UFP Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The interim financial statements are unaudited. UFP Technologies designs and manufactures custom components, products, and packaging, primarily for medical customers, and reports one operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $50.7 million | $43.3 million | $150.0 million | $134.2 million |
| Gross profit | $12.0 million | $10.5 million | $38.0 million | $33.3 million |
| Gross margin | 23.7% | 24.3% | 25.4% | 24.8% |
| Operating income | $5.1 million | $3.7 million | $16.6 million | $11.8 million |
| Net income | $3.8 million | $3.0 million | $12.7 million | $9.2 million |
| Diluted earnings per share | $0.50 | $0.40 | $1.67 | $1.22 |
- Q3 sales rose 17.1% year over year; nine-month sales rose 11.7%. Nine-month operating income increased 40.6% and net income increased 37.7%.
- For the first nine months, operating cash flow was $13.7 million, versus $16.7 million in 2020. Capital expenditures were $4.3 million, and cash increased by $8.9 million to $33.1 million.
- At September 30, current assets were $91.1 million and current liabilities were $18.8 million. Total assets were $220.7 million, total liabilities $29.9 million, and stockholders’ equity $190.8 million.
- No borrowings were outstanding on the credit facilities. The company had an unsecured $50 million revolving facility, in addition to a $20 million term-loan facility; it reported compliance with financial covenants. Standby letters of credit totaled $0.7 million. The credit agreement matures December 31, 2025.
Material changes and management commentary
- Q3 sales increased across medical, consumer, electronics, industrial, and aerospace and defense markets, partly offset by a 13.9% decline in automotive sales, which management attributed to supply-chain and delivery constraints. Medical represented 63.8% of Q3 sales.
- Nine-month gross margin improved, but Q3 margin declined year over year. Management cited inflation in materials and supplies, wage increases, and staffing challenges; the company was seeking to pass these costs on to customers. Higher sales helped reduce SG&A as a percentage of revenue.
- Receivables increased $6.0 million and inventory increased $3.0 million during the nine-month period, weighing on operating cash flow. Management attributed the receivables increase to higher sales late in Q3 and the inventory increase to restocking.
- On October 12, 2021, after quarter-end, the company acquired Contech Medical for $9.5 million cash, with up to $5 million additional consideration tied to EBITDA targets. Q3 included $154,000 of acquisition-related costs.
- The company entered a guaranteed lease for approximately 83,256 square feet of manufacturing, storage, and office space in Tijuana. The initial term is approximately 122 months, with base rent starting at about $45,939 per month, plus its share of property and operating expenses.
Outlook, risks, and unusual items
- Management expected existing resources, operating cash generation, and revolving-credit availability to fund requirements, including capital spending, for the next 12 months. It planned to add manufacturing capacity and continued to consider acquisitions; no specific revenue or earnings guidance was provided.
- Management said COVID-19 conditions appeared to be improving but remained uncertain. Risks included supply-chain delays and costs, labor shortages and wage pressure, and delayed medical procedures, physician visits, and hospital capital purchases.
- Other stated risks include successful execution and integration of acquisitions, manufacturing-efficiency initiatives, customer demand, and access to financing and covenant compliance. Management noted possible effective-tax-rate volatility from share-based compensation tax benefits.
- The interest-rate swap remained outstanding despite repayment of the term loan it was intended to hedge. Its September 30 fair value was a $261,000 liability; the company may cancel it before maturity.
- The company reported no material changes to its previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether raw-material, labor, and supply-chain cost pressures ease and whether customer price increases protect gross margins.
- Whether increased receivables and inventory convert to cash, and how operating cash generation compares with earnings in subsequent periods.
- Contech’s performance against the EBITDA earnout targets, total acquisition consideration, and integration outcomes.
- The costs and commitments associated with the Tijuana lease and planned capacity investments.
- COVID-19 effects on end-market demand, production, staffing, and supply availability, and the company’s liquidity and covenant position.