UFP Technologies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. UFP designs and custom-converts foam, plastics, composites, and natural-fiber products for several end markets. It reports as one operating segment.
Financial performance
Amounts in millions except per-share data; rounded.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $33.977 | $34.609 | Down 1.8% |
| Gross profit / margin | $8.638 / 25.4% | $9.177 / 26.5% | Margin down 1.1 percentage points |
| Operating income / margin | $2.567 / 7.6% | $3.195 / 9.2% | Down 19.7% |
| Net income | $1.653 | $2.062 | Down 19.8% |
| Diluted EPS | $0.23 | $0.29 | Down $0.06 |
| Net cash used in operating activities | $1.154 | $1.006 | Greater cash use |
| Capital expenditures | $8.522 | $1.377 | Substantially higher |
SG&A was $6.024 million, up 2.2%; interest expense was $24,000 versus $22,000. The effective tax rate was approximately 35% in both periods.
Liquidity and balance sheet
- At March 31, cash was $24.392 million, down from $34.052 million at year-end 2014. Total current assets were $61.329 million and current liabilities $9.836 million.
- Total assets were $114.026 million; stockholders’ equity was $97.087 million.
- Debt totaled approximately $2.619 million, including current installments. The company had no borrowings on its $40 million revolving credit facility and reported compliance with its covenants.
- Cash from operations was negative despite $1.653 million of net income, primarily reflecting higher receivables and prepaid expenses, lower accounts payable, and payments of accrued expenses. Investing cash use was primarily for manufacturing equipment and a new Massachusetts manufacturing and headquarters building.
Changes, outlook, and risks
- Management cited softness across end markets except medical, where sales grew just over 13%. Medical sales rose to $13.820 million from $12.228 million. Aerospace and defense sales fell about 15%, and consumer sales about 14%, partly due to nonrecurring prior-year orders from individual customers.
- Lower gross margin reflected start-up costs at the new molded-fiber line in El Paso, transfer of business from Iowa, and higher fixed overhead against softer sales. Management said consolidation efficiencies partly offset these pressures.
- Management anticipated improving sales during 2015 and continued strength in medical. No numerical sales or earnings guidance was provided. The company planned further capacity additions and said existing resources, expected operating cash, and available financing should fund needs for the next 12 months, while noting future liquidity depends on operating performance.
- On March 18, the company approved closing its Raritan, New Jersey plant and consolidating operations into Newburyport and other facilities, with completion expected by October 31, 2015. It expects approximately $1.1 million in one-time expenses, about $1.0 million cash charges, and annual savings of approximately $400,000.
- The California consolidation was completed during the quarter; related restructuring costs were $78,000. Management identified risks around plant closures and realizing savings, new equipment implementation and utilization, market conditions, and potential acquisitions. The filing reported no material changes to previously disclosed risk factors or market risks.
- Disclosure controls were judged effective, with no material change in internal control over financial reporting during the quarter. The filing states that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales recover as management anticipated, particularly outside medical, and whether medical growth continues.
- Whether molded-fiber start-up costs and underutilized fixed overhead diminish, improving gross margin.
- Whether the Raritan consolidation is completed on schedule and within expected costs, and whether projected annual savings are achieved.
- How elevated capital spending and working-capital requirements affect cash, liquidity, and future financing needs.
- Whether deferred tax assets remain realizable; management had not recorded a valuation allowance but said estimates of future taxable income could change that assessment.