UFP Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial figures below are in millions of dollars unless stated otherwise. The interim statements are unaudited.
Business context
UFP Technologies designs and manufactures engineered components, subassemblies, products and packaging, primarily for medical customers, using specialized foams, films and plastics. It also serves consumer, automotive, aerospace and defense, industrial, and electronics markets. The company reports one operating segment; all assets are in the United States.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $43.3 | $49.4 | $134.2 | $148.1 |
| Gross profit | $10.5 | $13.3 | $33.3 | $40.2 |
| Gross margin | 24.3% | 27.0% | 24.8% | 27.1% |
| Operating income | $3.7 | $6.1 | $11.8 | $18.0 |
| Net income | $3.0 | $5.6 | $9.2 | $14.0 |
| Diluted EPS | $0.40 | $0.75 | $1.22 | $1.87 |
- Q3 SG&A was $6.8 million, down 5.5% year over year, but rose to 15.7% of sales from 14.5%. Nine-month SG&A was $21.2 million, down 4.6%.
- Operating cash flow for the first nine months was $16.7 million, compared with $22.4 million a year earlier. Capital expenditures were $3.1 million, versus $4.4 million. Cash increased to $17.4 million at September 30 from $3.7 million at year-end 2019.
- At September 30, current assets were $68.6 million and current liabilities $16.1 million. The balance sheet reports no term debt; the $20 million term loan had been repaid in full. The company has a $50 million unsecured revolving facility maturing February 2023; $0.7 million of standby letters of credit were outstanding. The filing does not state a specific unused borrowing-availability figure.
- Total assets were $200.7 million and stockholders’ equity $172.4 million. The company reported a $0.5 million interest-rate-swap liability.
Changes versus the prior comparable period
- Sales fell 12.3% in Q3 and 9.4% for the nine-month period. Management attributed the declines primarily to pandemic-related demand disruption.
- Q3 gross margin declined 2.7 percentage points and nine-month gross margin declined 2.3 points. Management cited fixed overhead against lower sales, partly offset by manufacturing efficiencies and an improved mix of business.
- Q3 operating income fell 39.3% and net income fell 47.0%; for the nine months, operating income fell 34.3% and net income fell 34.2%.
- Lower debt levels contributed to reduced net interest expense: $17,000 in Q3 versus $165,000, and $66,000 for nine months versus $590,000.
- Medical was 62.0% of Q3 sales, down from 65.1% a year earlier; Q3 medical sales declined to $26.9 million from $32.2 million. Automotive and consumer demand were also affected, while consumer and aerospace-and-defense sales increased in Q3.
Outlook, commentary and risks
- Management expects pandemic-related negative effects to continue in Q4 2020, particularly from lower product demand. It gave no numerical revenue or earnings guidance.
- Management said customer stockpiling earlier in the pandemic may have reduced Q3 orders and could further depress demand for the remainder of 2020. Delayed elective medical procedures and hospital capital purchases, and customer shutdowns in automotive and other markets, also weighed on demand.
- COVID-19 increased labor, maintenance and other operating costs and caused manufacturing inefficiencies; the company reported minimal raw-material supply disruption to date. It implemented safety measures and cost reductions, including employee terminations, whose effects were expected primarily from Q4 onward.
- Management expected cash, operating cash generation and available financing to fund requirements, including capital spending, for the next twelve months, while cautioning that future operating cash generation and pandemic effects are uncertain. It planned continued manufacturing-capacity investment and may pursue acquisitions.
- The company deferred approximately $1.0 million of employer Social Security taxes under the CARES Act. Management did not expect the Act to materially affect results or liquidity.
- A $20 million interest-rate swap remained outstanding with a $12.1 million notional amount, although its related term loan was repaid. Its negative fair value increased to $538,000 from $325,000 at year-end; nine-month swap fair-value expense was $362,000. LIBOR’s planned phaseout could require changes to credit and swap agreements and could affect borrowing costs or hedge effectiveness.
- The company reported compliance with credit-facility covenants at September 30. It warned that a future covenant breach could limit financing flexibility. Other risks include continued demand declines, customer payment difficulties, facility or employee disruption, and possible impairment or credit-loss charges. No material changes to previously disclosed contractual obligations were reported; management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether demand stabilized or continued to weaken after September 30, especially in medical, automotive and consumer markets, and whether customer inventory levels affected subsequent orders.
- Q4 and full-year effects of the announced cost reductions, including severance costs, labor availability and manufacturing efficiency.
- Current revolver borrowings and actual availability, covenant headroom, and the terms and timing of any LIBOR-related amendments to the credit facility and swap.
- Whether deferred payroll taxes, receivables, inventory and customer payment trends affected subsequent cash flow and liquidity.
- The filing’s reported nine-month figures: gross margin of 24.8%, operating cash flow of $16.7 million, and net income of $9.2 million; also assess the $298,000 fixed-asset disposal loss and $362,000 swap fair-value expense.