UFP Technologies, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 8, 2013. UFP Technologies designs and manufactures products using foams, plastics, composites, and natural fibers, primarily for medical, automotive, aerospace and defense, and packaging markets. Results are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $35.83 million | $33.67 million | $69.53 million | $65.62 million |
| Gross profit | $10.72 million | $9.69 million | $19.62 million | $18.89 million |
| Gross margin | 29.9% | 28.8% | 28.2% | 28.8% |
| Operating income | $4.63 million | $4.31 million | $7.59 million | $7.99 million |
| Net income | $2.98 million | $2.75 million | $5.01 million | $5.10 million |
| Diluted EPS | $0.42 | $0.39 | $0.71 | $0.72 |
Q2 sales increased 6.4% and net income increased 8.6% year over year; six-month sales increased 5.9%, while operating income declined 5.1% and net income declined 1.6%. SG&A rose 12.7% in Q2 and 10.2% year to date, largely reflecting PAC acquisition costs. Net interest expense was $45,000 in Q2 and $85,000 year to date.
Cash flow: Six-month operating cash flow was $5.08 million, versus $5.91 million in 2012. Capital expenditures were $3.54 million, compared with $5.03 million; investing cash outflow totaled $3.74 million, including a $200,000 PAC holdback payment. Financing cash outflow was $544,000. Cash increased $792,000 to $34.27 million.
Balance sheet and liquidity: At June 30, cash was $34.27 million, working capital approximately $54.8 million, and total assets $101.92 million. Total reported debt was approximately $9.67 million ($1.55 million current and $8.13 million long term). The company had no revolving borrowings and reported about $16.9 million available under its $17 million revolver, subject to collateral levels. The Bank of America facility’s revolver matures November 30, 2013; management expected to negotiate an extension but could not assure favorable or timely completion. The company was in compliance with its fixed-charge coverage covenant.
Material changes and business drivers
- PAC, acquired December 31, 2012 for $5.7 million, contributed $2.67 million of Q2 sales and $5.35 million for the first half, with operating income of $145,000 and $212,000, respectively.
- Excluding PAC, sales declined 1.5% in Q2 and 2.2% for the first half. Management attributed the organic decline mainly to reduced military/aerospace and defense demand amid government spending cuts. Medical sales were strong; molded-fiber packaging also grew.
- For the first half, Component Products sales rose to $47.66 million, but segment operating income fell to $5.96 million from $6.99 million. Excluding PAC, Component Products sales declined about 6.8%. Engineered Packaging sales rose to $21.87 million and operating income increased to $1.63 million from $1.01 million, supported by molded-fiber demand and plant efficiencies.
- Q2 gross margin improved on favorable business mix; first-half margin declined as lower organic sales increased overhead as a percentage of sales. The first half included approximately $150,000 in one-time costs integrating PAC and absorbing the El Paso beauty business.
Outlook, risks, and unusual items
Management gave no specific quantitative earnings or revenue guidance. It planned continued capacity additions and may pursue complementary acquisitions; management believed cash, operations, and available financing would fund requirements, including capital spending, for the next 12 months. The company considers the PAC acquisition and Ventura, California plant closure and manufacturing consolidation strategic investments expected to benefit future periods.
The six-month effective tax rate was 33.2%, versus 36.0% a year earlier, including a $135,000 first-quarter tax benefit from retroactive 2012 R&D credits; excluding that item, the rate was 35%. Key stated risks include weak customer demand and defense spending, customer order delays or cancellations, competition, acquisition integration, equipment implementation and utilization, plant consolidation execution, and interest-rate changes. The company reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic sales stabilize, particularly in military, aerospace and defense, and automotive markets, and whether medical and molded-fiber growth continues.
- Renewal terms and timing for the revolver maturing November 30, 2013, and ongoing covenant compliance.
- Whether PAC integration, Ventura consolidation, and capacity investments deliver expected efficiencies and returns.
- How working-capital requirements, capital expenditures, and operating cash flow develop; inventory and receivables increased during the first half.
- The extent to which the $135,000 discrete tax benefit affected reported year-to-date earnings and the effective tax rate.