UFP Technologies, Inc. — FY2017 Form 10-K
Business context and reporting period. UFP designs and custom-converts foam, plastics, composites and natural-fiber materials for medical, automotive, consumer, electronics, industrial, and aerospace and defense customers. This annual report covers the fiscal year ended December 31, 2017; the company reports one operating and reportable segment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $147.8 million | $146.1 million |
| Gross profit / gross margin | $35.5 million / 24.0% | $34.7 million / 23.7% |
| Operating income / margin | $11.7 million / 8.0% | $12.2 million / 8.3% |
| Net income | $9.2 million | $8.0 million |
| Diluted earnings per share | $1.26 | $1.10 |
| Cash from operations | $17.5 million | $9.3 million |
| Capital expenditures | $10.4 million | $7.2 million |
| Cash and cash equivalents at year-end | $38.0 million | $31.4 million |
| Working capital at year-end | $65.1 million | $60.3 million |
| Debt at year-end | $0 | $0.9 million |
FY2017 sales increased 1.2%, while net income rose 15.6% and diluted EPS rose 14.5%. Gross margin improved modestly, reflecting lower material and direct-labor costs from manufacturing-efficiency initiatives, partly offset by higher overhead. Operating income declined 4.4%, in part because the 2016 period included a larger material-overcharge settlement gain. The effective tax rate fell to 22.3% from 35.3%; the FY2017 result included a provisional $1.5 million tax benefit related to the Tax Cuts and Jobs Act and a benefit from adopting share-based-payment guidance.
Cash from operations increased substantially, aided by earnings, depreciation and amortization, and reductions in inventory and prepaid expenses. Investing cash outflow was $10.4 million, including $4.7 million for the Newburyport facility expansion. At year-end the company had no borrowings under its $40 million revolving facility and reported compliance with its covenants. Its balance sheet reported $14.5 million in total liabilities and $123.7 million in stockholders’ equity.
Material changes and unusual items
- Medical sales increased 8.1%, aerospace and defense 5.2%, and consumer 4.4%; automotive sales fell 15.1% and industrial sales fell 7.4%. Medical represented 47.3% of FY2017 sales.
- The phase-out of the Mercedes-Benz door-panel program contributed to weaker automotive sales. Program sales were approximately $3.0 million in 2017; the program was expected to end in the first quarter of 2018.
- The company recorded $63,000 of restructuring costs in 2017, down from $420,000 in 2016. Massachusetts facility consolidations were substantially completed, with the partial Georgetown relocation completed in June 2017.
- A polyurethane-foam antitrust settlement generated a $121,000 gain in 2017, compared with a $2.1 million gain in 2016.
- Fourth-quarter 2017 sales were $37.2 million, gross profit $7.8 million, net income $2.7 million, and diluted EPS $0.37. In fourth-quarter 2016, those amounts were $36.5 million, $8.2 million, $1.5 million, and $0.20, respectively.
Outlook, transactions and risks
Management planned to add manufacturing capacity in 2018, pursue organic growth and consider complementary acquisitions. It stated that cash from operations and available financing were expected to fund requirements, including capital expenditures, for the next twelve months, while cautioning that future operating cash generation is not assured. No specific earnings or revenue guidance was provided.
On February 1, 2018, after the reporting period, UFP acquired Dielectrics, a medical-device designer and manufacturer, for $80 million in cash and expected approximately $1.1 million of transaction costs in the first quarter of 2018. A new unsecured credit agreement provides a $50 million revolving facility and a $20 million term loan, maturing February 1, 2023. As of March 16, 2018, borrowings were approximately $56 million. A five-year $20 million interest-rate swap fixes the term-loan rate at 2.7% plus the applicable margin.
Other notable risks include dependence on a limited number of customers and specialized foam suppliers, cyclical demand, raw-material and energy-cost fluctuations, product defects and regulatory compliance, and execution risks from facility closures, part requalification, new equipment and acquisition integration. The Atlanta-area facility was expected to close when its lease expired in April 2018. The company also cautioned that its Tax Act accounting was provisional and could change with further guidance. Management and the auditor reported effective internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Dielectrics integration, acquisition synergies and the resulting leverage develop as planned; monitor debt, covenant headroom and interest costs.
- Whether the medical-market growth offsets the Mercedes-Benz program wind-down and other automotive weakness, including customer requalification and the Atlanta facility closure.
- Whether manufacturing-efficiency improvements persist and translate into stronger operating margins, given FY2017 operating income declined despite higher sales.
- How final tax guidance changes the provisional $1.5 million Tax Act benefit and the company’s effective tax rate.
- Whether backlog growth is realized as revenue: reported backlog was $46.9 million at February 23, 2018, included Dielectrics, and included orders that may be canceled or rescheduled.