UFP Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 10, 2019. Amounts below are in millions, except per-share data. The interim financial statements are unaudited.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $47.328 | $42.931 | +10.2%; organic sales +4.5% |
| Gross profit / margin | $12.497 / 26.4% | $10.185 / 23.7% | Margin +2.7 percentage points |
| Operating income | $5.253 | $2.564 | +104.9% |
| Net income | $3.734 | $1.777 | +110.1% |
| Diluted EPS | $0.50 | $0.24 | +$0.26 |
| Cash from operations | $3.629 | $(1.992) | Improved by $5.621 |
| Capital expenditures | $1.388 | $1.494 | — |
Gross margin improvement was attributed to higher sales leverage over fixed overhead and manufacturing efficiencies. SG&A was $7.244 million, up 9.9%, but declined slightly as a share of sales to 15.3% from 15.4%. The effective tax rate was 21.9%, versus 24.9%.
Revenue mix and operating context
UFP Technologies designs and manufactures custom components, subassemblies, products, and packaging, primarily for medical customers; it reports one operating segment. Medical sales were $28.813 million (60.9% of revenue), up 19.4%, partly reflecting an extra month of Dielectrics sales and greater demand. Aerospace and defense sales rose 42.0%, primarily on increased government spending; automotive sales rose 7.1%, helped by a new customer program. Combined consumer, electronics, and industrial sales declined 15.6%, primarily due to lower protective-packaging orders as customers worked through excess inventory. Consumer sales were described as softer than anticipated.
Balance sheet, debt, and liquidity
- Cash was $2.493 million at March 31, 2019, down from $3.238 million at year-end. Current assets were $55.048 million and current liabilities $18.970 million.
- Total debt was $22.143 million, down from $25.143 million at December 31, 2018, after $3.0 million of revolving-credit repayments. Debt comprised a $17.143 million term loan and $5.0 million drawn on the revolver.
- The unsecured credit agreement provides a $20 million term loan and a revolving facility of up to $50 million, maturing February 1, 2023. The filing reports a 3.50% applicable interest rate and covenant compliance. Standby letters of credit totaled $0.7 million.
- A $20 million interest-rate swap had a $16.4 million notional amount and a $0.175 million liability. The company recorded $0.239 million of related fair-value expense in the quarter.
- Operating lease right-of-use assets were $3.785 million and lease liabilities totaled $3.831 million following adoption of ASC 842 on January 1, 2019. Adoption did not materially affect income or cash flows.
Management said existing resources, expected operating cash, the revolving facility, and potential equipment financing or additional borrowing should be sufficient for cash requirements, including capital spending, over the next 12 months. It also planned further capacity investments in 2019 and may pursue complementary acquisitions.
Material changes, outlook, and risks
- Reported sales growth included Dielectrics; organic growth, excluding Dielectrics sales for January, was 4.5%. The acquisition closed February 1, 2018, so the prior-year quarter included only February and March of Dielectrics sales.
- Q1 2018 included $1.069 million of Dielectrics acquisition costs; none were recorded in Q1 2019. Lower net interest expense reflected reduced debt, while swap fair-value movements increased other expense.
- A $0.156 million state tax settlement receipt reduced income tax expense. The company attributed year-over-year earnings growth to higher sales, improved gross margins, and the lower effective tax rate.
- No specific revenue or earnings guidance was provided. Management cautioned that future operating cash generation is not guaranteed and that longer-term liquidity depends on operating performance.
- Disclosed risks include Dielectrics integration, plant consolidation and closure execution, customer part requalification, new program launches and qualification delays, equipment implementation and utilization, acquisition execution, and debt covenant compliance. The company reported no material change to previously disclosed risk factors.
Investor facts to verify
- How much of future growth is organic and sustained, particularly in medical, aerospace and defense, and automotive markets?
- Whether consumer, electronics, and industrial demand recovers as customers reduce excess inventories.
- Whether manufacturing efficiencies and the higher gross margin persist as capacity investments continue.
- Debt paydown, cash conversion, revolver availability, covenant headroom, and interest-rate swap exposure.
- Dielectrics integration and expected acquisition benefits, alongside the effect of lease obligations and planned capital spending.