UFP Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; amounts below are in millions except per-share data. UFP designs and manufactures engineered components, products and packaging, primarily for medical customers, and operates as one reportable segment.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $50.7 | $42.6 | $99.3 | $90.9 |
| Gross profit / margin | $13.4 / 26.5% | $9.9 / 23.3% | $26.0 / 26.2% | $22.8 / 25.0% |
| Operating income | $6.2 | $3.0 | $11.5 | $8.1 |
| Net income | $4.7 | $2.3 | $8.9 | $6.2 |
| Diluted EPS | $0.62 | $0.31 | $1.17 | $0.82 |
- Sales rose 18.8% in Q2 and 9.2% in the first half. First-half operating income increased 42.6% and net income increased 43.0% year over year.
- Gross margin improved in both periods. Management attributed the improvement mainly to lower overhead as a share of sales, including better absorption of fixed costs and elevated COVID-related costs in Q2 2020. Material and labor costs as a share of sales rose, reflecting higher raw-material costs and unfavorable mix.
- Q2 sales increased in automotive, consumer and aerospace & defense by 146.0%, 88.2% and 40.7%, respectively; medical sales rose 3.3%. First-half medical sales declined 4.0%, while consumer, aerospace & defense and automotive increased 74.4%, 50.1% and 35.7%.
- SG&A was $7.2 million in Q2, up from $6.7 million, primarily due to discretionary compensation and increased travel and entertainment; as a share of sales it declined to 14.3% from 15.6%. First-half SG&A was $14.5 million versus $14.4 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $9.9 million, compared with $10.7 million in the prior-year period. Higher receivables ($4.8 million) and inventory ($2.5 million) used cash; the receivables increase was attributed to stronger sales late in Q2, while inventory was replenished toward historical levels. Accounts payable increased $4.0 million, partly reflecting payment timing.
- Capital spending was $3.3 million, primarily for manufacturing machinery and equipment. Investing cash outflow was $3.3 million; financing cash outflow was $0.6 million, mainly for statutory withholding on equity awards. Cash increased $6.0 million to $30.3 million.
- There was no debt outstanding at June 30. The unsecured facility includes a $50 million revolver and a $20 million term loan; the term loan has been repaid. The facility matures December 31, 2025, and the company reported compliance with its covenants. Standby letters of credit totaled $0.7 million.
- Current assets were $86.5 million and current liabilities $19.6 million at June 30. The company said cash, operating cash generation and its revolver should fund requirements, including capital expenditures, for the next 12 months.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management plans to add manufacturing capacity and pursue organic growth and potential strategic acquisitions; it also expects to shift toward higher-margin, longer-run opportunities.
- COVID-19 effects remain uncertain. Management cited labor, maintenance and inefficiency costs, employee absenteeism, and delayed elective medical procedures, physician visits and hospital capital purchases. It noted conditions generally appeared to be improving but warned that further effects could materially harm results.
- Other cited risks include raw-material cost increases, customer demand and product/program launches, acquisition execution, manufacturing efficiency initiatives, and LIBOR transition. The interest-rate swap, originally intended to hedge term debt, remains outstanding despite repayment of the loan; its fair-value liability was $0.3 million at June 30, and changes continue to affect other income or expense.
- The first-half effective tax rate was 22.9%, versus 18.9%, primarily reflecting lower discrete tax benefits from share-based compensation. The filing cautions that the rate may fluctuate.
- The company deferred approximately $1.6 million of employer Social Security taxes under the CARES Act; half is due by December 31, 2021 and the remainder by December 31, 2022. Management did not expect a material impact on results or liquidity.
- Management reported no material changes to previously disclosed risk factors, no material changes in market risk, and no material changes to contractual commitments outside the ordinary course. It said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales momentum and margin gains persist, particularly given rising raw-material and labor costs and the change in market mix.
- Whether medical-market demand recovers from procedure delays and whether the company can manage continuing pandemic-related disruption.
- Cash conversion and working-capital trends, especially receivables, inventory and payable timing.
- Planned capacity investment, its returns, and any acquisition activity or resulting funding needs.
- The status and eventual settlement or cancellation of the interest-rate swap, and the LIBOR transition arrangements.
- Tax-rate variability, deferred payroll-tax repayment, and continuing compliance with credit-facility covenants.