UFP Technologies, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
UFP Technologies designs and custom-converts foam, plastic, composite and natural-fiber products for medical, automotive, consumer, aerospace and defense, electronics, and industrial markets. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $37.1 million | $34.5 million; up 7.4% |
| Gross profit / margin | $9.5 million / 25.7% | $7.7 million / 22.4% |
| Operating income | $3.2 million | $1.7 million |
| Net income | $2.2 million | $1.1 million |
| Diluted earnings per share | $0.30 | $0.15 |
| Operating cash flow | $4.1 million provided | $2.5 million used |
| Capital expenditures | $1.5 million | $1.5 million |
Gross margin improved 3.3 percentage points. Management attributed lower material and labor costs as a share of sales to manufacturing efficiencies, price increases, and an improved business mix; overhead as a share of sales rose 0.8 percentage points, including higher indirect labor costs. SG&A increased 7% to $6.3 million, but declined slightly as a share of sales, to 17.0% from 17.1%. There were no restructuring costs in Q1 2017, versus $123,000 in Q1 2016.
At March 31, 2017, cash was $33.8 million, up from $31.4 million at year-end 2016. Current assets were $73.0 million and current liabilities $10.6 million. Total liabilities were $16.1 million and stockholders’ equity $115.4 million. The company had $0.6 million of term debt outstanding, due to mature in September 2017, and no borrowings on its $40 million revolving credit facility; approximately $0.4 million of letters of credit used the facility. The company reported compliance with all credit-facility covenants.
Operating cash generation included net income and a $1.5 million increase in accounts payable, partly offset by higher receivables, prepaid expenses and inventory and lower accrued expenses. Investing activities used $1.5 million, primarily for manufacturing equipment and facility expansion; financing activities used $0.3 million, primarily for debt repayments and equity-award withholding payments.
Material changes versus the prior period
- Sales growth was primarily driven by medical (+11.8%), automotive (+10.3%) and aerospace and defense (+18.2%). Industrial sales fell 10.3% and electronics sales fell 6.1%, primarily reflecting lower protective-packaging demand.
- Medical sales were $17.5 million, or 47.1% of revenue, compared with $15.6 million, or 45.3%, a year earlier. No customer represented more than 10% of quarterly revenue.
- Net income more than doubled, reflecting stronger sales, improved gross margin, the absence of prior-year restructuring costs, and a lower effective tax rate. The tax rate was 32.8%, versus 37.3%; the 2017 rate benefited from a $69,000 share-based compensation tax benefit, while Q1 2016 included a $40,000 tax assessment.
- Operating cash flow improved from a use of $2.5 million to a provision of $4.1 million. Cash rose to $33.8 million from $25.5 million at March 31, 2016.
Outlook, risks and notable items
The company gave no specific full-year revenue or earnings guidance. Management said it planned to add manufacturing capacity, further expand its Newburyport, Massachusetts facility, pursue organic growth and consider strategic acquisitions. It believed cash, operating cash generation and available borrowing capacity would fund requirements, including capital expenditures, through the next 12 months, while noting that future liquidity depends on operating performance.
The remaining portion of the Mercedes-Benz Southeast automotive door-panel program is expected to end in Q4 2017. Management estimated program sales of $2.3 million in 2017 and none in 2018. Forward-looking outcomes are subject to risks including customer demand, acquisition execution, facility consolidation efficiencies, transferred-equipment qualification, new production equipment implementation, and the ability to utilize expected capacity. The company also cautioned that share-based compensation tax benefits may cause effective tax-rate volatility.
The company adopted the share-based payment accounting update effective January 1, 2017 and elected to recognize forfeitures as they occur. It expects to adopt the revenue-recognition standard in Q1 2018 using the modified retrospective method; its initial assessment indicated point-in-time recognition for a significant portion of revenue, consistent with current practice. It was evaluating the effect of the new lease standard. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material change in risk factors from its 2016 Form 10-K.
Important facts for investors to verify
- Whether gross-margin gains and medical-market growth persist, and how much of Q1 sales growth reflects temporary customer shutdown or relocation comparisons in automotive.
- The expected timing and revenue impact of the Mercedes-Benz program’s Q4 2017 termination, including the estimated $2.3 million of 2017 sales and no 2018 sales.
- Capital-spending requirements, progress and returns from Newburyport expansion and added manufacturing capacity, and whether operating cash flow remains sufficient.
- Repayment of the $0.6 million term loan due in September 2017 and continued compliance with revolving-credit covenants; the facility matures November 30, 2018.
- Potential tax-rate variability from share-based compensation and the realizability of deferred tax assets, for which no valuation allowance was recorded at quarter-end.