UFP Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. UFP Technologies designs and converts foam, plastic, and natural-fiber materials for medical, consumer, automotive, aerospace and defense, industrial, and electronics markets. It reports one operating segment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $35.684 million | $37.220 million | $110.623 million | $109.626 million |
| Gross profit | $8.193 million | $8.452 million | $27.650 million | $26.465 million |
| Gross margin | 23.0% | 22.7% | 25.0% | 24.1% |
| Operating income | $2.500 million | $4.081 million | $9.635 million | $9.978 million |
| Net income | $1.695 million | $2.669 million | $6.495 million | $6.479 million |
| Diluted EPS | $0.23 | $0.37 | $0.89 | $0.89 |
- Q3 sales declined 4.1% year over year, while nine-month sales increased 0.9%. Medical sales grew 1% in Q3 and 7.9% year to date; automotive sales fell 25.5% in Q3 and 12.0% year to date.
- Nine-month operating income included material-overcharge settlement gains of $121,000 in 2017 versus $2.114 million in 2016, and restructuring costs of $63,000 versus $203,000. Management said operating income increased 19% excluding these nonrecurring items.
- Q3 SG&A decreased 5.5% to $5.693 million; nine-month SG&A decreased 1.8% to $18.070 million. Management attributed the nine-month gross-margin improvement to manufacturing efficiencies, pricing, and a better business mix; higher indirect labor costs partly offset those benefits.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $13.010 million, compared with $6.268 million in 2016. Capital spending was $6.880 million, primarily for manufacturing equipment and the Newburyport facility expansion. Cash ended the period at $37.246 million, up from $31.359 million at year-end 2016.
- At September 30, current assets were $75.639 million and current liabilities $10.398 million; total assets were $137.091 million and stockholders’ equity $120.913 million.
- No borrowings were outstanding on the unsecured $40 million revolving credit facility; approximately $300,000 of letters of credit used facility capacity. The facility matures November 30, 2018, and the company reported compliance with its covenants. Term debt was $84,000, due to mature in October 2017.
- The company stated that cash, expected operating cash flow, and available borrowing and equipment-financing capacity were expected to fund requirements, including capital expenditures, for the next twelve months. It cautioned that future liquidity depends on operating performance.
Changes, outlook, and risks
- Automotive weakness reflected soft demand in legacy interior-trim programs. The remaining Mercedes-Benz southeast door-panel program was expected to end, with estimated 2017 sales of approximately $3.0 million and modest sales into Q1 2018.
- Q3 automotive and electronics sales declined approximately 25.5% and 9.2%, respectively. Medical growth was slower than recent historical levels, partly because two large customers added second suppliers and storm-related disruptions reduced some customer orders. Industrial sales were affected year to date by a customer credit issue.
- The previously announced plant consolidations and relocations were complete by June 30, 2017. The company was expanding its Newburyport facility, planned to add manufacturing capacity during 2017, and described organic growth and strategic acquisitions as elements of its strategy. No specific earnings or revenue guidance was provided.
- Forward-looking statements are subject to risks including acquisition execution and integration, consolidation efficiencies, customer-contract completion, equipment installation and requalification delays, capacity utilization, and the ability to sustain sales and earnings. Management reported no material changes to previously disclosed risk factors or market risks.
- The company expected to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method. It anticipated possible timing changes for some customer stocking commitments and tooling sales, but did not expect a significant financial-statement impact based on its preliminary assessment. The company was evaluating the effect of the new lease standard.
- Management noted potential effective-tax-rate volatility from share-based compensation tax benefits or shortfalls. No valuation allowance was recorded against deferred tax assets; realizability depends in part on future taxable income.
Important facts for investors to verify
- Whether medical-market growth continues and offsets automotive, electronics, and industrial weakness.
- The revenue and earnings impact as the Mercedes-Benz program winds down and whether replacement business is secured.
- Whether Newburyport expansion and manufacturing-efficiency initiatives deliver expected capacity, savings, and returns on capital spending.
- Future operating cash generation, capital requirements, and the company’s refinancing or replacement plans ahead of the revolving facility’s November 2018 maturity.
- The final effect of revenue-recognition adoption, and the continued realizability of deferred tax assets.