UFP Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Comparisons are against Q1 2020 unless otherwise noted. UFP Technologies designs and manufactures engineered components, subassemblies, products and packaging, primarily for medical customers, and reports one operating segment.
Key financial results
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $48.599 million | $48.277 million; up 0.7% |
| Gross profit / margin | $12.609 million / 25.9% | $12.823 million / 26.6% |
| Operating income / margin | $5.300 million / 10.9% | $5.075 million / 10.5%; income up 4.4% |
| Net income | $4.163 million | $3.891 million; up 7.0% |
| Diluted earnings per share | $0.55 | $0.52 |
| Net cash from operations | $3.334 million | $4.742 million |
| Capital expenditures | $1.449 million | $1.020 million |
| Cash and cash equivalents | $25.377 million at March 31 | $24.234 million at December 31, 2020 |
| Total assets / stockholders’ equity | $209.180 million / $180.819 million | $203.204 million / $176.893 million at December 31, 2020 |
| Debt and available credit | No borrowings outstanding; $50 million unsecured revolving facility | $0.7 million in standby letters of credit outstanding |
Changes and operating drivers
- Sales growth was modest overall, with Aerospace & Defense sales up 68.2% and Consumer sales up 62.1%; Medical sales fell 11.5%. Medical represented 61.4% of revenue, down from 69.9% a year earlier.
- Gross margin declined 0.7 percentage points. Management cited higher overhead, including shipping supplies and outbound freight, and an unfavorable mix; manufacturing efficiencies and lower direct labor partly offset these factors.
- SG&A fell 5.7% to $7.309 million, primarily from labor reductions and lower travel and entertainment costs. SG&A was 15.0% of sales versus 16.1%.
- Operating cash flow was lower, with increased receivables ($3.590 million) and inventory ($1.374 million) among the uses of cash. Management attributed receivables growth to higher sales late in the quarter and inventory growth to restocking.
- The effective tax rate rose to 21.4% from 17.8%, largely because 2020 benefited from anticipated research-related tax credits.
Liquidity, outlook and risks
- Management said cash, expected operating cash generation and the credit facility should fund requirements, including capital expenditures, for at least the next 12 months. The company plans to add manufacturing capacity and may pursue complementary acquisitions; no specific earnings or revenue guidance was provided.
- The credit agreement maturity was extended to December 31, 2025. The company reported compliance with its financial covenants and no amounts drawn at quarter-end. The facility includes a $20 million term loan and $50 million revolver; the term loan had been repaid. A related interest-rate swap had a $10.7 million notional amount and a negative fair value of $0.385 million.
- COVID-19 continued to create uncertainty. Management cited weaker demand in medical and automotive markets, labor and manufacturing inefficiencies, higher costs, and potential effects on customers, suppliers, employees, orders and liquidity. The company continued safety measures and cost controls.
- The company deferred approximately $1.6 million of Social Security payroll taxes under the CARES Act; half is due by December 31, 2021 and the remainder by December 31, 2022.
- Other income of $10,000 in Q1 2021 contrasted with other expense of $327,000 in Q1 2020, primarily reflecting changes in the interest-rate swap’s fair value and settlements. Management stated ordinary-course legal matters were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors or market risks.
Important facts for investors to verify
- Whether medical demand and other market trends recover, and whether growth in Consumer and Aerospace & Defense offsets medical softness.
- Whether margin pressure from overhead, shipping and product mix persists, and whether planned capacity investments improve efficiency.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside capital spending needs.
- COVID-19 effects on operating costs, customer orders and supply chains, as well as payment timing for deferred payroll taxes.
- Credit-facility covenant headroom, LIBOR transition arrangements and the future accounting and cash effects of the interest-rate swap.