earnings or revenue guidance was provided.
- Management cited uncertainty from inflation, the war in Ukraine, COVID-19, customer demand and payment timing, supply chains, acquisition execution, financing availability, and debt covenants. It cautioned that future operating cash generation is not assured. The filing reported no material change to previously disclosed risk factors, no material litigation, and no material change in market risks.
Important facts for investors to verify
- Whether medical growth and the increased customer concentration are sustainable, and how the largest customer’s demand may affect results.
- Whether margin gains persist as input costs, labor costs, and production volumes change.
- Cash conversion and working-capital trends, particularly receivables and inventory growth.
- Debt reduction, borrowing costs, covenant headroom, and the timing and amount of contingent acquisition payments.
- Progress and returns from planned capacity investments and any future acquisitions.