UFP Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company designs and manufactures engineered components, products, and packaging, primarily for medical customers, with sales across medical, automotive, consumer, aerospace and defense, industrial, and electronics markets. Financial statements are unaudited.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $48.3 million | $47.3 million | +2.0% |
| Gross profit / margin | $12.8 million / 26.6% | $12.5 million / 26.4% | Margin +0.2 percentage points |
| Operating income | $5.1 million | $5.3 million | Down about 3% |
| Net income | $3.9 million | $3.7 million | Up about 4% |
| Diluted EPS | $0.52 | $0.50 | +4% |
| Cash from operations | $4.7 million | $3.6 million | Up $1.1 million |
SG&A increased 7% to $7.8 million, or 16.1% of sales versus 15.3%. Management attributed the increase mainly to higher stock-based compensation and bad-debt expense. The effective tax rate was 17.8%, compared with 21.9%, primarily reflecting higher anticipated R&D tax credits. Other expense rose to $327,000 from $239,000, mainly from an adverse fair-value change in the interest-rate swap.
Markets and material changes
- Medical sales grew 16.4% to $33.7 million, representing 69.8% of revenue; management cited continued growth in Dielectrics programs.
- Automotive sales fell 19.8% to $4.6 million, and aerospace and defense sales fell 23.2% to $2.7 million. Combined consumer, industrial, and electronics sales declined 20.2%.
- Management said Q1 results were not materially affected by COVID-19, but the pandemic had begun to affect operations by quarter-end. Automotive and consumer demand was particularly weak; increased orders from certain medical customers partly offset this.
- Gross margin improved with manufacturing efficiencies and business mix. Management also reported higher overhead as a share of sales, partly due to indirect labor supporting anticipated growth.
Cash, liquidity, debt, and balance sheet
- Cash was $7.3 million at March 31, up from $3.7 million at year-end. Operating cash flow was $4.7 million; capital expenditures were $1.0 million; financing activities used $0.1 million.
- Working capital included $20.2 million of inventory, up $2.0 million from year-end, as the company restocked and built safety stock. Receivables were $29.4 million.
- There were no borrowings under the credit facilities at March 31, apart from $0.7 million of standby letters of credit. The unsecured facilities include a $50 million revolving line and mature February 1, 2023; the company reported covenant compliance.
- On April 1, after quarter-end, the company drew $5.5 million on its revolver to preserve cash amid uncertainty and possible working-capital, operating-cost, or collections pressures.
- The company’s $20 million, five-year interest-rate swap no longer hedges outstanding term debt, which had been repaid. Its March 31 fair value was a $624,000 liability; the company said it may cancel the swap.
Outlook, risks, and unusual items
The company gave no numerical earnings or revenue guidance. Management expects COVID-19 disruptions and related events to negatively affect 2020 results, with a more significant impact anticipated in Q2 and Q3. Risks include further demand declines or canceled orders, customer payment delays or defaults, higher labor and cleaning costs, employee absenteeism, potential supply-chain disruption, and possible impairment charges. Several customers had extended payment terms; management expected the extensions to be short-term but noted they could last longer. The company increased raw-material purchases to establish safety stock.
Management said it plans to add manufacturing capacity and may pursue strategic acquisitions. It believes cash, operating cash flow, and borrowing capacity should fund requirements for the next 12 months, but cautioned that future liquidity depends on operating performance. The filing also notes that COVID-19 impacts are uncertain and that covenant compliance or financing availability could become a concern if business conditions deteriorate. The CARES Act was not expected to have a material effect on results or liquidity.
Important facts for investors to verify
- Subsequent-quarter revenue, orders, margins, and cash conversion, particularly in automotive, consumer, and medical markets.
- Whether customer payment extensions persist and how receivables, bad-debt provisions, and inventory levels develop.
- COVID-related manufacturing costs, employee availability, plant operations, and raw-material supply.
- Revolver borrowings, covenant headroom, and liquidity as the $5.5 million post-quarter draw is used or repaid.
- The interest-rate swap’s ongoing fair-value impact and whether the company cancels it.