UFP Technologies, Inc. — Q2 2015 Form 10-Q
Business and period: UFP designs and converts foam, plastic, composite, and natural-fiber products for medical, automotive, industrial, consumer, aerospace and defense, and electronics markets. This unaudited report covers the quarter and six months ended June 30, 2015; the company reports one operating segment.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $36.5m | $34.0m | $70.5m | $68.6m |
| Gross profit / margin | $10.3m / 28.2% | $9.5m / 28.1% | $18.9m / 26.9% | $18.7m / 27.3% |
| Operating income | $3.5m | $2.8m | $6.1m | $6.0m |
| Net income | $2.3m | $1.9m | $3.9m | $3.9m |
| Diluted EPS | $0.32 | $0.26 | $0.55 | $0.55 |
| Operating cash flow | Not separately presented | Not separately presented | $5.7m | $1.9m |
All figures are in U.S. dollars; income-statement and cash-flow values are rounded. Six-month operating cash flow benefited from a $2.9m reduction in refundable income taxes and was partly offset by a $3.0m increase in receivables. Investing cash outflow was $10.4m, including $10.5m of property and equipment additions, primarily manufacturing equipment and the new Massachusetts manufacturing/headquarters building. Financing cash outflow was $0.1m. Cash fell $4.9m to $29.2m from year-end.
At June 30, total assets were $118.3m, current assets $64.8m, and current liabilities $11.6m. Total debt was approximately $2.4m, including $1.0m current and $1.4m long-term. The company had no borrowings on its unsecured $40m revolving facility and was in covenant compliance. Stockholders’ equity was $99.9m.
Changes and operating trends
- Quarterly sales increased 7.3%; first-half sales increased 2.7%. Medical, aerospace and defense, and automotive growth more than offset softness in electronics and consumer products. Medical represented about 41% of first-half sales.
- Quarterly gross margin edged up to 28.2%, while first-half margin declined to 26.9%. Management attributed cost pressure partly to lower sales of lower-material-content molded-fiber packaging; Q2 also included a roughly $75,000 obsolete-inventory write-off.
- SG&A rose 3.7% for the quarter and 3.0% for the first half, but its share of sales declined in Q2 and edged higher for the first half. Restructuring expense was lower year over year: $30,000 for Q2 and $108,000 for the first half.
Outlook, risks and unusual items
- The company expects to complete the Raritan, New Jersey plant closure and consolidation by October 31, 2015. It estimates approximately $1.1m in one-time expense, about $1.0m of which is cash, and approximately $400,000 in annual savings. Management expected significant related costs in Q3 and Q4.
- Management planned continued capacity investments during 2015 and may pursue complementary acquisitions. It stated existing resources, the credit facility, and expected operating cash flows should fund needs through the next 12 months, while cautioning that future operating cash generation is not assured. No specific revenue or earnings guidance was provided.
- Risks highlighted include execution, timing, cost, and utilization of new equipment; realizing consolidation savings; acquisition identification and integration; and uncertainty in future taxable income that could affect realization of deferred tax assets. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
- The board authorized up to $10m of share repurchases. None had occurred by June 30; 29,599 shares had been repurchased by August 5, 2015. The filing reported no material change in contractual obligations and no off-balance-sheet arrangements other than operating leases.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether the Raritan consolidation finishes on schedule and within its estimated costs, and whether projected annual savings materialize.
- Assess whether sales momentum in medical, automotive, and aerospace and defense continues to offset weakness in electronics and consumer markets, and monitor gross-margin recovery.
- Review cash conversion and working-capital movements, particularly receivables, prepaid expenses, and accrued liabilities, alongside the elevated capital spending.
- Confirm use of the repurchase authorization and its effect on liquidity and share count; assess covenant headroom and debt repayment requirements.
- Monitor deferred-tax-asset realizability and any developments affecting the company’s stated outlook or risk assumptions.