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").
Management and representatives of UFP Technologies, Inc. (the "Company") also
may from time to time make forward-looking statements. 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 regarding the potential impact of the proposed phase out
of LIBOR by the end of 2021; 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; 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.
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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 related to the proposed phase out of
LIBOR by the end of 2021; 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; and risks associated with new product and
program launches. Accordingly, actual results may differ materially.
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, 2020, 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.
As further summarized below, the COVID-19 pandemic has had, and we believe it
will continue to have, negative effects on our business and financial results.
Despite the impact of the COVID-19 pandemic, sales for the Company for the
three-month period ended March 31, 2021 increased 0.7% to $48.6 million from
$48.3 million in the same period last year. Gross margins for the three-month
period ended March 31, 2021 decreased to 25.9% from 26.6% in the same period
last year. Operating income and net income increased 4.4% and 7.0%,
respectively.
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Recent Developments
IMPACT OF COVID-19 ON OUR BUSINESS
Through much of 2020, COVID-19 spread across the country to areas in which our
products are designed, manufactured, distributed or sold. The spread of COVID-19
and the response to it negatively impacted operating conditions for our business
in 2020. Although we expect COVID-19 will continue to have negative impacts on
our operating results in future periods, the magnitude and duration of the
continuing impact is uncertain.
To stall the spread of COVID-19, authorities in states in which we do business
implemented numerous measures, including social distancing guidelines, travel
bans and restrictions, quarantines, curfews, stay-at-home orders, and business
shutdowns. These measures have impacted and will likely further impact us, our
customers, consumers, employees, suppliers and other third parties with whom we
do business. It is uncertain how these and any future measures in response to
the pandemic will impact our business, including whether and to what extent they
will result in further changes in demand for our products or further increases
in operating costs. The timing of distribution and the effectiveness of recently
introduced vaccines is also uncertain. Our top priorities continue to be
ensuring the health and safety of our workforce and serving our various
constituencies with as little disruption as possible.
Our operations expose us to risks associated with the COVID-19 pandemic. The
COVID-19 pandemic has impacted the cost of manufacturing our goods, including
higher labor costs, maintenance costs and manufacturing inefficiencies due to
employee absenteeism and significantly enhanced cleaning and sterilization.
Elective medical procedures and exams have been delayed or canceled, there has
been a significant reduction in physician office visits, and hospitals have
postponed or canceled capital purchases. We believe that these responses
negatively impacted demand for the Company's components for medical devices.
Additionally, many of our customers in the automotive markets experienced
closures of their businesses in connection with the pandemic. Such closures
negatively impacted the demand for our automobile component products
particularly in the second quarter. Any continued reduced demand for our
products, including reduced need for components for medical devices as well as
continued economic uncertainty, could adversely and materially affect our
business, financial condition and results of operations, as well as those of our
customers.
To ensure the health and safety of our employees and to comply with governmental
orders, since March 2020 we have required or enabled certain employees to work
from home or remotely where practicable, and expanded IT and communication
support to enhance their productivity; adjusted work spaces and shifted
schedules to facilitate social distancing and sterilization for those who
continue to work in our facilities; enhanced cleaning and disinfecting
procedures at our facilities; required face coverings and worked to procure and
distributed personal protective equipment; implemented health checks and visitor
protocols and restricted travel.
In response to the economic uncertainties resulting from the COVID-19 pandemic,
we initiated and at present are continuing certain cost-cutting measures,
including restrictions on travel and labor cost reduction measures (including
employee terminations).
Although the impact of the pandemic on our business and financial results will
depend on future developments that are highly uncertain and cannot be predicted,
and which may vary by market, we have a strong liquidity position, solid balance
sheet, and access to capital which we expect will enable us to effectively
manage through the COVID-19 pandemic.
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")
The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act
and related notices include several significant provisions, including delaying
certain payroll tax payments and estimated income tax payments that we expect to
defer to future periods. Accordingly, the Company deferred social security
payments of approximately $1.6 million through December 31, 2020. Fifty percent
of this amount is required to be paid by December 31, 2021 and the remaining
balance is required to be paid by December 31, 2022. We do not currently expect
the CARES Act to have a material impact on our financial results, including on
our annual estimated effective tax rate, or on our liquidity. We will continue
to monitor and assess the impact the CARES Act may have on our business and
financial results.
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Results of Operations
Sales
Sales for the three-month period ended March 31, 2021 increased approximately
0.7% to $48.6 million from sales of $48.3 million for the same period in 2020.
The increase in sales is primarily due to increases in sales to customers in the
Aerospace & defense and Consumer markets of 68.2% and 62.1%, respectively,
partially offset by a decrease in sales to customers in the Medical market of
11.5%.
Gross Profit
Gross profit as a percentage of sales ("gross margin") decreased to 25.9% for
the three-month period ended March 31, 2021, from 26.6% for the same period in
2020. As a percentage of sales, material and labor costs collectively decreased
0.5%, while overhead increased 1.1%. The decrease in collective material and
labor costs as a percentage of sales was primarily due to gains in manufacturing
efficiencies resulting from continuous improvement initiatives, and a reduction
in direct labor partially offset by an unfavorable change in mix. The increase
in overhead as a percentage of sales was primarily due to increases in the cost
of shipping supplies and outbound freight.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") decreased approximately
5.7% to $7.3 million for the three-month period ended March 31, 2021, from $7.8
million for the same period in 2020 primarily due to labor reductions as well as
decreases in company-wide travel and entertainment. As a percentage of sales,
SG&A decreased to 15.0% for the three-month period ended March 31, 2021, from
16.1% for the same three-month period in 2020. The decrease in SG&A for the
three-month period ended March 31, 2021 primarily due to labor reductions as
well as decreases in company-wide travel and entertainment.
Interest Income and Expense
Net interest expense was approximately $16 thousand for both the three-month
periods ended March 31, 2021 and 2020.
Other (Income) Expense
Other income was approximately $10 thousand and other expense was approximately
$327 thousand for the three-month periods ended March 31, 2021 and 2020,
respectively. Other expense was primarily generated by 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 21.4% and 17.8% of income
before income tax expense, respectively, for each of the three-month periods
ended March 31, 2021 and 2020. The increase in the effective tax rate for the
current period as compared to the prior period was largely due to a lower
anticipated effective tax rate in 2020 due to credits available for increased
research activities.
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 provided by operations for the three-month period ended March 31, 2021
was approximately $3.3 million and was primarily a result of net income
generated of approximately $4.2 million, depreciation and amortization of
approximately $2.1 million, share-based compensation of approximately $0.5
million, an increase in deferred taxes of approximately $0.3 million, an
increase in income taxes payable of approximately $0.8 million, an increase in
accounts payable of approximately $1.6 million, due to the timing of vendor
payments in the ordinary course of business, and an increase of other long-term
liabilities of approximately $0.3 million. These cash inflows and adjustments to
income were partially offset by an increase in accounts receivable of
approximately $3.6 million due to higher sales in the last two months of the
first quarter of 2021 as compared to the same period in the fourth quarter of
2020 , an increase in inventory of approximately $1.4 million due to restocking
to historical levels, an increase in prepaid expenses of approximately $0.1
million, an increase in other assets of approximately $0.2 million, a decrease
in accrued expenses of approximately $1.1 million due to the payment of accrued
compensation, and a decrease in deferred revenue of approximately $0.1 million.
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Net cash used in investing activities during the three-month period ended March
31, 2021 was approximately $1.4 million and was primarily the result of
additions of manufacturing machinery and equipment across the Company.
Net cash used in financing activities was approximately $0.7 million during the
three-month period ended March 31, 2021, resulting primarily from payments of
statutory withholding for stock options exercised and restricted stock units
vested.
Outstanding and Available Debt
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70
million Amended and Restated Credit Agreement (the "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 Amended and Restated Credit Agreement
amended and restated the Company's prior credit agreement.
On December 31, 2020, the Company, as the borrower, and Bank of America, N.A.,
as administrative agent and sole lender, entered into a First Amendment (the
"First Amendment") to the Company's Amended and Restated Credit Agreement, dated
February 1, 2018 (as amended, the "Restated Credit Agreement").
The First Amendment amended the Restated Credit Agreement by (i) extending the
scheduled maturity date from February 1, 2023 to December 31, 2025, and (ii)
creating procedures and guidelines for establishing a successor benchmark rate
if LIBOR ceases to be available during the term of the revolving credit
facility. The Restated Credit Agreement called for interest of LIBOR plus a
margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the
bank's prime rate less a margin that ranges from 0.25% to zero. The First
Amendment calls for interest of LIBOR plus a margin that ranges from 1.25% to
1.75% or, at the discretion of the Company, the bank's prime rate plus a margin
that ranges from zero to 0.25%. In both cases the applicable margin remains
dependent upon Company performance. The First Amendment also added certain
representations and covenants concerning compliance by the Company with legal
requirements.
The credit facilities under the Restated Credit Agreement consist of a $20
million unsecured term loan to the Company and an unsecured revolving credit
facility, under which the Company may borrow up to $50 million. The proceeds of
the Restated Credit Agreement may be used for general corporate purposes, as
well as permitted acquisitions. The Company's obligations under the Restated
Credit Agreement are guaranteed by the Subsidiary Guarantors.
Under the 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 Restated Credit Agreement contains other
covenants customary for transactions of this type, including restrictions on
certain payments, permitted indebtedness and permitted investments. As of March
31, 2021 and December 31, 2020 there were no amounts outstanding; the applicable
interest rate was approximately 1.11% and the Company was in compliance with all
financial covenants under the Restated Credit Agreement. As of March 31, 2021
and December 31, 2020, there were $0.7 million in standby letters of credit
outstanding, drawable as a financial guarantee on worker's compensation
insurance policies.
Derivative Financial Instruments
The Company uses interest-rate-related derivative instruments to manage its
exposure related to changes in interest rates on 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, which creates credit risk for the Company. When the fair value of a
derivative contract is negative, the Company owes the counterparty and,
therefore, 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 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 expose the
Company to variability in interest payments due to changes in interest rates.
The Company believes that it is prudent to limit the variability of a portion of
its interest payments. To meet this objective, in connection with the term loan
under the Amended and Restated Credit Agreement, the Company entered into a
$20 million, 5year 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 agreement was established to modify the
Company's interest rate exposure by converting the interest on the term loan
from a variable rate to a fixed rate to hedge against the possibility of rising
interest rates during the term of the loan. As the Company repaid its term loan
in full, the swap agreement no longer serves this purpose and may be canceled by
the Company prior to its expiration date. The notional amount was approximately
$10.7 million at March 31, 2021. The fair value of the swap as of March 31, 2021
and 2020 was approximately $(385) thousand and $(624) thousand, respectively,
and is included in other liabilities on the condensed consolidated balance
sheets. Changes in the fair value and net cash settlement amounts related to the
swap are recorded in other expense on the condensed consolidated statements of
income and resulted in income of $10 thousand and expense of $327 thousand
during the three-month periods ended March 31, 2021 and 2020, respectively.
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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 generated cash of approximately $3.3 million in operations
during the three months ended March 31, 2021; however, 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. Further, the continued
economic uncertainty resulting from the COVID-19 pandemic could affect the
Company's long-term ability to access the public markets and obtain necessary
capital in order to properly capitalize and continue operations.
Throughout fiscal 2021, 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.
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 three months of 2021. At March 31,
2021 approximately $9.4 million was available for future repurchases of the
Company's common stock under this authorization.
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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, 2020.
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UFP TECHNOLOGIES, INC. 
