UFP Technologies, Inc. — Q1 2013 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. UFP designs and manufactures products using foams, plastics, composites and natural-fiber materials, serving medical, automotive, aerospace and defense, and packaging markets. Its segments are Engineered Packaging and Component Products.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $33.70 million | $31.95 million | +5.5% |
| Gross profit / margin | $8.90 million / 26.4% | $9.20 million / 28.8% | Profit down 3.3%; margin down 2.4 points |
| Operating income / margin | $2.96 million / 8.8% | $3.69 million / 11.5% | Down 19.8% |
| Net income | $2.03 million | $2.35 million | Down 13.5% |
| Diluted EPS | $0.29 | $0.33 | Down $0.04 |
| Operating cash flow | $0.11 million | $1.66 million | Down $1.54 million |
Cash and cash equivalents were $31.94 million at March 31, down from $33.48 million at year-end 2012. Working capital was approximately $53.0 million. Current and long-term debt totaled approximately $10.06 million; the company also reported no revolving-credit borrowings and approximately $16.9 million of availability, subject to collateral levels. Investing activities used $1.45 million, primarily for capital expenditures; financing activities used $0.20 million. Capital expenditures were $1.25 million.
Changes and operating drivers
- Sales included $2.68 million from PAC, acquired on December 31, 2012. Excluding PAC, sales declined 2.9%.
- Medical-market sales increased approximately $3.4 million, largely reflecting PAC. Automotive sales declined about $1.1 million; aerospace and defense sales declined about $525,000.
- Automotive sales began slowly amid temporary customer plant shutdowns; management also cited expected softness in aerospace and defense related to government spending cuts. Strong medical sales partly offset those pressures.
- Gross margin fell primarily because PAC products had higher material costs (about 1.4 percentage points of sales) and lower sales excluding PAC reduced absorption of fixed overhead (about 1.0 point).
- SG&A increased 7.7% to $5.95 million, primarily reflecting approximately $500,000 of PAC expenses. Management cited approximately $150,000 of one-time costs integrating PAC and absorbing the El Paso beauty business.
- Engineered Packaging sales were $10.87 million and operating income $0.19 million; Component Products sales were $22.83 million and operating income $2.76 million. Segment operating income declined year over year in both segments.
Liquidity, outlook and risks
Management said it expects existing resources, operating cash generation, the revolving facility and potential equipment financing or additional bank borrowings to fund requirements, including capital spending, over the next 12 months. It planned to continue adding manufacturing capacity and may pursue complementary acquisitions. Management characterized PAC and the Ventura plant closure and business consolidation as strategic investments expected to benefit future periods; no quantified earnings or revenue guidance was provided.
The $17 million revolving facility matures November 30, 2013, and management anticipated negotiating an extension but cautioned that it might not be completed timely or on favorable terms. The company was in compliance with its minimum fixed-charge-coverage covenant at quarter-end. A $4.6 million equipment loan for molded-fiber machines carries a fixed 1.83% rate. Interest-rate exposure exists on debt tied to LIBOR or prime; management considered market risk minimal. The filing reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Other notable items
- The effective tax rate was approximately 30.4%, versus 36% a year earlier. A retroactive research and development credit reduced Q1 2013 tax expense by $135,000; excluding it, the rate was approximately 35%.
- Operating cash flow was limited in part by a roughly $2.2 million reduction in accrued expenses, including payment of year-end bonuses, profit sharing and certain taxes, along with increases in inventory and receivables.
- Contractual obligations totaled approximately $17.71 million, including debt, operating leases, debt interest and supplemental retirement obligations. The filing reported no off-balance-sheet arrangements other than operating leases.
Investor verification points
- Assess whether PAC and the Ventura consolidation deliver the expected benefits, and whether PAC’s higher material costs can be managed.
- Track organic sales trends by end market, particularly automotive and aerospace and defense, and distinguish them from acquisition-driven growth.
- Review gross-margin recovery, integration costs and cash conversion, including working-capital movements and accrued-expense payments.
- Verify renewal terms and availability of the revolving facility before its November 2013 maturity, and monitor covenant compliance and debt service.
- Consider that the reported tax rate and earnings benefited from a $135,000 discrete tax credit; management provided no specific forward financial targets.