UFP Technologies, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; filed November 9, 2011. The company designs and converts foam, plastic, and fiber products for markets including medical, automotive, aerospace and defense, consumer, and industrial. Its segments are Engineered Packaging and Component Products. Financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $30.8 million | $30.5 million | $95.8 million | $89.1 million |
| Gross profit | $8.5 million | $8.9 million | $27.3 million | $25.4 million |
| Gross margin | 27.6% | 29.2% | 28.5% | 28.5% |
| Operating income | $3.3 million | $3.8 million | $11.5 million | $9.9 million |
| Net income attributable to UFP Technologies | $2.4 million | $2.4 million | $7.3 million | $6.2 million |
| Diluted earnings per share | $0.35 | $0.35 | $1.05 | $0.92 |
For the nine months, sales grew 7.5% and management reported organic sales growth of 7.5%. Operating income rose 16%, helped by the property-sale gain. Q3 sales grew about 1%; excluding the prior-year door-panel program sales, management said Q3 revenue grew 7%. Q3 gross margin declined 1.6 percentage points, primarily due to Alabama closure and relocation costs and added engineering resources. Nine-month SG&A rose 7.3% to $16.6 million, while SG&A as a share of sales remained 17.4%.
Cash, liquidity, and debt
- Cash and cash equivalents were $30.7 million at September 30, 2011, up from $24.4 million at year-end 2010. Working capital increased to approximately $45.1 million from $38.3 million.
- Nine-month operating cash flow was $9.2 million, compared with $9.1 million in 2010. Investing activities used $1.4 million, including $2.6 million of capital expenditures partly offset by $1.2 million of sale proceeds. Financing activities used $1.6 million, including debt repayments and stock-related withholding payments.
- Reported current and long-term debt totaled approximately $6.4 million, down from $7.5 million at December 31, 2010. UDT’s approximately $620,000 mortgage debt was paid off. The company reported a 1.2% interest rate on its credit facilities and compliance with its fixed-charge coverage covenant.
- The $17 million revolving facility had approximately $16.7 million of availability at September 30, subject to collateral levels, and matures November 30, 2013. Term loans mature January 29, 2016. Management said cash, operations, and available financing should fund requirements through at least the end of 2012.
Business developments, outlook, and risks
- UFP sold UDT’s Alabama facility in January for approximately $1.25 million, recording an approximately $834,000 gain; about $428,000 of that gain related to noncontrolling interests. Sale proceeds and the gain contributed to reported cash flow and earnings.
- A substantial portion of a large automotive door-panel program ended June 30, 2011, following a vehicle redesign. The company continued supplying panels for other models. The phase-out weighed on Q3 automotive sales.
- Management expected approximately $100,000 of additional Alabama closure and relocation expense in Q4. It planned to research a next-generation molded-fiber line and, upon completion, invest in equipment aimed at bringing capacity online in 2012. No specific revenue or earnings guidance was provided.
- The effective tax rate declined, partly because approximately $385,000 of uncertain-tax-benefit reserves were reversed following a favorable IRS audit outcome and expiration of certain statutes of limitation.
- Management cited economic conditions affecting customers, customer order cancellations or delays, competition, customer acquisition, new-product execution, acquisition integration, and the automotive program phase-out among risks. It reported no material changes to the risk factors in its 2010 Form 10-K. Interest-rate exposure exists through LIBOR- or prime-based debt; management characterized market risk as minimal.
- One Component Products customer represented 8.3% of nine-month consolidated revenue. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How quickly the automotive door-panel phase-out is offset by other programs and markets, and whether management’s stated growth is sustained.
- Whether Q3 margin pressure and Alabama relocation costs abate as expected, and the timing and cost of the molded-fiber investment.
- How much of nine-month earnings growth reflects recurring operations versus the property-sale gain and tax-reserve reversal.
- Cash conversion, inventory growth and reserves, capital spending needs, and continued compliance with credit-facility covenants and borrowing availability.
- The filing’s segment note reports nine-month total segment operating income of $11,490,966, while the consolidated income statement reports $11,494,966; verify the difference against the original filing.