UFP Technologies, Inc. — Q2 2012 Form 10-Q
Business context and period: The company makes custom-engineered components, products, and specialty packaging for medical, automotive, aerospace and defense, electronics, consumer, and industrial markets. This unaudited report covers the three and six months ended June 30, 2012; comparisons are to the same 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $33.67M | $33.50M | $65.62M | $65.00M |
| Gross profit | $9.69M | $10.00M | $18.89M | $18.81M |
| Gross margin | 28.8% | 29.9% | 28.8% | 28.9% |
| Operating income | $4.31M | $4.32M | $7.99M | $8.23M |
| Net income attributable to UFP | $2.75M | $2.70M | $5.10M | $4.91M |
| Diluted EPS | $0.39 | $0.39 | $0.72 | $0.70 |
Cash flow and liquidity: First-half cash from operations was $5.91M, versus $5.48M a year earlier. Investing used $4.89M, primarily for manufacturing equipment and software; capital expenditures were $5.03M, including about $2.6M in progress payments for molded-fiber machinery. Financing used $1.63M, including a distribution related to the UDT transaction. Cash declined $0.61M to $29.24M. Working capital was approximately $48.9M at June 30.
Total debt was approximately $5.93M, comprising $0.58M current and $5.35M long term. The company reported approximately $16.9M of borrowing availability under its $17M revolving facility, subject to collateral levels, and was in compliance with its minimum fixed-charge-coverage covenant. The revolver matures November 30, 2013; term loans mature January 29, 2016. The reported facility interest rate was approximately 1.24%.
Material changes and operating drivers
- Reported sales increased about 0.5% in Q2 and 1.0% for the first half. Management reported organic first-half growth of 1%; excluding the discontinued portion of a large automotive door-panel program, sales growth was 7.4% for Q2 and 7.6% for the first half.
- Medical sales and molded-fiber packaging rose, while automotive sales fell due primarily to the phase-out of a substantial portion of the door-panel program. The discontinued model generated approximately $2.15M of Q2 2011 sales and $4.0M for the first half of 2011.
- Q2 gross margin declined to 28.8% from 29.9%, primarily reflecting a $250,000 tooling sale at zero gross margin and a one-time $220,000 reserve for potentially non-compliant materials. First-half margin was 28.8%, slightly below 28.9%.
- SG&A decreased 5.2% in Q2 and 4.4% for the first half, mainly because of lower professional fees. Operating income was nearly flat in Q2 and declined about 2.8% for the first half.
- First-half 2011 results included an approximately $834,000 gain on sale of fixed assets, primarily UDT real estate; approximately $428,000 was attributable to noncontrolling interests. This makes reported year-over-year operating-income comparisons less favorable for 2012.
- In February 2012, the company purchased from commonly controlled UDT the manufacturing building it had leased, for $1.35M, and UDT was subsequently dissolved. The transaction did not affect consolidated operating results; $535,481 was recorded as a reduction to additional paid-in capital.
Outlook, risks, and other disclosures
Management plans to add manufacturing capacity and improve efficiency, including implementing a next-generation molded-fiber production line, and may pursue complementary acquisitions. It believes cash, operating cash generation, the revolving facility, and potential equipment financing or additional borrowing will be sufficient for requirements, including capital spending, over the next 12 months. No specific revenue or earnings guidance was provided. Management cautions that interim results are not necessarily indicative of full-year results.
Risks cited include economic and customer-market conditions; automotive-program phase-outs and the ability to replace lost sales; customer order cancellations or deferrals; winning new customers and launching products; timely, cost-effective implementation and realization of benefits from new equipment; acquisitions and integration; competition; and variable-rate debt exposure. The company reported no material change in previously disclosed risk factors, no off-balance-sheet arrangements other than operating leases, and effective disclosure controls with no material quarterly change in internal control over financial reporting.
Contractual obligations totaled approximately $12.42M, including $2.21M for new molded-fiber equipment, operating leases, debt, interest, and supplemental retirement obligations. The revolving facility is secured by company assets, including specified real estate; its availability depends partly on receivables and inventory.
Important facts for investors to verify
- Whether medical and molded-fiber growth can offset continuing automotive program declines, and how much growth remains after the door-panel comparison effect.
- Whether the $5.03M first-half capital program and molded-fiber equipment commitments are completed on time and deliver expected capacity, efficiency, and returns.
- Whether gross margins recover after the one-time reserve and zero-margin tooling sale, and whether other cost pressures persist.
- Revolver availability, covenant compliance, and the company’s ability to fund planned investment and obligations as the facility approaches its November 2013 maturity.
- Cash-flow reporting detail: the cash-flow statement reports first-half operating cash flow of $5.91M; MD&A describes it as approximately $5.7M. The filing does not reconcile that difference clearly in the supplied text.