Forward-looking Statements
Some of the statements contained in this Report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act").
These statements are subject to known and unknown risks, uncertainties, and
other factors, which may cause our or our industry's actual results,
performance, or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. Forward-looking statements include, but are not limited to,
statements about the Company's prospects; statements about the potential further
impact the novel coronavirus ("COVID-19") pandemic may have on the Company's
business, financial condition and results of operations, including with respect
to the different markets in which the Company participates, the demand for its
products, the well-being and availability of the Company's employees, the
continuing operation of the Company's locations, delayed payments by the
Company's customers and the potential for reduced or canceled orders, the
Company's efforts to address the pandemic, including regarding the safety of its
employees, the maintenance of its facilities and the sufficiency of the
Company's supply chain, inventory, liquidity and capital resources, including
increased costs in connection with such efforts, the impact of the pandemic on
the businesses of the Company's suppliers and customers, and the overall impact
the pandemic may have on the Company's financial results in 2021; statements
about the Company's acquisition strategies and opportunities and the Company's
growth potential and strategies for growth; expectations regarding customer
demand; expectations regarding the Company's liquidity and capital resources,
including the sufficiency of its cash reserves and the availability of borrowing
capacity to fund operations and/or potential future acquisitions; anticipated
revenues and the timing of such revenues; expectations about shifting the
Company's book of business to higher-margin, longer-run opportunities;
anticipated trends and potential advantages in the different markets in which
the Company competes, including the medical, aerospace and defense, automotive,
consumer, electronics, and industrial markets, and the Company's plans to expand
in certain of its markets; statements regarding anticipated advantages the
Company expects to realize from its investments and capital expenditures;
statements regarding anticipated advantages to improvements and alterations at
the Company's existing plants; expectations regarding the Company's
manufacturing capacity, operating efficiencies, and new production equipment;
statements about new product offerings and program launches; statements about
the Company's participation and growth in multiple markets; statements about the
Company's business opportunities; statements about the Company's ability to
integrate and realize the benefits expected from the acquisitions of Contech
Medical, DAS Medical and Advant, including any related synergies; statements
regarding our supply chain arrangements; and any indication that the Company may
be able to sustain or increase its sales, earnings or earnings per share, or its
sales, earnings or earnings per share growth rates.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties that could adversely affect the Company's business and prospects,
and otherwise cause actual results to differ materially from those anticipated
by such forward-looking statements, or otherwise, including without limitation:
the severity and duration of the COVID-19 pandemic and its impact on the markets
in which the Company participates, including its impact on the Company's
customers, suppliers and employees, as well as the U.S. and worldwide economies;
the timing, scope and effect of further governmental, regulatory, fiscal,
monetary and public health responses to the COVID-19 pandemic; risks and
uncertainties associated with the COVID-19 pandemic and its impact on the
Company's business, financial condition and results of operations, including
risks relating to decreased, including substantially decreased, demand for the
Company's products; risks relating to the potential closure of any of the
Company's facilities or the unavailability of key personnel or other employees;
risks that the Company's inventory, cash reserves, liquidity or capital
resources may be insufficient; risks relating to delayed payments by our
customers and the potential for reduced or canceled orders; risks relating to
the increased costs associated with the Company's efforts to respond to the
pandemic; risks associated with the identification of suitable acquisition
candidates and the successful, efficient execution of acquisition transactions,
the integration of any such acquisition candidates, the value of those
acquisitions to our customers and shareholders, and the financing of such
acquisitions; risks related to our indebtedness and compliance with covenants
contained in our financing arrangements, and whether any available financing may
be sufficient to address our needs; risks associated with efforts to shift the
Company's book of business to higher-margin, longer-run opportunities; risks
associated with the Company's entry into and growth in certain markets; risks
and uncertainties associated with seeking and implementing manufacturing
efficiencies and implementing new production equipment; risks and uncertainties
associated with growth of the Company's business and increases to sales,
earnings and earnings per share; risks associated with the Company's ability to
pay the contingent liability payments to Contech Medical and DAS Medical, if and
when due; and risks associated with new product and program launches.
Accordingly, actual results may differ materially.
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In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential," and similar
expressions intended to identify forward-looking statements. Our actual results
could be different from the results described in or anticipated by our
forward-looking statements due to the inherent uncertainty of estimates,
forecasts, and projections, and may be materially better or worse than
anticipated. Given these uncertainties, you should not place undue reliance on
these forward-looking statements. Forward-looking statements represent our
current beliefs, estimates and assumptions and are only as of the date of this
Report. We expressly disclaim any duty to provide updates to forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this Report, in order to reflect changes in circumstances or
expectations, or the occurrence of unanticipated events, except to the extent
required by applicable securities laws. All of the forward-looking statements
are qualified in their entirety by reference to the factors discussed above and
under "Risk Factors" set forth in Part I Item 1A of our Annual Report on Form
10-K for the fiscal year ended December 31, 2021, and our Quarterly Report on
Form-Q for the quarter ended March 31, 2022, as well as the risks and
uncertainties discussed elsewhere in this Report. We qualify all of our
forward-looking statements by these cautionary statements. We caution you that
these risks are not exhaustive. We operate in a continually changing business
environment and new risks emerge from time to time.
Unless the context requires otherwise, the terms "we", "us", "our", or "the
Company" refer to UFP Technologies, Inc. and its consolidated subsidiaries.
Overview
UFP Technologies, Inc. (the "Company") is an innovative designer and custom
manufacturer of components, subassemblies, products and packaging primarily for
the medical market. Utilizing highly specialized foams, films and plastics, the
Company converts raw materials through laminating, molding, radio frequency
welding and fabricating techniques. The Company is diversified by also
providing highly engineered solutions to customers in the aerospace & defense,
automotive, consumer, electronics and industrial markets. The Company consists
of a single operating and reportable segment.
The Company's current strategy includes further organic growth and growth
through strategic acquisitions.
Sales for the Company for the six-month period ended June 30, 2022 increased
66.8% to $165.6 million from $99.3 million in the same period last year, due to
the Company's acquisitions of Contech Medical, DAS Medical and Advant Medical,
and an organic sales increase of approximately 13.9%. Gross margins for the
six-month period ended June 30, 2022 decreased to 25.0% from 26.2% in the same
period last year, largely due to supply chain challenges. Operating income and
net income increased 61.3% and 55.3%, respectively.
Results of Operations
Sales
Sales for the three-month period ended June 30, 2022 increased approximately
86.2% to $94.3 million from sales of $50.7 million for the same period in 2021.
The increase in sales is primarily due to increases in sales to customers in the
Medical market of 127.8%. The increase in sales in the Medical market were
primarily due to sales from the Company's recently acquired companies of $34.6
million, as well as an organic sales increase of 17.9%. Sales to customers in
all other markets increased 11.1%.
Sales for the six-month period ended June 30, 2022 increased approximately 66.8%
to $165.6 million from sales of $99.3 million for the same period in 2021. The
increase in sales is primarily due to increases in sales to customers in the
Medical market of 102.3%. The increase in sales in the Medical market were
primarily due to sales from the Company's recently acquired companies of $52.6
million, as well as an organic sales increase of 13.9%. Sales to customers in
all other markets increased 5.9%.
Gross Profit
Gross profit as a percentage of sales ("gross margin") decreased to 25.8% for
the three-month period ended June 30, 2022, from 26.5% for the same period in
2021. As a percentage of sales, material and labor costs collectively increased
5.3%, while overhead costs decreased 4.6%. The decline in gross margin is
primarily due to the impact of inflationary cost increases that largely
commenced in the second half of 2021 and continued to a lesser degree through
the first half of 2022, partially offset by higher sales measured against the
fixed portion of overhead.
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Gross profit as a percentage of sales ("gross margin") decreased to 25.0% for
the six-month period ended June 30, 2022, from 26.2% for the same period in
2021. As a percentage of sales, material and labor costs collectively increased
5.3%, while overhead costs decreased 4.1%. The decline in gross margin is
primarily due to the impact of inflationary cost increases that largely
commenced in the second half of 2021 and continued to a lesser degree through
the first half of 2022, partially offset by higher sales measured against
the fixed portion of overhead.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") increased approximately
67.1% to $12.1 million for the three-month period ended June 30, 2022, from $7.2
million for the same period in 2021, primarily due to the additional SG&A from
recent acquisitions. As a percentage of sales, SG&A decreased to 12.8% for the
three-month period ended June 30, 2022, from 14.3% for the same three-month
period in 2021. The decrease in SG&A as a percentage of sales for the
three-month period ended June 30, 2022 was primarily due to increased sales
measured against relatively fixed SG&A, partially offset by the additional SG&A
from recent acquisitions.
SG&A increased approximately 51.9% to $22.1 million for the six-month period
ended June 30, 2022, from $14.5 million for the same period in 2021, primarily
due to the additional SG&A from recent acquisitions. As a percentage of sales,
SG&A decreased to 13.3% for the three-month period ended June 30, 2022, from
14.6% for the same three-month period in 2021. The decrease in SG&A as a
percentage of sales for the three-month period ended June 30, 2022 was primarily
due to increased sales measured against relatively fixed SG&A, partially offset
by the additional SG&A from recent acquisitions.
Acquisition Costs
The Company incurred approximately $0.2 million and $1.0 million in costs
associated with acquisition related activities which were charged to expense for
the three and six-months ended June 30, 2022, respectively. These costs were
primarily for legal services, valuation services and stamp duty filings and are
reflected on the face of the income statement.
Change in fair value of contingent consideration
In connection with the acquisitions discussed in Note 2, "Acquisitions," the
Company is required to make contingent payments, subject to the entities
achieving certain financial performance thresholds. The contingent consideration
payments for both the DAS Medical and Contech Medical acquisitions combined are
up to $25 million. The fair value of the liabilities for the contingent
consideration payments recognized upon the acquisition as part of the purchase
accounting opening balance sheets totaled approximately $9.7 million and was
estimated by discounting to present value the probability-weighted contingent
payments expected to be made. Assumptions used in this calculation were
managements financial forecasts, discount rate and various probability factors.
The ultimate settlement of contingent consideration could deviate from current
estimates based on the actual results of these financial measures. This
liability is considered to be a Level 3 financial liability that is re-measured
each reporting period. The fair value of the liabilities for the contingent
consideration payments recognized at June 30, 2022 for both the DAS Medical and
Contech Medical acquisitions combined totaled approximately $15.7 million. The
change in fair value of contingent consideration for the DAS Medical and Contech
Medical acquisitions for the three and six-month periods ended resulted in an
expense of approximately $6.0 million and was included in change in fair value
of contingent consideration in the consolidated statements of income.
Gain on sale of fixed assets
For the three and six-month periods ended June 30, 2022, the Company recorded a
gain on the sale of fixed assets of approximately $6.2 million. This was
primarily the result of the sale of the Company's Georgetown, Massachusetts
manufacturing facility. The operations previously housed in this location have
been fully absorbed by the nearby Newburyport manufacturing facility. The gain
on the Georgetown manufacturing facility was determined by a sales price of
approximately $6.7 million, measured against a net book value and selling
expenses of approximately $0.5 million.
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Interest Income and Expense
Net interest expense was approximately $733 thousand for the three-month period
ended June 30, 2022, compared to net interest income of approximately $21
thousand for the same period in 2021. The increase in net interest expense for
the three-month period ended June 30, 2022 was primarily due to interest paid on
funds drawn on the Company's credit facility used to finance recent
acquisitions.
Net interest expense was approximately $1.1 million for the six-month period
ended June 30, 2022 compared to net interest income of $5 thousand in the same
period of 2021. The increase in net interest expense for the six-month period
ended June 30, 2022 was primarily due to interest paid on funds drawn on the
Company's credit facility used to finance recent acquisitions.
Other (Income) Expense
Other income was approximately $157 thousand and other expense was approximately
$4 thousand for the three-month periods ended June 30, 2022 and 2021,
respectively, and other income was approximately $209 thousand compared to $7
thousand for the six-month periods ended June 30, 2022 and 2021, respectively.
The increases in other income in both periods are primarily generated by foreign
currency transaction gains and changes in the fair value of the swap liability,
which is driven by anticipated future interest rate changes, offset by net cash
settlement amounts related to the swap.
Income Taxes
The Company recorded tax expense of approximately 23.2% and 24.2% of income
before income tax expense, respectively, for each of the three-month periods
ended June 30, 2022 and 2021. The decrease in the effective tax rate for the
current period as compared to the prior period was largely due to lower
statutory rates on certain foreign taxable income related to the Company's
acquisitions of DAS Medical and Advant Medical.
The Company recorded tax expense of approximately 22.1% and 22.9% of income
before income tax expense, respectively, for each of the six-month periods ended
June 30, 2022 and 2021. The decrease in the effective tax rate for the current
period as compared to the prior period was largely due to lower statutory rates
on certain foreign taxable income that was new to the Company in 2022. The
Company notes the potential for volatility in its effective tax rate, as any
windfall or shortfall tax benefits related to its share-based compensation plans
will be recorded directly into income tax expense.
Liquidity and Capital Resources
The Company generally funds its operating expenses, capital requirements, and
growth plan through internally generated cash and bank credit facilities.
Cash Flows
Net cash used in operations for the six-month period ended June 30, 2022 was
approximately $35 thousand and was primarily a result of net income generated of
approximately $13.8 million, depreciation and amortization of approximately $6.3
million, share-based compensation of approximately $1.5 million, a change in the
fair value of contingent consideration of approximately $6.0 million, an
increase in accounts payable of approximately $11.8 million due to the building
of inventory to meet demand and the timing of vendor payments in the ordinary
course of business, an increase in accrued expenses of approximately $4.6
million and an increase in deferred revenue of approximately $1.4 million.
These cash inflows and adjustments to income were offset by a gain on disposal
of property, plant and equipment of approximately $6.2 million, a decrease in
deferred taxes of approximately $0.4 million, an increase in accounts receivable
of approximately $16.4 million due to higher sales in the last two months of the
second quarter of 2022 as compared to the same period in the fourth quarter of
2021 and the addition of Advant receivables, an increase in inventory of
approximately $15.2 million due to inventory build for upcoming demand,
restocking to historical levels and the addition of Advant inventory, an
increase in prepaid expenses and other current assets of approximately $1.3
million primarily due to the payment of current year insurance policies, an
increase in refundable income taxes of approximately $1.1 million, an increase
in other assets of approximately $3.0 million due to increased right of use
lease assets and a decrease in other long-term liabilities of approximately $1.8
million.
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Net cash used in investing activities during the six-month period ended June 30,
2022 was approximately $29.1 million and was primarily the result of the
acquisition of Advant, as well as additions of manufacturing machinery and
equipment and various building improvements across the Company.
Net cash provided by financing activities was approximately $23.7 million during
the six-month period ended June 30, 2022, representing borrowings under our
credit facility to fund acquisitions of approximately $34.0 million, partially
offset by payments on revolving line of credit of approximately $7.0 million,
principal payments of long-term debt of approximately $2.0 million, and payments
of statutory withholding for stock options exercised and restricted stock units
vested of approximately $1.3 million.
Outstanding and Available Debt
On December 22, 2021, the Company, as the borrower, entered into a secured $130
million Second Amended and Restated Credit Agreement (the "Second Amended and
Restated Credit Agreement") with certain of the Company's subsidiaries (the
"Subsidiary Guarantors") and Bank of America, N.A., in its capacity as the
initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and
certain other lenders from time-to-time party thereto. The Second Amended and
Restated Credit Agreement amends and restates the Company's prior credit
agreement, originally dated as of February 1, 2018.
The credit facilities under the Second Amended and Restated Credit Agreement
consist of a $40 million secured term loan to the Company and a secured
revolving credit facility, under which the Company may borrow up to $90
million. The Second Amended and Restated Credit Agreement matures on December
21, 2026. The secured term loam requires quarterly principal payments of
$1,000,000 commencing on March 31, 2022. The proceeds of the Second Amended and
Restated Credit Agreement may be used for general corporate purposes, including
funding the acquisition of DAS Medical, as well as certain other permitted
acquisitions. The Company's obligations under the Second Amended and Restated
Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Second Amended and Restated Credit Agreement calls for interest determined
by the Bloomberg Short-Term Bank Yield Index rate ("BSBY") plus a margin that
ranges from 1.25% to 2.0% or, at the discretion of the Company, the bank's prime
rate less a margin that ranges from .25% to zero. In both cases the applicable
margin is dependent upon Company performance. Under the Second Amended and
Restated Credit Agreement, the Company is subject to a minimum fixed-charge
coverage financial covenant as well as a maximum total funded debt to EBITDA
financial covenant. The Second Amended and Restated Credit Agreement contains
other covenants customary for transactions of this type, including restrictions
on certain payments, permitted indebtedness, and permitted investments.
At June 30, 2022, the Company had approximately $100 million in borrowings
outstanding under the Second Amended and Restated Credit Agreement, which were
used as partial consideration for the DAS Medical and Advant acquisitions, and
also had approximately $0.7 million in standby letters of credit outstanding,
drawable as a financial guarantee on worker's compensation insurance policies.
At June 30, 2022, the applicable interest rate was approximately 3.4% and the
Company was in compliance with all covenants under the Second Amended and
Restated Credit Agreement.
Long-term debt consists of the following (in thousands):
June 30, 2022
Revolving credit facility $ 62,000
Term loan 38,000
Total long-term debt 100,000
Current portion (4,000 )
Long-term debt, excluding current portion $ 96,000
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Future maturities of long-term debt at June 30, 2022 are as follows (in
thousands):
Revolving
Term Loan credit facility Total
Remainder of 2022 $ 2,000 $ - $ 2,000
2023 $ 4,000 $ - $ 4,000
2024 $ 4,000 $ - $ 4,000
2025 $ 4,000 $ - $ 4,000
2026 $ 24,000 $ 62,000 $ 86,000
$ 38,000 $ 62,000 $ 100,000Derivative Financial Instruments
The Company used interest-rate-related derivative instruments to manage its
exposure related to changes in interest rates on certain of its variable-rate
debt instruments. The Company does not enter into derivative instruments for any
purpose other than cash flow hedging. Derivative financial instruments expose
the Company to credit risk and market risk. Credit risk is the failure of the
counterparty to perform under the terms of the derivative contract. When the
fair value of a derivative contract is positive, the counterparty owes the
Company, creating credit risk for the Company. When the fair value of a
derivative contract is negative, the Company owes the counterparty and,
therefore, in these circumstances the Company is not exposed to the
counterparty's credit risk. The Company minimizes counterparty credit risk in
derivative instruments by entering into transactions with carefully selected
major financial institutions based upon their credit profile. Market risk is the
adverse effect on the value of a derivative instrument that results from a
change in interest rates.
The Company assesses interest rate risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities. The Company's debt
obligations exposed the Company to variability in interest payments due to
changes in interest rates. The Company believed that it was prudent to limit the
variability of a portion of its interest payments. To meet this objective, in
connection with the first Amended and Restated Credit Agreement, the Company
entered into a $20 million, 5-year interest rate swap agreement under which the
Company receives three-month LIBOR plus the applicable margin and pays a 2.7%
fixed rate plus the applicable margin. The swap modified the Company's interest
rate exposure by converting the previous term loan from a variable rate to a
fixed rate in order to hedge against the possibility of rising interest rates
during the term of the loan.
The notional amount was approximately $7.1 million at June 30, 2022. The fair
value of the swap as of June 30, 2022 was approximately $6 thousand and is
included in other assets. The fair value of the swap as of December 31, 2021
was approximately $(176) thousand and is included in other liabilities. Changes
in the fair value and net cash settlement amounts related to the swap are
recorded in other expense and resulted in income of approximately $67 thousand
and $182 thousand, respectively, during the three- and six-month periods ending
June 30, 2022. In the same periods in 2021, change in the fair value of the
swap resulted in income of $64 thousand and expense of $144 thousand,
respectively.
As the Company has paid the remaining balance of the term loan that was
associated with the swap in its entirety, there is no longer underlying debt to
hedge against with the swap. The changes in the fair value of the swap will
continue to be accounted for as a financial instrument until the sooner of the
time that the Company elects to cancel it or until its maturity, which will
occur on February 1, 2023.
Future Liquidity
The Company requires cash to pay its operating expenses, purchase capital
equipment, and to service its contractual obligations. The Company's principal
sources of funds are its operations and its amended and restated credit
facility. The Company used cash of approximately $35 thousand in operations
during the six months ended June 30, 2022; and the Company cannot guarantee that
its operations will generate cash in future periods. The Company's longer-term
liquidity is contingent upon future operating performance and draws on the
revolving credit facility are possible.
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Throughout fiscal 2022, the Company plans to continue to add capacity to enhance
operating efficiencies in its manufacturing plants. The Company may consider
additional acquisitions of companies, technologies, or products that are
complementary to its business. The Company believes that its existing resources,
including its revolving credit facility, together with cash expected to be
generated from operations, will be sufficient to fund its cash flow
requirements, including capital asset acquisitions, through the next twelve
months.
The Company may also require additional capital in the future to fund capital
expenditures, acquisitions, or other investments. These capital requirements
could be substantial. The Company anticipates that any future expansion of its
business will be financed through existing resources, cash flow from operations,
the Company's revolving credit facility, or other new financing. The Company
cannot guarantee that it will be able to meet existing financial covenants or
obtain other new financing on favorable terms, if at all. The Company's
liquidity will be impacted to the extent additional stock repurchases are made
under the Company's stock repurchase program.
Subsequent event
On July 26, 2022, pursuant to a share purchase agreement and related agreements,
the Company sold its molded fiber business ("MFT") and related real estate in
Iowa to CKF USA INCORPORATED ("CKF") (a Delaware Corporation) for approximately
$32 million. The purchase price is subject to adjustment based upon MFT's final
working capital at closing. A portion of the purchase price is being held in
escrow to indemnify CKF against certain claims, losses, and liabilities. The
Securities Purchase Agreement contains customary representations, warranties,
and covenants customary for transactions of this type. MFT's annual revenue was
approximately $21.3 million for the year ended December 31, 2021.
In addition, subsequent to quarter-end, the Company repaid $38 million on its
revolving line of credit utilizing the proceeds received from both the above
noted MFT sale and from the June 30, 2022 sale of its Georgetown, MA
manufacturing facility.
Stock Repurchase Program
The Company accounts for treasury stock under the cost method, using the
first-in, first-out flow assumption, and includes treasury stock as a component
of stockholders' equity. On June 16, 2015, the Company announced that its Board
of Directors authorized the repurchase of up to $10.0 million of the Company's
outstanding common stock. Under the program, the Company is authorized to
repurchase shares through Rule 10b5-1 plans, open market purchases, privately
negotiated transactions, block purchases or otherwise in accordance with
applicable federal securities laws, including Rule 10b-18 of the Securities
Exchange Act of 1934. The stock repurchase program will end upon the earlier of
the date on which the plan is terminated by the Board or when all authorized
repurchases are completed. The timing and amount of stock repurchases, if any,
will be determined based upon our evaluation of market conditions and other
factors. The stock repurchase program may be suspended, modified, or
discontinued at any time, and the Company has no obligation to repurchase any
amount of its common stock under the program. The Company did not repurchase any
shares of its common stock under this program in the first six months of 2022.
At June 30, 2022 approximately $9.4 million was available for future repurchases
of the Company's common stock under this authorization.
Commitments and Contractual Obligations
There have been no material changes outside the ordinary course of business to
our contractual obligations and commitments, as disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2021.
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UFP TECHNOLOGIES, INC. 
