UFP Technologies, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing also presents unaudited quarterly results, including Q4 2021. UFP designs and manufactures specialty foam, film, plastic and molded-fiber products, primarily for medical customers, and reports one operating segment.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $206.3 million | $179.4 million | +15.0% |
| Gross profit / margin | $51.1 million / 24.8% | $44.7 million / 24.9% | Margin down 0.1 percentage point |
| Operating income / margin | $21.2 million / 10.3% | $16.7 million / 9.3% | +26.8% |
| Net income | $15.9 million | $13.4 million | +18.8% |
| Diluted EPS | $2.09 | $1.77 | +18.1% |
| Cash from operations | $14.3 million | $25.0 million | Down $10.7 million |
- Gross margin was pressured by higher material and labor costs, inflation and staffing challenges; lower overhead as a share of sales partly offset these effects. SG&A rose 7.2% to $29.5 million but declined to 14.3% of sales from 15.3%.
- Q4 2021 sales were $56.3 million versus $45.2 million in Q4 2020; net income was $3.2 million versus $4.2 million, and diluted EPS was $0.42 versus $0.55. Q4 gross profit was $13.1 million versus $11.4 million.
- At year-end, cash was $11.1 million, current assets $87.3 million and current liabilities $34.7 million. Receivables were $39.4 million and inventory $33.4 million.
- Year-end debt was $75.0 million: $35.0 million drawn on the revolving facility and $40.0 million in term debt. The secured credit agreement provides a $90 million revolver and $40 million term loan, maturing in December 2026; approximately $0.7 million of letters of credit was also outstanding. The stated rate was approximately 1.58%, variable, and the company reported covenant compliance.
- Investing cash outflow was $101.5 million, including acquisitions and $5.4 million of property and equipment additions. Financing provided $74.0 million. Operating cash flow was reduced by increases in receivables and inventory.
Material changes and transactions
- Medical sales were $132.5 million, or 64.2% of total revenue. Sales increased across all reported markets; medical grew 10.2%, including $5.9 million from the fourth-quarter acquisitions, while organic medical sales increased 5.3%.
- UFP acquired Contech Medical on October 12, 2021, and DAS Medical on December 22, 2021. Reported post-acquisition revenue was $4.5 million and $1.4 million, respectively. Preliminary purchase accounting recorded substantial goodwill and intangible assets; goodwill rose to $107.9 million from $51.8 million.
- Acquisition consideration includes performance-based earn-outs of up to $25 million in aggregate. DAS-related noncompetition arrangements involve $10 million of payments over ten years; their recorded present value was $8.9 million. The company recognized $9.7 million of contingent consideration liabilities at year-end.
- Unaudited pro forma results, as if both acquisitions had occurred at the start of each year, show 2021 sales of $269.9 million and net income of $20.3 million; these figures are illustrative and are not reported GAAP results.
Outlook, risks and other notable items
- Management planned to add manufacturing capacity and pursue efficiency improvements in 2022, while continuing to consider complementary acquisitions. It stated that cash from operations and available credit were expected to cover requirements, including capital expenditures, for the next 12 months. No specific revenue or earnings guidance was provided.
- COVID-19 continued to disrupt raw-material availability and increase material, labor, maintenance and safety costs. Management said the future impact remained uncertain.
- Key risks include dependence on a limited number of customers (top ten accounted for 34.1% of 2021 revenue), supplier concentration for certain specialty foams, raw-material and energy price volatility, labor availability, cyclical end markets, product-quality and liability exposure, acquisition integration and valuation, and variable-rate debt and covenant restrictions.
- The effective tax rate rose to 25.1% from 17.9%, primarily reflecting fewer discrete tax benefits. The company deferred $1.6 million of payroll taxes under the CARES Act; about $0.9 million remained payable by December 31, 2022.
- Management and the auditor reported effective internal control over financial reporting, but the assessment excluded Contech and DAS, which were acquired late in 2021. The auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified acquisition-date valuation of acquired intangibles and contingent consideration as a critical audit matter. One employee claim was pending; management did not expect a material adverse outcome.
Important facts for investors to verify
- Whether recent acquisitions meet earn-out targets and deliver expected growth, margins and integration benefits; review final purchase-price allocations and valuation assumptions.
- How much of future sales growth is organic, and whether medical-market and customer concentration create material exposure.
- Whether margin performance can withstand ongoing input-cost, wage and supply-chain pressure, and whether increased inventory converts to sales and cash.
- Debt availability, variable-rate exposure, quarterly term-loan amortization and continued compliance with financial covenants.
- Q4 earnings and EPS declined year over year despite higher sales; verify the causes and whether the trend continued after year-end.