UFP Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 7, 2020. UFP Technologies designs and manufactures custom components, subassemblies, products, and packaging, primarily for medical customers, and reports as one operating segment. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $42.6 | $51.4 | $90.9 | $98.7 |
| Gross profit | $9.9 | $14.4 | $22.8 | $26.9 |
| Gross margin | 23.3% | 28.0% | 25.0% | 27.2% |
| Operating income | $3.0 | $6.6 | $8.1 | $11.8 |
| Net income | $2.3 | $4.6 | $6.2 | $8.3 |
| Diluted EPS | $0.31 | $0.62 | $0.82 | $1.11 |
- Q2 sales declined 17.0% year over year; first-half sales declined 7.9%. First-half operating income fell 31.7% and net income fell 25.5%, per management.
- SG&A decreased 14.5% in Q2 and 4.2% in the first half, but as a share of sales increased to 15.6% and 15.9%, respectively, from 15.2% in both comparable periods.
- Cash from operations was $10.7 versus $12.4 in the first half of 2019. Capital expenditures were $2.2; cash increased $8.5 to $12.3.
- At June 30, cash was $12.3, current assets $63.9, and current liabilities $16.6. Total assets were $197.2 and stockholders’ equity $169.2.
- The company reported no outstanding bank borrowings at period-end after repaying a $5.5 revolving-facility draw in June. Its unsecured facility includes a $50.0 million revolver; $0.7 million of letters of credit were outstanding. The facility matures February 2023, and the company reported covenant compliance. Operating and finance lease liabilities totaled $2.7.
Business changes and management commentary
- Management attributed the downturn primarily to COVID-19-related demand weakness. Automotive and consumer demand was substantially affected; medical orders related to elective procedures also declined, while increased orders from some medical customers partly offset weakness elsewhere.
- Q2 medical sales were $31.7 million, down from $33.0 million, but represented 74.2% of sales versus 64.3%. Automotive sales fell to $1.5 million from $5.0 million. First-half medical sales increased to $65.3 million from $62.0 million, while first-half automotive sales fell to $6.1 million from $10.7 million.
- Gross margin pressure reflected fixed overhead against lower sales. Management said material and labor costs as a percentage of sales improved through manufacturing efficiencies and business mix, but those gains were outweighed by higher overhead as a percentage of sales.
- Management expected negative effects to continue in Q3, particularly from lower product demand. It anticipated possible improvement in Q4, but emphasized substantial uncertainty and expected COVID-19-related disruption to affect 2020 results. The filing gives no quantified earnings or revenue guidance.
Liquidity, risks, and unusual items
- Inventory increased $2.7 million from year-end to $21.0 million, which management attributed to restocking and anticipated safety-stock needs. Receivables declined $1.4 million, while customers extended payment terms; management expected higher working-capital needs.
- The company temporarily drew $5.5 million on its revolver in April as a precaution against shutdowns, cost increases, and collection delays, then repaid it before quarter-end. Management said cash, operating cash flows, and available borrowing capacity were expected to cover requirements for the next 12 months, while noting future cash generation was not assured.
- COVID-19 risks include further demand declines or order cancellations, customer payment delays or defaults, higher labor and manufacturing costs, employee absences, facility disruption, supply-chain issues, and potential impairment charges. The company implemented cost reductions, including labor measures, and enhanced employee health and facility protocols.
- A $0.3 million loss on fixed-asset sales reduced operating income in the first half. The interest-rate swap liability was $0.6 million at June 30, compared with $0.3 million at year-end; its fair-value changes are recorded in other expense. The swap no longer hedges an outstanding term loan and may be canceled.
- The company deferred $0.4 million of employer Social Security taxes under the CARES Act. It cited the planned LIBOR phaseout by the end of 2021 as a risk to credit and swap agreements, borrowing costs, and hedge effectiveness.
- Management reported no material changes to previously disclosed legal proceedings or contractual obligations. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified during the quarter.
Investor verification priorities
- Track quarterly orders, revenue, margins, and customer demand by end market, particularly medical, automotive, and consumer.
- Monitor receivable aging, extended customer payment terms, inventory levels, and operating cash flow as demand and customer purchasing patterns change.
- Confirm revolver availability, covenant headroom, and the company’s ability to fund operations and planned capital expenditures if the downturn persists.
- Assess the timing and costs of COVID-19-related labor, safety, and manufacturing measures, along with potential customer or asset impairment exposure.
- Review the interest-rate swap’s continued treatment and any LIBOR-transition changes to credit or hedging agreements.