UFP Technologies, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The company designs and manufactures components, products, and packaging, primarily for medical customers, and reports as one operating segment. This unaudited filing covers the quarter and six months ended June 30, 2022. Growth comparisons reflect acquisitions completed since 2021, as well as organic growth.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $94.3 million | $50.7 million | $165.6 million | $99.3 million |
| Gross profit | $24.3 million | $13.4 million | $41.5 million | $26.0 million |
| Gross margin | 25.8% | 26.5% | 25.0% | 26.2% |
| Operating income | $12.2 million | $6.2 million | $18.6 million | $11.5 million |
| Net income | $8.9 million | $4.7 million | $13.8 million | $8.9 million |
| Diluted EPS | $1.17 | $0.62 | $1.81 | $1.17 |
Q2 sales rose 86.2%; six-month sales rose 66.8%. Management attributed medical-market growth to acquired businesses and organic growth: acquired-company sales were $34.6 million in Q2 and $52.6 million for the six-month period; organic sales growth was 17.9% and 13.9%, respectively. Q2 medical sales were 78.7% of total revenue.
Gross margin declined year over year in both periods. Management cited inflationary material and labor costs, partly offset by higher sales absorbing fixed overhead. SG&A increased in dollars with acquisitions but decreased as a share of sales: 12.8% in Q2 versus 14.3%, and 13.3% for the six months versus 14.6%.
Cash flow, liquidity, and debt
- Operating cash flow was negative $0.04 million for the first six months of 2022, compared with positive $9.9 million a year earlier. Management cited increased receivables and inventory, including acquisition-related balances and inventory built for demand.
- Investing cash outflow was $29.1 million, including $20.8 million for Advant and $8.5 million of capital expenditures. Financing cash inflow was $23.7 million.
- Cash was $5.6 million at June 30, 2022, down from $11.1 million at year-end 2021. Receivables were $57.9 million and inventory was $50.6 million, up from $39.4 million and $33.4 million, respectively.
- Total debt was $100 million ($62 million revolving credit facility and $38 million term loan); $4 million was current. The credit facility had a $130 million total commitment, including a $90 million revolver. The reported rate was approximately 3.4%, and the company was in covenant compliance at quarter-end.
- After quarter-end, the company reported repaying $38 million on the revolver using proceeds from the Georgetown facility sale and the molded fiber business sale. The filing does not give a subsequent revised debt balance.
Material changes, unusual items, and outlook
- Advant Medical was acquired in March 2022 for approximately $21.2 million in total consideration. The filing also reflects the earlier Contech Medical and DAS Medical acquisitions. Advant contributed approximately $6.8 million in revenue and $0.7 million in earnings after acquisition through June 30.
- Reported operating results included a $6.0 million expense from increased fair value of contingent consideration related to DAS and Contech, and a $6.2 million gain on sale of the Georgetown manufacturing facility. The contingent consideration liability for DAS and Contech was $15.7 million at June 30; payments are performance-dependent and could reach $25 million combined.
- On July 26, 2022, the company sold its molded fiber business and related Iowa real estate for approximately $32 million, subject to working-capital adjustment and escrow. The business had 2021 annual revenue of approximately $21.3 million.
- Management said it planned to add manufacturing capacity and may pursue further acquisitions. It believed existing resources, the revolver, and expected operating cash flow would cover requirements for the next 12 months, while cautioning that operating cash generation, covenant compliance, and access to future financing are not guaranteed. No quantified earnings or revenue guidance was provided.
- Risks highlighted include inflation and supply-chain challenges, customer demand and order variability, acquisition integration and financing, debt and covenant exposure, and the ability to meet contingent acquisition payments. One customer represented 20.2% of Q2 revenue and 17.8% of six-month revenue.
Most important facts for investors to verify
- How much reported growth and margin performance is attributable to acquisitions versus organic growth, and whether acquired operations are integrating as expected.
- Cash conversion and working-capital trends, particularly the sharp increases in receivables and inventory.
- Debt and interest costs after the $38 million post-quarter revolver repayment, including remaining borrowing capacity and covenant headroom.
- The final proceeds and working-capital adjustment for the molded fiber sale, and the operational and earnings effects of divestiture.
- The assumptions behind contingent-consideration valuations and potential future payments, and the effect of the $6.0 million remeasurement expense.
- Whether inflation, supply constraints, and customer concentration continue to pressure margins or demand.