UFP Technologies, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. UFP designs and converts foams, plastics, composites, and natural-fiber products for medical, consumer, automotive, aerospace and defense, electronics, and industrial markets. It reports one operating segment. Results include Dielectrics Inc., acquired February 1, 2018; prior-year results are not restated for the acquisition.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $49.0m | $37.9m | $91.9m | $74.9m |
| Gross profit | $13.0m | $9.9m | $23.2m | $19.5m |
| Gross margin | 26.5% | 26.2% | 25.2% | 26.0% |
| Operating income | $5.7m | $3.9m | $8.2m | $7.1m |
| Net income | $4.0m | $2.6m | $5.8m | $4.8m |
| Diluted EPS | $0.54 | $0.36 | $0.78 | $0.66 |
- Q2 sales grew 29.4%; six-month sales grew 22.7%. Medical revenue was the largest market and increased 56.2% in Q2 and 47.5% for the six-month period, primarily reflecting Dielectrics. Consumer sales rose 21.0% and 22.0%, respectively. Automotive sales fell 17.3% and 18.9%, primarily because the Mercedes-Benz door-panel program was phased out.
- Six-month operating income increased 15.4% and net income increased 20.1%. The six-month gross margin declined to 25.2%, primarily reflecting higher overhead associated with the Georgia plant closure. Q2 gross margin improved modestly; management cited manufacturing efficiencies, price increases, and a better business mix.
- Q2 SG&A was $7.4m, or 15.1% of sales, versus $6.1m and 16.0%. Six-month SG&A was $14.0m, or 15.2%, versus $12.4m and 16.5%; increases largely reflected Dielectrics, while lower SG&A as a share of sales reflected Dielectrics’ cost profile.
- Six-month acquisition-related costs were $1.1m; the company also reported approximately $760,000 of losses associated with the Georgia plant closure. Six-month effective tax rate was 24.5%, down from 33.3%, primarily due to the lower federal statutory rate and share-based tax benefits.
Cash, debt, and liquidity
- For the six months, operating cash flow was $7.4m (versus $7.9m in 2017), capital expenditures were $3.0m, and investing cash outflow was $79.9m, including $77.0m for the Dielectrics acquisition, net of cash acquired. Financing provided $40.4m.
- Cash was $5.9m at June 30, 2018, down from $38.0m at year-end 2017. Receivables were $30.2m and inventory was $18.7m. Current assets were $57.5m and current liabilities $20.3m.
- Total debt was $39.6m: $21.0m drawn on the revolving facility and $18.6m on the term loan. The amended unsecured credit agreement provides a $20m term loan and a $50m revolving facility, maturing February 2023. The company reported an approximately 3.34% applicable rate and compliance with covenants at quarter-end. A $20m interest-rate swap converts the term loan exposure to a fixed 2.7% rate plus the applicable margin.
- Management said existing resources, the credit facility, and expected operating cash flow should fund requirements, including capital assets, for the next 12 months; it also plans to use available cash to pay down debt. Management cautioned that future operating cash generation is not assured.
Acquisition, outlook, and risks
- Dielectrics was acquired for $80m cash plus a $250,000 working-capital adjustment; net consideration in the purchase-price allocation was $77.0m after acquired cash. Since acquisition, Dielectrics contributed approximately $15.6m of revenue and $1.9m of net income. The preliminary allocation included $44.5m goodwill and $22.6m of customer-list assets; the allocation remained subject to final valuation work.
- No specific revenue or earnings guidance was provided. Management described continued capacity investment and potential complementary acquisitions as part of its growth strategy. The company expects benefits from integration and facility consolidation, but cautioned that acquisition integration, plant closure and part requalification, new-program launches, manufacturing efficiency, and market conditions could affect results.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. For the six months, adoption increased reported sales by $152,000 and gross profit by $20,000 versus legacy accounting; the opening retained-earnings adjustment was a $70,000 reduction. The filing also notes that the effective tax rate may vary with share-based compensation tax benefits.
- Dielectrics represented 42.8% of consolidated assets and 16.9% of six-month revenue. Its internal controls were excluded from the company’s control assessment during the acquisition year; management otherwise concluded disclosure controls were effective. The filing reported no material changes to previously disclosed risk factors or market risks.
Important facts for investors to verify
- Whether Dielectrics integration, acquired earnings, and preliminary purchase accounting develop as expected.
- Whether the company can manage acquisition-related leverage, interest costs, covenant requirements, and cash conversion as receivables and inventory rise.
- Whether medical and consumer growth offsets continuing automotive declines and the Mercedes-Benz program phase-out.
- Whether Georgia closure costs, manufacturing capacity investments, and part requalification affect margins or customer programs.
- Whether cash-flow generation supports planned investment and debt paydown; the filing provides no formal earnings guidance.