UFP Technologies, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. UFP designs and manufactures custom components, devices, and packaging, primarily for medical customers, with additional exposure to consumer, automotive, aerospace and defense, electronics, and industrial markets.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $190.5 million | $147.8 million | +28.8% |
| Gross profit / margin | $48.3 million / 25.4% | $35.5 million / 24.0% | Margin +1.4 percentage points |
| Operating income / margin | $19.6 million / 10.3% | $11.7 million / 8.0% | +67.7% |
| Net income | $14.3 million | $9.2 million | +55.4% |
| Diluted EPS | $1.93 | $1.26 | +53.2% |
| Cash from operations | $21.3 million | $17.5 million | +22.0% |
Gross margin improved with manufacturing efficiencies and price increases; selling, general and administrative expense declined as a share of sales to 14.6% from 16.1%. The effective tax rate was 22.2%, versus 22.3% in 2017.
Fourth quarter: Sales were $50.7 million, compared with $37.2 million in Q4 2017; gross profit was $12.7 million versus $7.8 million; net income was $4.4 million versus $2.7 million. Diluted EPS was $0.59, compared with $0.37.
Liquidity, debt, and investment
- Year-end cash was $3.2 million, down from $38.0 million; working capital was $35.0 million, down from $65.1 million.
- Total debt was $25.1 million: $8.0 million drawn on the revolving facility and $17.1 million on the term loan. The $70 million credit agreement comprises a $50 million revolver and $20 million term loan, matures February 2023, and carries variable-rate pricing. A $20 million interest-rate swap fixes the term loan rate at 2.7% plus the applicable margin. The company reported covenant compliance at year-end.
- Investing cash use was $82.3 million, including $77.0 million net cash consideration for Dielectrics and $5.4 million of property and equipment additions. Financing provided $26.3 million, including borrowings and repayments.
- Management said current resources and expected operating cash flow should fund requirements for the next 12 months, while noting future operating cash generation and access to financing are not assured.
Material changes and management commentary
- UFP acquired Dielectrics, a medical-device manufacturer, on February 1, 2018, for $80 million cash plus a $0.25 million working-capital adjustment; net cash consideration was $77.0 million after acquired cash. Dielectrics contributed approximately $36.2 million in sales and $6.3 million in net income after acquisition. The purchase added $44.5 million of goodwill.
- Medical sales grew 57.3%, including Dielectrics and 5.8% growth from legacy medical customers. Aerospace and defense sales rose 14.0%; consumer sales rose 17.2%. Automotive sales fell 13.4%, primarily as the Mercedes-Benz door-panel program phased out.
- FY2018 included $1.1 million of Dielectrics acquisition costs, approximately $0.76 million of losses associated with the Georgia plant closure, and approximately $0.7 million of increased health-care costs. The acquisition contributed significantly to earnings.
- Backlog was $53.8 million as of February 22, 2019, versus $46.9 million a year earlier. Orders may be canceled or rescheduled, and backlog includes nonbinding blanket orders; it is not a reliable revenue forecast.
- Management plans to add manufacturing capacity and pursue organic growth and potential strategic acquisitions. No specific revenue or earnings guidance is provided.
Risks, contingencies, and controls
- Key risks include integrating Dielectrics, customer concentration (top ten customers represented 29.3% of FY2018 revenue), product quality and liability, regulatory and customer-contract compliance, competition, cyclical end markets, raw-material and supplier availability and cost, and variable interest rates and credit-covenant restrictions.
- Ordinary-course legal matters were not expected by management to result in material adverse judgments or settlements. The company received a $156,000 state-tax settlement in February 2019 and expected to eliminate the related uncertain-tax-benefit balance in Q1 2019.
- The financial-statement and internal-control audits received unqualified opinions. The internal-control assessment excluded Dielectrics, which represented 43.3% of consolidated assets and 19.0% of revenue, under the acquisition-year relief described in the filing.
- The shareholder-rights plan was set to expire March 19, 2019; the board decided not to replace it.
Important facts for investors to verify
- How much of FY2018 sales and earnings growth came from Dielectrics, and whether its contribution and integration benefits are sustainable.
- Whether improved gross margins persist as the company invests in capacity and manages labor, health-care, and material costs.
- Cash conversion and liquidity trends, including the effects of working-capital needs, capital spending, acquisition plans, and debt repayment.
- Progress replacing the declining Mercedes-Benz program and the quality and durability of the reported backlog.
- Compliance with credit covenants and the impact of interest-rate changes on variable-rate borrowings.