UFP Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. UFP designs and manufactures custom components, subassemblies, products, and packaging, primarily for medical customers, and reports one operating segment.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $49.4 | $47.8 | $148.1 | $139.8 |
| Gross profit | $13.3 | $12.4 | $40.2 | $35.6 |
| Gross margin | 27.0% | 26.0% | 27.1% | 25.5% |
| Operating income | $6.1 | $5.9 | $18.0 | $14.1 |
| Net income | $5.6 | $4.1 | $14.0 | $9.9 |
| Diluted EPS | $0.75 | $0.56 | $1.87 | $1.34 |
- Q3 sales rose 3.3%; nine-month sales rose 6.0%. Nine-month operating income increased 27.2% and net income 41.1% year over year.
- For the nine months, SG&A was $22.2 million, or 15.0% of sales, versus $20.6 million, or 14.7%, in 2018. The increase reflected an additional month of Dielectrics operations, compensation increases, and strategic plant-management hires.
- Effective tax rates were 5.2% for Q3 and 17.4% for the nine months, compared with 26.5% and 25.4%, respectively, a year earlier. Management attributed the decline largely to research-related federal and state business tax credits and said it anticipated qualifying for higher-than-historical credits in 2019.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was $22.4 million, versus $13.5 million in 2018. Capital expenditures were $4.4 million; investing cash outflow was $4.4 million. Financing cash outflow was $9.9 million, primarily debt repayments.
- Cash was $11.4 million at September 30, 2019, compared with $3.2 million at December 31, 2018. Current assets were $64.1 million and current liabilities $21.4 million.
- Total debt was $15.0 million at September 30, 2019, down from $25.1 million at year-end 2018; no revolving-facility borrowings were outstanding. The $50 million revolving facility matures in February 2023. The company reported covenant compliance and a roughly 3.0% applicable interest rate.
- After quarter-end, UFP elected to prepay $8.0 million of its term loan. The filing does not state the resulting post-prepayment debt balance.
- The company adopted ASC 842 leases in January 2019, recording operating lease right-of-use assets and liabilities. At September 30, lease liabilities totaled $3.3 million; adoption did not materially affect income or cash flows.
Business trends, outlook, and risks
- Medical sales were the principal growth driver: up 16.5% in Q3 and 16.3% for nine months. Management cited Dielectrics and stronger demand from legacy medical customers; the nine-month comparison also includes one additional month of Dielectrics sales.
- Automotive sales increased in both periods, attributed to demand for new products. Nine-month aerospace and defense sales rose 16.0%, with management citing increased government spending; Q3 sales in that market declined 15.0%, primarily due to order timing.
- Consumer, electronics, and industrial sales collectively declined, attributed primarily to weaker demand for molded-fiber packaging. Medical accounted for 63.6% of nine-month sales, up from 57.9%.
- Management cited continuous-improvement initiatives, a better business mix, fixed-cost leverage, and targeted cost reductions as contributors to higher gross margins. Its strategy includes organic growth, capacity additions, and potential strategic acquisitions. It expected cash, operations, credit facilities, and potential equipment financing to fund requirements through the next 12 months, but cautioned that future operating cash generation is not assured. No specific revenue or earnings guidance was provided.
- Risks highlighted include Dielectrics integration, manufacturing inefficiencies and the ability to sustain margins and efficiencies, acquisition execution, and debt and covenant compliance. Management reported no material changes to previously disclosed risk factors. A $20 million interest-rate swap hedged variable-rate debt; its fair value was a $397,000 liability at quarter-end, with fair-value changes recorded in other expense or income.
- UFP reported $0.7 million of standby letters of credit for workers’ compensation insurance. It had $9.4 million remaining under its $10 million share-repurchase authorization; no shares were repurchased during the nine-month period.
Important facts for investors to verify
- Whether medical-market growth and the higher medical share of sales are sustainable, and how much growth reflects Dielectrics versus legacy operations.
- Whether weaker consumer, electronics, and industrial demand, particularly molded-fiber packaging, persists.
- The durability of gross-margin improvement and the effect of higher SG&A on operating leverage.
- The extent to which 2019 earnings benefited from tax credits and the potential volatility of the effective tax rate.
- The post-quarter $8.0 million term-loan prepayment, remaining debt, revolver availability, and compliance with credit covenants.