Ufp Technologies Inc 10-Q for FY2022 Q1
Ufp Technologies Inc (UFPT)
About this 10-Q
Ufp Technologies Inc filed this 10-Q on May 10, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $71.24M
- up 46.6% from $48.6M a year earlier
- Net income
- $4.86M
- up 16.7% from net income of $4.16M a year earlier
- Diluted EPS
- $0.64
- up 16.4% from $0.55 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
For the quarterly period ended
OR
For the transition period from ____ to ____
Commission File Number:
UFP Technologies, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant's telephone number, including area code)
_________________________________________
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange |
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
UFP Technologies, Inc.
Index
Page
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
| March 31, | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Receivables, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Net property, plant and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Non-qualified deferred compensation plan | ||||||||
| Finance lease right of use assets | ||||||||
| Operating lease right of use assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Finance lease liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Income taxes payable | ||||||||
| Current installments of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, excluding current installments | ||||||||
| Deferred income taxes | ||||||||
| Non-qualified deferred compensation plan | ||||||||
| Finance lease liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively, at March 31, 2022; and shares issued and outstanding, respectively, at December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Treasury stock at cost, shares at March 31, 2022 and 29,559 shares at December 31, 2021 | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Income
and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Selling, general & administrative expenses | ||||||||
| Acquisition costs | ||||||||
| Gain on disposal of property, plant & equipment | ( | ) | ||||||
| Operating income | ||||||||
| Interest income | ( | ) | ||||||
| Interest expense | ||||||||
| Other income | ( | ) | ( | ) | ||||
| Income before income tax expense | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted average common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Comprehensive Income | ||||||||
| Net Income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Foreign currency translation gain | ||||||||
| Other comprehensive gain | ||||||||
| Comprehensive income | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | comprehensive | Treasury Stock | Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | income | Shares | Amount | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||||||
| Net share settlement of RSU's | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | comprehensive | Treasury Stock | Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | income | Shares | Amount | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||||||
| Net share settlement of RSU's | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on disposal of property, plant & equipment | ( | ) | ||||||
| Share-based compensation | ||||||||
| Interest expense on finance leases | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables, net | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Income taxes payable | ||||||||
| Non-qualified deferred compensation plan and other liabilities | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant, and equipment | ( | ) | ( | ) | ||||
| Acquisition of Advant, net of cash acquired | ( | ) | ||||||
| Acquisition of DAS Medical, working capital adjustment | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from advances on revolving line of credit | ||||||||
| Payments on revolving line of credit | ( | ) | ||||||
| Principal payments of long-term debt | ( | ) | ||||||
| Principal payments on finance lease obligations | ( | ) | ( | ) | ||||
| Payment of statutory withholdings for restricted stock units vested | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Interim Condensed Consolidated Financial Statements
| (1) | Basis of Presentation |
The interim condensed consolidated financial statements of UFP Technologies, Inc. (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company's 2021 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, the condensed consolidated statements of income for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The results of operations for the three-month period ended March 31, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2022.
New Accounting Policy
The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of this translation is recorded in the consolidated financial statements as a component of AOCI. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company’s foreign subsidiaries.
Recent Accounting Pronouncements
There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial statements.
| (2) | Acquisitions |
Advant Medical
On March 16, 2022 the Company purchased
Founded in 1993, Advant is headquartered in Galway, Ireland, with operations in Costa Rica and partner manufacturing in Mexico. Advant is a developer and manufacturer of Class I, II, and III medical devices and packaging, primarily for catheters and guide wires.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s preliminary estimates of fair value (in thousands):
| Fair value of considerations transferred | ||||
| Cash paid at closing | $ | |||
| Other liability | ||||
| Cash from Contech | ( | ) | ||
| Total consideration | $ | |||
| Purchase price allocation | ||||
| Accounts receivable | $ | |||
| Inventory | ||||
| Other current assets | ||||
| Property, plant, and equipment | ||||
| Customer contracts & relationships | ||||
| Intellectual property | ||||
| Non-compete agreement | ||||
| Lease right of use assets | ||||
| Other assets | ||||
| Goodwill | ||||
| Total identifiable assets | $ | |||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Income taxes | ( | ) | ||
| Deferred taxes | ( | ) | ||
| Lease liabilities | ( | ) | ||
| Net assets acquired | $ |
Acquisition costs associated with the transaction were approximately $
The amount of revenue and earnings of Advant recognized since the acquisition date, which is included in the condensed consolidated statement of income for the period ended March 31, 2022, was approximately $
Pro-forma statements
The following table contains an unaudited pro forma condensed consolidated statement of operations for the three-month periods ended March 31, 2022 and 2021, as if the Advant acquisition had occurred at the beginning of the respective periods (in thousands):
| Three-month Period Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Sales | $ | $ | ||||||
| Operating income | $ | $ | ||||||
| Net income | $ | $ | ||||||
| Earnings per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
The above unaudited pro forma information is presented for illustrative purposes only and may not be indica‐tive of the results of operations that would have occurred had both acquisitions occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
DAS Medical
On December 22, 2021 the Company purchased
In connection with its entry into the Purchase Agreement, the Company also entered into an Agreement for the Purchase and Sale of Personal Goodwill (the “Goodwill Agreement”) with the purchase price beneficiaries. Pursuant to the terms of the Goodwill Agreement, on December 22, 2021, the Company purchased from the beneficiaries their personal goodwill, including business relationships, trade secrets and knowledge in connection with DAS Medical’s business, for a purchase price of $
The Company has also entered into Non-Competition Agreements with the beneficiaries and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $
Founded in 2010, DAS Medical is headquartered in Atlanta, Georgia, with manufacturing in the Dominican Republic. DAS Medical is a medical device contract manufacturer specializing in the design, development and production of single-use surgical equipment covers, robotic draping systems and fluid control pouches.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s preliminary estimates of fair value (in thousands):
| Cash paid at closing | $ | |||
| Contingent liability (Earn-out) | ||||
| Non-compete agreements | ||||
| Cash from DAS | ( | ) | ||
| Working capital adjustment | ( | ) | ||
| Total consideration | $ | |||
| Purchase price allocation | ||||
| Accounts receivable | $ | |||
| Inventory | ||||
| Other current assets | ||||
| Property, plant, and equipment | ||||
| Customer contracts & relationships | ||||
| Intellectual property | ||||
| Non-compete agreement | ||||
| Lease right of use assets | ||||
| Goodwill | ||||
| Total identifiable assets | $ | |||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Lease liabilities | ( | ) | ||
| Net assets acquired | $ |
Acquisition costs associated with the transaction were approximately $
Contech Medical
On October 12, 2021 the Company purchased
Founded in 1987, Contech is based in Providence, Rhode Island with partner manufacturing in Costa Rica. Contech is a global leader in the design, development, and manufacture of Class III medical device packaging primarily for catheters and guide wires. The Company has leased the Providence location from a realty trust owned by the selling shareholders and affiliates. The lease is for five years with one five-year renewal option.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s estimates of fair value (in thousands):
| Fair value of considerations transferred | ||||
| Cash paid at closing | $ | |||
| Contingent liability (Earn-out) | ||||
| Other liability | ||||
| Cash from Contech | ( | ) | ||
| Total consideration | $ | |||
| Purchase price allocation | ||||
| Accounts receivable | $ | |||
| Inventory | ||||
| Other current assets | ||||
| Property, plant, and equipment | ||||
| Customer contracts & relationships | ||||
| Intellectual property | ||||
| Non-compete agreement | ||||
| Lease right of use assets | ||||
| Goodwill | ||||
| Total identifiable assets | $ | |||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Lease liabilities | ( | ) | ||
| Net assets acquired | $ |
Acquisition costs associated with the transaction were approximately $
Pro-forma statements
The following table contains an unaudited pro forma condensed consolidated statement of operations for the three-month period ended March 31, 2021, as if both the DAS Medical and Contech Medical acquisitions had occurred at the beginning of the period (in thousands):
| Three-month Period Ended March 31, 2021 | ||||
| (Unaudited) | ||||
| Sales | $ | |||
| Operating income | $ | |||
| Net income | $ | |||
| Earnings per share: | ||||
| Basic | $ | |||
| Diluted | $ | |||
The above unaudited pro forma information is presented for illustrative purposes only and may not be indica‐tive of the results of operations that would have occurred had both acquisitions occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
| (3) | Revenue Recognition |
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, resulting in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to the Company’s customers (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| Net sales of: | 2022 | 2021 | ||||||
| Products | $ | $ | ||||||
| Tooling and Machinery | ||||||||
| Engineering services | ||||||||
| Total net sales | $ | $ | ||||||
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has contract liabilities included within “deferred revenue” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract liabilities for the three-month periods ended March 31, 2022 and 2021 (in thousands):
| Contract Liabilities | ||||||||
| Three Months Ended | ||||||||
| 2022 | 2021 | |||||||
| Deferred revenue - beginning of period | $ | $ | ||||||
| Increases due to consideration received from customers | ||||||||
| Revenue recognized | ( | ) | ( | ) | ||||
| Deferred revenue - end of period | $ | $ | ||||||
Revenue recognized during the three-month periods ended March 31, 2022 and 2021 from amounts included in deferred revenue at the beginning of the period were approximately $
When invoicing occurs after revenue recognition, the Company has contract assets, included within “receivables” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract assets for the three-month periods ended March 31, 2022 and 2021 (in thousands):
| Contract Assets | ||||||||
| Three Months Ended | ||||||||
| 2022 | 2021 | |||||||
| Unbilled Receivables - beginning of period | $ | $ | ||||||
| Increases due to revenue recognized, not invoiced to customers | ||||||||
| Decreases due to customer invoicing | ( | ) | ( | ) | ||||
| Unbilled Receivables - end of period | $ | $ | ||||||
| (4) | Supplemental Cash Flow Information |
Supplemental cash flow information consists of the following (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes, net of refunds | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Capital additions accrued but not yet paid | $ | $ | ||||||
| (5) | Receivables and Allowance for Credit Losses |
Receivables consist of the following (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts receivable–trade | $ | $ | ||||||
| Less allowance for credit losses | ( | ) | ( | ) | ||||
| Receivables, net | $ | $ | ||||||
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. Estimates based on an assessment of anticipated payment and all other historical, current, and future information that is reasonably available are used to determine the allowance.
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected for the three months ended March 31, 2022 and 2021 (in thousands):
| Allowance for Credit | ||||||||
| Three Months Ended | ||||||||
| 2022 | 2021 | |||||||
| Allowance - beginning of period | $ | $ | ||||||
| Provision (adjustment) for expected credit losses | ( | ) | ||||||
| Amounts written off against the allowance | ( | ) | ( | ) | ||||
| Allowance - end of period | $ | $ | ||||||
| (6) | Fair Value of Financial Instruments |
Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820, Fair Value Measurements and Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:
Level 1
Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3
Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The following table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):
| Level 2 | March 31, 2022 | March 31, 2021 | ||||||
| Liabilities: | ||||||||
| Derivative financial instruments | $ | ( | ) | $ | ( | ) | ||
Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full term of the swap agreement.
The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, that are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.
| (7) | Share-Based Compensation |
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2021. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| Share-based compensation related to: | 2022 | 2021 | ||||||
| Common stock grants | $ | $ | ||||||
| Stock option grants | ||||||||
| Restricted Stock Unit Awards ("RSUs") | ||||||||
| Total share-based compensation | $ | $ | ||||||
The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensa‐tion arrangements was approximately $
Common stock grants
The compensation expense for common stock granted during the three-month period ended March 31, 2022, was determined based on the market price of the shares on the date of grant.
Stock Option grants
The following is a summary of stock option activity under all plans for the three-month period ended March 31, 2022:
| Shares Under Options | Weighted Average Exercise Price (per share) | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
| Vested and expected to vest at March 31, 2022 | $ | $ | $ | |||||||||||||
During both three-month periods ended March 31, 2022 and 2021, there were
Restricted Stock Unit awards
The following table summarizes information about RSU activity during the three-month period ended March 31, 2021:
| Restricted Stock Units | Weighted Average | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Awarded | ||||||||
| Shares vested | ( | ) | ||||||
| Shares forfeited | ( | ) | ||||||
| Outstanding at March 31, 2022 | $ | |||||||
At the Company’s discretion, upon vesting, RSU holders are given the option to net-share settle to cover the required minimum withholding tax and the remaining amount is converted into the equivalent number of common shares and issued to the RSU holder. During the three-month periods ended March 31, 2022 and 2021,
As of March 31, 2022, the Company had approximately $
| (8) | Inventories |
Inventories are stated at the lower of cost (determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
| (9) | Leases |
The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet.
ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments pursuant to the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's assumed lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets are also adjusted for any deferred or accrued rent. As the Company's leases do not typically provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| ($ in thousands) | ||||||||
| 2022 | 2021 | |||||||
| Lease Cost: | ||||||||
| Finance lease cost: | ||||||||
| Amortization of right of use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Operating lease cost | ||||||||
| Variable lease cost | ||||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| Cash paid for amounts included in measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Financing cash flows from finance leases | ||||||||
| Weighted-average remaining lease term (years): | ||||||||
| Finance | ||||||||
| Operating | ||||||||
| Weighted-average discount rate: | ||||||||
| Finance | % | % | ||||||
| Operating | % | % | ||||||
The aggregate future lease payments for leases as of March 31, 2022 are as follows (in thousands):
| Finance | Operating | |||||||
| Remainder of 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
| (10) | Income Per Share |
Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during each period.
The weighted average number of shares used to compute basic and diluted net income per share consisted of the following (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Basic weighted average common shares outstanding | ||||||||
| Weighted average common equivalent shares due to restricted stock, stock options and RSUs | ||||||||
| Diluted weighted average common shares outstanding | ||||||||
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included in the computation of diluted income per share because the effect would be antidilutive. For both the three-month periods ended March 31, 2022 and 2021, there were
| (11) | Segment Reporting |
The Company consists of a single operating and reportable segment.
Revenues from customers outside of the United States are not material. customer comprised approximately
The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Aerospace & Defense, Industrial, and Electronics markets. Net sales by market for the three-month periods ended March 31, 2022 and 2021 are as follows (in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Market | Net Sales | % | Net Sales | % | ||||||||||||
| Medical | $ | % | $ | % | ||||||||||||
| Consumer | % | % | ||||||||||||||
| Automotive | % | % | ||||||||||||||
| Aerospace & Defense | % | % | ||||||||||||||
| Industrial | % | % | ||||||||||||||
| Electronics | % | % | ||||||||||||||
| Net Sales | $ | % | $ | % | ||||||||||||
Certain amounts for the three months ended March 31, 2021 were reclassified between markets to conform to the current period presentation.
| (12) | Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill for the three months ended March 31, 2022 were are follows (in thousands):
| Goodwill | ||||
| December 31, 2021 | $ | |||
| Acquired in Advant Medical business combination (See Note 2) | ||||
| DAS working capital adjustment | ||||
| Foreign currency translation | ||||
| March 31, 2022 | $ | |||
The carrying values of the Company’s definite lived intangible assets as of March 31, 2022 are as follows (in thousands):
| Intelletual Property / Tradename & Brand | Non- | Customer | Total | |||||||||||||
| Weighted-average amortization period (years) | ||||||||||||||||
| Gross amount | $ | $ | $ | $ | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | $ | ( | ) | |||||||
| Net balance | $ | $ | $ | $ | ||||||||||||
Amortization expense related to intangible assets was approximately $
| Remainder of 2022 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ |
| (13) | Income Taxes |
The determination of income tax expense in the accompanying unaudited condensed consolidated statements of income is based upon the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur. The Company recorded income tax expense of approximately
| (14) | Indebtedness |
On December 22, 2021, the Company, as the borrower, entered into a secured $
The credit facilities under the Second Amended and Restated Credit Agreement consist of a $
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
Long-term debt consists of the following (in thousands):
| March 31, 2022 | ||||
| Revolving credit facility | $ | |||
| Term loan | ||||
| Total long-term debt | ||||
| Current portion | ( | ) | ||
| Long-term debt, excluding current portion | $ | |||
Future maturities of long-term debt at March 31, 2022 are as follows (in thousands):
| Term Loan | Revolving credit facility | Total | ||||||||||
| Remainder of 2022 | $ | $ | $ | |||||||||
| 2023 | $ | $ | $ | |||||||||
| 2024 | $ | $ | $ | |||||||||
| 2025 | $ | $ | $ | |||||||||
| 2026 | $ | $ | $ | |||||||||
| $ | $ | $ | ||||||||||
Derivative 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 $
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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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; 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; 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, 2021, 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
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 three-month period ended March 31, 2022 increased 46.6% to $71.2 million from $48.6 million in the same period last year, largely due to the Company’s acquisitions of Contech Medical, DAS Medical and Advant Medical. Organic sales increased approximately 9.6%. Gross margins for the three-month period ended March 31, 2022 decreased to 24.1% from 25.9% in the same period last year, largely due to continued supply chain challenges. Operating income and net income increased 20.0% and 16.8%, respectively.
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 and 2021, and to a lesser extent, the beginning of 2022. 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 largely been lifted, but if they are reinstated, they could 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 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 inefficien‐cies due to employee absenteeism and significantly enhanced cleaning and sterilization. Elective medical procedures and exams had been delayed or canceled, there had been a significant reduction in physician office visits, and hospitals had postponed or canceled capital purchases. We believe that these responses negatively impacted demand for the Company’s components for medical devices in 2020 and portions of 2021. 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 of 2020. 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, in a portion of 2020 and all of 2021, we required or enabled certain employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity. We have begun to encourage employees to return to work.
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 continue to effectively manage through the COVID-19 pandemic.
Results of Operations
Sales
Sales for the three-month period ended March 31, 2022 increased approximately 46.6% to $71.2 million from sales of $48.6 million for the same period in 2021. The increase in sales is primarily due to increases in sales to customers in the Medical markets of 75.1%. The increase in sales to the medical market is primarily due to increased sales of $18.0 million, due to the acquisitions of Contech Medical, DAS Medical and Advant Medical, as well as organic sales growth of $4.6 million or 9.6%.
Gross Profit
Gross profit as a percentage of sales (“gross margin”) decreased to 24.1% for the three-month period ended March 31, 2022, from 25.9% for the same period in 2021. As a percentage of sales, material costs increased 6.8%, while labor and overhead costs collectively decreased 4.9%. 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, to a lesser extent, Q1 of 2022.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased approximately 37.0% to $10.0 million for the three-month period ended March 31, 2022, from $7.3 million for the same period in 2021 largely due to the additional SG&A expenses from our newly acquired operations. Absent the SG&A from newly acquired operations, SG&A increased approximately 4.3%, primarily due to increased compensation and travel expenses. As a percentage of sales, SG&A decreased to 14.1% for the three-month period ended March 31, 2022, from 15.0% for the same three-month period in 2021.
Acquisition Costs
The Company incurred approximately $775 thousand in costs associated with acquisition related activities which were charged to expense for the period ended March 31, 2022. These costs were primarily for legal services, valuation services and stamp duty filings and are reflected on the face of the income statement.
Interest Income and Expense
Net interest expense was approximately $327 thousand and $16 thousand for the three-month periods ended March 31, 2022 and 2021, respectively. The increase was primarily due to borrowings to fund the Company’s recent acquisitions.
Other (Income) Expense
Other income was approximately $52 thousand and $10 thousand for the three-month periods ended March 31, 2022 and 2021, respectively. Other income 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 20.2% and 21.4% of income before income tax expense, respectively, for each of the three-month periods ended March 31, 2022 and 2021. The decrease in the effective tax rate for the current period as compared to the prior period was largely due to increased discrete tax benefits associated with the issuance of stock compensation as well as lower effective tax rates from foreign income.
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 by operations for the three-month period ended March 31, 2022 was approximately $3.2 million and was primarily a result of net income generated of approximately $4.9 million, depreciation and amortization of approximately $3.0 million, share-based compensation of approximately $0.7 million, an increase in income taxes payable of approximately $1.1 million, an increase in accounts payable of approximately $4.1 million due to the timing of vendor payments in the ordinary course of business, an increase in other assets of approximately $0.3 million and an increase in deferred revenue of approximately $0.8 million.
These cash inflows and adjustments to income were offset by a decrease in deferred taxes of approximately $0.4 million, an increase in accounts receivable of approximately $4.5 million due to higher sales in the last two months of the first 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 $7.8 million due to inventory build for upcoming demand, restocking to historical levels and the addition of Advant inventory, an increase in prepaid expenses of approximately $1.7 million primarily due to the payment of current year insurance policies, a decrease in accrued expenses of approximately $3.4 million due to the payment of accrued compensation and a decrease in other long-term liabilities of approximately $0.3 million.
Net cash used in investing activities during the three-month period ended March 31, 2022 was approximately $23.0 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 $18.7 million during the three-month period ended March 31, 2022, representing borrowings under our credit facility to fund acquisitions of approximately $28.0 million, partially offset by payments on revolving line of credit of approximately $7.0 million, principal payments of long-term debt of approximately $1.0 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 March 31, 2022, the Company had approximately $95 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 March 31, 2022, the applicable interest rate was approximately 1.91% 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):
| March 31, 2022 |
||||
| Revolving credit facility |
$ | 56,000 | ||
| Term loan |
39,000 | |||
| Total long-term debt |
95,000 | |||
| Current portion |
(4,000 | ) | ||
| Long-term debt, excluding current portion |
$ | 91,000 | ||
Future maturities of long-term debt at March 31, 2022 are as follows (in thousands):
| Term Loan |
Revolving credit facility |
Total |
||||||||||
| Remainder of 2022 |
$ | 3,000 | $ | - | $ | 3,000 | ||||||
| 2023 |
$ | 4,000 | $ | - | $ | 4,000 | ||||||
| 2024 |
$ | 4,000 | $ | - | $ | 4,000 | ||||||
| 2025 |
$ | 4,000 | $ | - | $ | 4,000 | ||||||
| 2026 |
$ | 24,000 | $ | 56,000 | $ | 80,000 | ||||||
| $ | 39,000 | $ | 56,000 | $ | 95,000 | |||||||
Derivative 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 $7.9 million at March 31, 2022. The fair value of the swap as of March 31, 2022 was approximately $(61) 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 income of approximately $62 thousand and other expense of approximately $10 thousand during the three months ended March 31, 2022 and 2021, 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.
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 $4.9 million in operations during the three months ended March 31, 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. 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 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.
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 2022. At March 31, 2022 approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.
Critical Accounting Estimates
There have been no material changes to the Company’s Critical Accounting Estimates, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks as previously disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the “Evaluation Date”), the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Company closed the acquisitions of Contech, DAS Medical and Advant Medical on October 12, 2021, December 22, 2021 and March 17, 2022, respectively. The new acquisitions’ total assets and revenues constituted approximately 43.7% and 25.2%, respectively, of the Company’s consolidated total assets and revenues as shown on our consolidated financial statements as of and for the period ended March 31, 2022. As the acquisitions occurred in the fourth quarter of fiscal 2021and the first quarter of fiscal 2022, the Company excluded all of the acquired businesses internal control over financial reporting from the scope of the assessment of the effectiveness of the Company’s disclosure controls and procedures. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recently-acquired business may be omitted from the scope within the first year of acquisition if specified conditions are satisfied.
An evaluation was also performed under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Except as described above, that evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
From time to time, the Company may be a party to various suits, claims and complaints arising in the ordinary course of business. In the opinion of management of the Company, these suits, claims and complaints should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations.
The Company faces a number of uncertainties and risks that are difficult to predict and many of which are outside of the Company's control. For a detailed discussion of the risks that affect our business, please refer to Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no material changes from the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 with the exception of the additional Risk Factor noted below.
Economic and social volatility and geopolitical instability outside of the U.S. due to large-scale conflicts, including warfare among countries, may adversely impact us, the U.S., and global economies.
From time to time, tensions between countries may erupt into warfare and may adversely affect neighboring countries and those who conduct trade or foreign relations with those affected regions. Such acts of war may cause widespread and lingering damage on a global scale, including, but not limited to: (i) safety and cyber security, (ii) the economy, and (iii) global relations.
In February 2022, Russia invaded Ukraine following years of strained diplomatic relations between the two countries, which was heightened in 2021 when Russia amassed large numbers of military ground forces and support personnel on the Ukraine-Russia border. In response to the invasion and ensuing war, many countries, including the U.S., imposed significant economic and other sanctions against Russia. The war has created the largest refugee crisis in Europe since World War II and has inflicted significant damage to Ukraine’s infrastructure and economy. Both countries’ economies may be significantly affected, which may also adversely impact the global economy, including that of the U.S. The humanitarian crisis that has resulted from the war is likely to have pronounced and enduring impact on Ukraine, as well as a significant impact to neighboring countries that have accepted refugees. Further, Russia has launched an onslaught of cyberwarfare against Ukraine following its invasion, targeting the country’s critical infrastructure, government agencies, media organizations, and related think tanks in the U.S. and EU.
The current administration has cautioned Americans on the possibility of Russia targeting the U.S. with cyber attacks in retaliation for sanctions that the U.S. has imposed and has urged both the public and private sectors to strengthen their cyber defenses and protect critical services and infrastructure. Additionally, President Biden directed government bodies to mandate cybersecurity and network defense measures within their respective jurisdictions and has initiated action plans to reinforce cybersecurity within the electricity, pipeline, and water sectors. The current administration also launched joint efforts with the Cybersecurity and Infrastructure Security Agency (“CISA”) through its “Shields Up” campaign to defend the U.S. against possible cyber attacks. CISA recently published advisories warning of Russian state-sponsored threat actors targeting “COVID-19 research, governments, election organizations, healthcare and pharmaceutical, defense, energy, video gaming, nuclear, commercial facilities, water, aviation, and critical manufacturing” sectors in the U.S. and other Western nations. While we have not experienced such cyber attacks to date, it is yet unknown whether Russia will be successful in breaching our network defenses or, more broadly, those within the areas listed above, which, if successful, may cause disruptions to critical infrastructure required for our operations and livelihoods, or those of our tenants, communities, and business partners.
Further, international sanctions against Russia have led to many nations in the EU, the U.S., and Canada closing their airspace to Russia, with Russia retaliating by restricting its airspace to these nations and their allies, resulting in increased transport costs and logistical challenges for shipment of goods, which have exacerbated an already strained global supply chain previously disrupted by the COVID-19 pandemic. The rising costs and uncertain supply of commodities, coupled with additional pressure on supply chains, may lead to increases in operating expenses, construction costs, and wages in the near term, as discussed in the preceding risk factor. These factors may also continue to drive inflation upward, creating further economic uncertainty and loss of investor confidence, which may also negatively impact the capital markets, investments, and asset prices.
Russia is a large supplier of natural gas and oil, particularly to European countries. During 2021, Europe purchased approximately 49% and 74% of Russia’s supply of oil and natural gas, respectively. As Russia’s largest customer of oil and natural gas, Europe may be severely impacted if there is a shortage or if Russia withholds supplies of energy resources in retaliation for sanctions imposed on Russia. Adverse impacts on the businesses and economies of European countries may also adversely impact those of other countries, including the U.S., who conduct trade with Europe.
The scale and extent of the impact from Russia-Ukraine war are not yet fully known. Disruption, instability, volatility, and decline in economic activity, regardless of where it occurs, whether caused by acts of war, other acts of aggression, or terrorism, could in turn also harm the demand for, and the value of our products. As a result of the factors discussed above, we may be unable to operate our business as usual, which may adversely affect our cash flows, financial condition, and results of operations.
Any or all of the foregoing could have a material adverse effect on our financial condition, results of operations, and cash flows, or the market price of our common stock. Additional risks and uncertainties not currently known to us, or that we presently deem to be immaterial, may also have potential to materially adversely affect our business, financial condition, and results of operations.
| Exhibit No. |
Description |
| Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.* |
|
| Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.* |
|
| 101.INS |
Inline XBRL Instance Document.* |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document.* |
| 101.CAL |
Inline XBRL Taxonomy Calculation Linkbase Document.* |
| 101.LAB |
Inline XBRL Taxonomy Label Linkbase Document.* |
| 101.PRE |
Inline XBRL Taxonomy Presentation Linkbase Document.* |
| 101.DEF 104 |
Inline XBRL Taxonomy Extension Definition Linkbase Document.* Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
__________________
| * |
Filed herewith. |
| ** |
Furnished herewith. |
| # |
Indicates management contract or compensatory plan or arrangement. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UFP TECHNOLOGIES, INC.
| Date: May 10, 2022 |
By: /s/ R. Jeffrey Bailly |
| R. Jeffrey Bailly Chairman, Chief Executive Officer, President, and Director (Principal Executive Officer) |
|
| Date: May 10, 2022 |
By: /s/ Ronald J. Lataille |
| Ronald J. Lataille Chief Financial Officer (Principal Financial Officer) |
EXHIBIT 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, R. Jeffrey Bailly, President and Chief Executive Officer of UFP Technologies, Inc. certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of UFP Technologies, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: May 10, 2022 |
/s/ R. Jeffrey Bailly |
|
R. Jeffrey Bailly |
|
|
Chairman, Chief Executive Officer, President, and Director |
|
|
(Principal Executive Officer) |
EXHIBIT 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Lataille, Chief Financial Officer of UFP Technologies, Inc., certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of UFP Technologies, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: May 10, 2022 |
/s/ Ronald J. Lataille |
|
Ronald J. Lataille |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
EXHIBIT 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officers of UFP Technologies, Inc., a Delaware corporation (the “Company”) do hereby certify that, to the best of such officers’ knowledge and belief, that:
|
(1) |
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, (the “Form 10‑Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Form 10-Q fairly presents, in all materials respects, the financial condition and results of operations of the Company. |
|
Date: May 10, 2022 |
/s/ R. Jeffrey Bailly |
|
R. Jeffrey Bailly |
|
|
Chairman, Chief Executive Officer, President, and Director |
|
|
(Principal Executive Officer) |
|
|
Date: May 10, 2022 |
/s/ Ronald J. Lataille |
|
Ronald J. Lataille |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
A signed original of these written statements required by Section 906 has been provided to UFP Technologies, Inc. and will be retained by UFP Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.