UFP Technologies, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also reports fourth-quarter results. UFP designs and manufactures custom components and protective packaging from foam, plastics, composites, and fiber, serving medical, automotive, aerospace and defense, and packaging markets.
Key financial results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $139.2 million | $131.0 million |
| Gross profit; gross margin | $40.6 million; 29.2% | $38.2 million; 29.2% |
| Operating income; operating margin | $17.4 million; 12.5% | $16.7 million; 12.8% |
| Net income attributable to UFP | $11.3 million | $10.9 million |
| Diluted earnings per share | $1.59 | $1.55 |
| Operating cash flow | $16.1 million | $16.2 million |
| Cash and cash equivalents at year-end | $37.3 million | $33.5 million |
| Working capital at year-end | $56.5 million | $51.3 million |
| Long-term debt, including current portion | $3.8 million | $9.9 million |
FY 2013 investing cash outflow was $6.4 million, including $5.8 million of capital expenditures and a $0.6 million PAC acquisition holdback payment. Financing cash outflow was $5.9 million, primarily reflecting debt repayment and stock-related tax withholding. UFP had no borrowings outstanding on its $40 million revolving facility at year-end; the remaining debt was principally equipment financing.
Fourth-quarter 2013 sales were $35.0 million versus $33.4 million in Q4 2012; gross profit was $10.9 million versus $10.1 million; net income was $3.4 million versus $3.2 million; and diluted EPS was $0.47 versus $0.45.
Changes versus the prior year
- Annual sales rose 6.3%, while operating income rose 4.4% and net income rose 3.5%. Gross margin was unchanged, but operating margin declined from 12.8% to 12.5% as SG&A grew faster than sales.
- Organic sales, excluding acquired PAC sales, declined 1.5%. Management attributed this mainly to a 28% decline in military-market sales associated with government defense spending cuts, partly offset by medical-market and molded-fiber growth.
- Component Products sales increased 5.7% to $93.2 million, but segment operating income fell 13.4% to $11.8 million, chiefly due to lower high-margin military sales.
- Packaging sales increased 7.6% to $46.0 million; operating income rose 83.1% to $5.6 million, supported by 21.3% growth in molded-fiber packaging.
- PAC contributed $10.3 million of 2013 sales and $0.4 million of operating income. The acquisition was completed at the end of 2012, so its sales contributed to the year-over-year increase.
- Cash increased by $3.8 million and total debt declined, following repayment of approximately $5.1 million outstanding under the prior credit facility. Capital spending was lower than in 2012.
Outlook, risks, and unusual items
- No specific sales or earnings guidance was provided. Management expects operating cash flow, subject to stated risks, to be sufficient for expected operations over the next 12 months and describes growth as a combination of organic expansion and strategic acquisitions.
- In January 2014, UFP committed to close its Glendale Heights, Illinois plant and consolidate operations in Grand Rapids, Michigan. It expects approximately $1.15 million in one-time expenses, about $300,000 in building improvements, total cash charges of approximately $1.45 million, and annual savings of approximately $750,000. These are estimates, not reported FY 2013 results.
- The revolving facility matures in November 2018 and has fixed-charge coverage and funded-debt-to-EBITDA covenants. UFP reported compliance at year-end. Interest rates on potential revolver borrowings are variable.
- Key risks include customer concentration (top ten customers represented 27.6% of revenue), reliance on a limited number of cross-linked foam suppliers, raw-material and energy-cost volatility, cyclical and defense-market demand, competition, product defects and liability, and customer manufacturing moving offshore. ERP implementation, acquisition integration, and achieving consolidation savings also warrant attention.
- Management said ordinary-course administrative proceedings were not expected to have a material adverse effect. The filing reports no material off-balance-sheet arrangements other than operating leases. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
- UFP paid no dividends in 2012 or 2013 and said it intends to retain earnings for operations and strategic acquisitions.
Investor verification points
- Confirm whether molded-fiber growth and medical-market demand can offset ongoing weakness in military sales, and assess organic results separately from PAC contributions.
- Track Component Products profitability versus Packaging improvement, and monitor margins, SG&A, depreciation, and capital intensity.
- Verify that the Illinois-to-Michigan consolidation stays within estimated costs and delivers the expected annual savings and timing.
- Review cash conversion, inventory growth, capital spending, equipment-loan repayments, and compliance with credit-facility covenants.
- Assess customer and supplier concentration, especially the Packaging segment’s largest customer and limited sources of certain technical foams.