Company Quick10K Filing
Quick10K
UFP Technologies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$37.24 7 $276
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-10 Regulation FD, Exhibits
8-K 2019-06-05 Shareholder Vote
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-03-06 Earnings, Exhibits
8-K 2019-02-19 Officers, Exhibits
8-K 2018-11-12 Regulation FD, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-08-27 Regulation FD, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-06 Shareholder Vote
8-K 2018-05-04 Earnings, Exhibits
8-K 2018-03-01 Earnings, Exhibits
8-K 2018-02-21 Officers, Exhibits
8-K 2018-01-30 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
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MDP Meredith 2,670
FFG FBL Financial Group 1,600
APLS Apellis Pharmaceuticals 1,210
AINV Apollo Investment 1,090
CLXT Calyxt 523
CCT C&C Tours 0
UFPT 2019-03-31
Part I: Financial Information
Item 1:Financial Statements
Item 2:Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4:Controls and Procedures
Part Ii:Other Information
Item 1A:Risk Factors
Item 2:Unregistered Sales of Equity Securities and Use of Proceeds
Item 6:Exhibits
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32.1 exh_321.htm

UFP Technologies Earnings 2019-03-31

UFPT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q_051019p.htm FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended     MARCH 31, 2019    

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

 

Commission File Number: 001-12648

 

UFP Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 04-2314970
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

100 Hale Street, Newburyport, MA 01950, USA

(Address of principal executive offices) (Zip Code)

 

(978) 352-2200

(Registrant's telephone number, including area code)

 

_________________________________________

(Former name, former address, and former fiscal year, if changed since last report)

 

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.

Yes X ; No ____

 

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).

Yes   X ; No ____

 

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 ☐ 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 ____; No X   

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock UFPT The NASDAQ Stock Market L.L.C.

 

7,423,558 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of May 1, 2019.

 

 

 

 

UFP Technologies, Inc.

 

Index

 

 

  Page
   
PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 3
   
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited) 4
   
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited) 5
   
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited) 6
   
Notes to Interim Condensed Consolidated Financial Statements 7
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
   
Item 4. Controls and Procedures 22
   
PART II - OTHER INFORMATION 22
   
Item 1A. Risk Factors 22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
   
Item 6. Exhibits 23
   
Signatures 24

 

 

 

 

 

 

PART I: FINANCIAL INFORMATION
ITEM 1:FINANCIAL STATEMENTS

 

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

 

   March 31,
2019
  December 31,
2018
Assets          
Current assets:          
Cash and cash equivalents  $2,493   $3,238 
Receivables, less allowance for doubtful accounts of $496 at March 31, 2019 and $564 at December 31, 2018   29,772    28,321 
Inventories   19,437    19,576 
Prepaid expenses   1,842    2,206 
Refundable income taxes   1,504    2,285 
Total current assets   55,048    55,626 
Property, plant and equipment   113,275    111,779 
Less accumulated depreciation and amortization   (55,820)   (54,112)
Net property, plant and equipment   57,455    57,667 
Goodwill   51,838    51,838 
Intangible assets, net   21,918    22,232 
Non-qualified deferred compensation plan   2,482    2,034 
Operating lease right of use assets   3,785    - 
Other assets   137    201 
Total assets  $192,663   $189,598 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $6,037   $6,836 
Accrued expenses   5,952    8,458 
Deferred revenue   2,972    2,507 
Operating lease liabilities   1,152    - 
Current portion of long-term debt   2,857    2,857 
Total current liabilities   18,970    20,658 
Long-term debt, excluding current portion   19,286    22,286 
Deferred income taxes   4,553    4,129 
Non-qualified deferred compensation plan   2,481    2,044 
Operating lease liabilities   2,679    - 
Other liabilities   195    24 
Total liabilities   48,164    49,141 
Commitments and contingencies          
Stockholders’ equity:          
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued   -    - 
Common stock, $.01 par value, 20,000,000 shares authorized; 7,443,935 and 7,414,376 shares issued and outstanding, respectively at March 31, 2019;7,415,002 and 7,385,443 shares issued and outstanding, respectively at December 31, 2018   74    74 
Additional paid-in capital   29,476    29,168 
Retained earnings   115,536    111,802 
Treasury stock at cost, 29,559 shares at March 31, 2019 and at December 31, 2018   (587)   (587)
Total stockholders’ equity   144,499    140,457 
Total liabilities and stockholders' equity  $192,663   $189,598 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

UFP Technologies, Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended
March 31,
   2019  2018
Net sales  $47,328   $42,931 
Cost of sales   34,831    32,746 
Gross profit   12,497    10,185 
Selling, general & administrative expenses   7,244    6,592 
Acquisition related costs   -    1,069 
Gain on sale of fixed assets   -    (40)
Operating income   5,253    2,564 
Interest income   -    (25)
Interest expense   231    273 
Other expense (income)   239    (50)
Income before income tax expense   4,783    2,366 
Income tax expense   1,049    589 
Net income  $3,734   $1,777 
           
Net income per share:          
Basic  $0.50   $0.24 
Diluted  $0.50   $0.24 
Weighted average common shares outstanding:          
Basic   7,402    7,300 
Diluted   7,466    7,378 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

UFP TECHNOLOGIES, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31, 2019
   Common Stock  Additional
Paid-in
  Retained  Treasury Stock  Total
Stockholders'
   Shares  Amount  Capital  Earnings  Shares  Amount  Equity
                      
Balance at December 31, 2018   7,385   $74   $29,168   $111,802    30   $(587)  $140,457 
                                    
Share-based compensation   20    -    294    -    -    -    294 
Exercise of stock options net of shares presented for exercise   17    -    285    -    -    -    285 
Net share settlement of restricted stock units and stock option tax withholding   (8)   -    (271)   -    -    -    (271)
Net income   -    -    -    3,734    -    -    3,734 
                                    
Balance at March 31, 2019   7,414   $74   $29,476   $115,536    30   $(587)  $144,499 

 

Three Months Ended March 31, 2018
   Common Stock  Additional
Paid-in
  Retained  Treasury Stock  Total
Stockholders'
   Shares  Amount  Capital  Earnings  Shares  Amount  Equity
                      
Balance at December 31, 2017   7,280   $73   $26,664   $97,562    30   $(587)  $123,712 
                                    
Share-based compensation   16    -    237    -    -    -    237 
Exercise of stock options net of  shares presented for exercise   30    -    367    -    -    -    367 
Net share settlement of restricted   stock units and stock option tax withholding   (5)   -    (144)   -    -    -    (144)
Excess tax benefits on share-based  compensation - adjustment   -    -    167    -    -    -    167 
Adoption of ASC 606   -    -    -    (95)   -    -    (95)
Net income   -    -    -    1,777    -    -    1,777 
                                    
Balance at March 31, 2018   7,321   $73   $27,291   $99,244    30   $(587)  $126,021 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

 

 

UFP Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Three Months Ended
March 31,
   2019  2018
Cash flows from operating activities:          
Net income  $3,734   $1,777 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   2,022    1,832 
Gain on sale of fixed assets   -    (40)
Share-based compensation   294    237 
Deferred income taxes   424    346 
Changes in operating assets and liabilities:          
Receivables, net   (1,451)   (3,520)
Inventories   139    (977)
Prepaid expenses   364    (759)
Refundable income taxes   781    241 
Other assets   (338)   (155)
Accounts payable   (907)   (290)
Accrued expenses   (2,506)   (1,445)
Deferred revenue   465    658 
Non-qualified deferred compensation plan and other liabilities   608    103 
Net cash provided by (used in) operating activities   3,629    (1,992)
Cash flows from investing activities:          
Additions to property, plant, and equipment   (1,388)   (1,494)
Acquisition of Dielectrics, net of cash acquired   -    (76,978)
Proceeds from sale of fixed assets   -    40 
Net cash used in investing activities   (1,388)   (78,432)
Cash flows from financing activities:          
Proceeds from advances on revolving line of credit   -    36,000 
Payments on revolving line of credit   (3,000)   (6,000)
Proceeds from the issuance of long-term debt   -    20,000 
Principal repayments of long-term debt   -    (714)
Proceeds from exercise of stock options, net of shares presented for exercise   285    368 
Payment of statutory withholdings for stock options exercised and restricted stock units vested   (271)   (144)
Net cash (used in) provided by financing activities   (2,986)   49,510 
Net decrease in cash and cash equivalents   (745)   (30,914)
Cash and cash equivalents at beginning of period   3,238    37,978 
Cash and cash equivalents at end of period  $2,493   $7,064 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

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, 2018, included in the Company's 2018 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

 

The condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, the condensed consolidated statements of income for the three-month periods ended March 31, 2019 and 2018, the condensed consolidated statements of stockholders’ equity for the three-month periods ended March 31, 2019 and 2018 and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2019 and 2018 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, 2018 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, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2019.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Accounting Standards Codification (ASC) 842),” and issued subsequent amendments to the initial guidance in January 2018 within ASU No. 2018-01 and in July 2018 within ASU Nos. 2018-10 and 2018-11. The Company adopted ASC 842 on January 1, 2019. See Note 7 for further details.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (ASC 350), Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance will be applied prospectively and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017. The Company does not believe adoption will have a material impact on its financial condition or results of operations.

 

(2)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, except for certain tooling where control does not transfer to the customer, which results 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 as the services are performed. 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.

 

7

 

 

Disaggregated Revenue

 

The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to our customers (in thousands):

 

   Three Months Ended
March 31,
Net sales of:  2019  2018
Products  $46,410   $42,226 
Tooling and Machinery   645    410 
Engineering services   273    295 
Total net sales  $47,328   $42,931 

 

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 deferred revenue, or 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 months ended March 31, 2019 and 2018 (in thousands):

 

   Contract Liabilities
   Three Months Ended
March 31,
   2019  2018
Deferred revenue - beginning of period  $2,507   $871 
Acquired in Dielectrics business combination   -    2,175 
Increases due to consideration received from customers   991    685 
Revenue recognized   (526)   (601)
Deferred revenue - end of period  $2,972   $3,130 

 

Revenue recognized during the three months ended March 31, 2019 and 2018 from amounts included in deferred revenue at the beginning of the period was approximately $497 thousand and $314 thousand, respectively.

 

When invoicing occurs after revenue recognition, the Company has unbilled receivables (contract assets) included within “receivables” on the condensed consolidated balance sheet. Unbilled receivables were approximately $44 thousand at March 31, 2019 and resulted from revenue recognized (earned) during the period ended March 31, 2019 that had not yet been billed. There were no unbilled receivables at March 31, 2018.

 

8

 

 

The following table presents opening and closing balances of contract assets for the three months ended March 31, 2019 (in thousands):

 

   Contract Assets
   Three Months Ended
March 31,
2019
Unbilled Receivables - beginning of period  $65 
Decreases due to customer invoicing   (106)
Increases due to revenue recognized - not invoiced to customers   85 
Unbilled Receivables - end of period  $44 

 

(3)Supplemental Cash Flow Information

 

   Three Months Ended
March 31,
   2019  2018
   (in thousands)
Cash paid for:          
Interest  $47   $114 
Income taxes, net of refunds   (156)   - 
           
Non-cash investing and financing activities:          
Capital additions accrued but not yet paid  $108   $197 
Recognition of lease asset and liability (ASC 842)  $3,831   $- 

 

(4)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.

 

9

 

 

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,
2019
  March 31,
2018
(Liabilities) Assets:          
Derivative financial instruments  $(175)  $50 

 

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.

 

(5)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, 2018. 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:  2019  2018
Common stock grants  $100   $100 
Stock option grants   7    15 
Restricted Stock Unit Awards ("RSUs")   187    122 
Total share-based compensation  $294   $237 

 

The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $164 thousand and $156 thousand for the three-month periods ended March 31, 2019 and 2018, respectively.

 

The following is a summary of stock option activity under all plans for the three-month period ended March 31, 2019:

 

   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, 2018   134,043   $20.46           
Granted   -                
Exercised   (17,205)   32.50           
Outstanding at March 31, 2019   116,838   $21.04    4.65   $1,912 
Exercisable at March 31, 2019   109,338   $20.51    4.71   $1,847 
Vested and expected to vest at March 31, 2019   116,838   $21.04    4.65   $1,912 

 

 

10

 

 

During the three-month period ended March 31, 2019, the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $274 thousand , and the total amount of consideration received by the Company from the exercised options was approximately $285 thousand. During the three-month period ended March 31, 2018, the total intrinsic value of all options exercised was approximately $514 thousand , and the total amount of consideration received by the Company from the exercised options was approximately $367 thousand. At its discretion, the Company allows option holders to surrender previously-owned common stock in lieu of paying the exercise price and withholding taxes. During the three-month periods ended March 31, 2019 and 2018, there were zero shares surrendered for this purpose.

 

On February 19, 2019, the Company’s Compensation Committee approved the award of $400 thousand , payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan. Subject to his continued employment and the terms of his employment agreement. The shares will be issued in December 2019.

 

The following table summarizes information about RSU activity during the three-month period ended March 31, 2019:

 

   Restricted
Stock Units
  Weighted Average
Award Date
Fair Value
Outstanding at December 31, 2018   72,176   $23.60 
Awarded   61,710    33.05 
Shares vested   (19,860)   23.53 
Outstanding at March 31, 2019   114,026   $26.12 

 

At the Company’s discretion, 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. During the three-month periods ended March 31, 2019 and 2018, 8,132 and 5,238 shares were surrendered at an average market price of $33.35 and $27.60, respectively.

 

As of March 31, 2019, the Company had approximately $3.1 million of unrecognized compensation expense that is expected to be recognized over a period of 4 years.

 

(6)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,
2019
  December
31, 2018
Raw materials  $10,432   $11,727 
Work in process   2,618    2,521 
Finished goods   6,387    5,328 
Total inventory  $19,437   $19,576 

 

(7)Leases

 

The Company adopted ASC 842 - Leases (“ASC 842”) as of January 1, 2019, using the transition method wherein entities could initially apply the new leases standard at adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. The adoption of ASC 842 resulted in an increase to total assets due to the recording of operating lease right-of-use ("ROU") assets and operating lease liabilities of approximately $4.0 million and $4.1 million, respectively, as of January 1, 2019.  The Company did not have any finance leases at the adoption date. The adoption did not materially impact the Company’s condensed consolidated statements of income or cash flows.

 

11

 

 

The Company has operating 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 has elected the practical expedient to account 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. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. 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 ROU assets or operating 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 lease ROU assets and operating 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 operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. ROU assets will also be adjusted for any deferred or accrued rent. As the Company's operating 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. Operating fixed lease expense is recognized on a straight-line basis over the lease term.

 

 

 

 

 

12

 

 

   Three Months Ended
March 31, 2019
($'s in thousands)
Lease Cost:     
Operating  $307 
Variable   57 
Short-term   6 
Total lease cost  $370 
      
Cash paid for amounts included in measurement of lease liabilities:     
Operating  $303 
      
Weighted-average remaining lease term (years):     
Operating   3.37 
Weighted-average discount rate:     
Operating   4.45%
      
The aggregate future lease payments for operating leases as of March 31, 2019 were as follows (in thousands):     
      
Remainder of:     
2019  $899 
2020   1,128 
2021   1,119 
2022   957 
2023   35 
Thereafter   - 
Total lease payments   4,138 
Less: Interest   (307)
Present value of lease liabilities  $3,831 
      
The aggregate future lease payments for operating leases as of December 31, 2018 were as follows (in thousands):     
      
2019  $1,051 
2020   1,070 
2021   1,063 
2022   975 
2023   36 
Total  $4,195 

 

(8)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.

 

13

 

 

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,
   2019  2018
Basic weighted average common shares outstanding   7,402    7,300 
Weighted average common equivalent shares due to stock options and SUAs   64    78 
Diluted weighted average common shares outstanding   7,466    7,378 

 

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 the three-month periods ended March 31, 2019 and 2018, the number of stock awards excluded from the computation of diluted earnings per share for this reason was zero and 15,000, respectively.

 

(9)Segment Reporting

 

The Company consists of a single operating and reportable segment.

 

Revenues from customers outside of the United States are not material. No customer comprised more than 10% of the Company’s consolidated revenues for the three-month periods ended March 31, 2019 and 2018. All of the Company’s assets are located in the United States.

 

The Company’s products are primarily sold to customers within the Medical, Automotive, Consumer, Aerospace and Defense, Industrial and Electronics markets. Net sales by market for the three-month periods ended March 31, 2019 and 2018 are as follows (in thousands):

 

   Three Months Ended March 31,
   2019  2018
Market  Net Sales  %  Net Sales  %
             
Medical  $28,813    60.9%  $24,138    56.2%
Automotive   5,738    12.1%   5,356    12.5%
Consumer   4,416    9.3%   5,460    12.7%
Aerospace & Defense   3,532    7.5%   2,487    5.8%
Industrial   2,625    5.5%   2,618    6.1%
Electronics   2,204    4.7%   2,872    6.7%
Net Sales  $47,328    100.0%  $42,931    100.0%

 

Certain amounts for the three months ended March 31, 2018 were reclassified between markets to conform to the current period presentation.

 

(10)Other Intangible Assets

 

The carrying values of the Company’s definite lived intangible assets as of March 31, 2019 are as follows (in thousands):

 

   Tradename
& Brand
  Non-
Compete
  Customer
List
  Total
Estimated useful life  10 years  5 years  20 years   
Gross amount  $367   $462   $22,555   $23,384 
Accumulated amortization   (42)   (108)   (1,316)   (1,466)
Net balance  $325   $354   $21,239   $21,918 

 

 

14

 

 

Amortization expense related to intangible assets was approximately $314 thousand and $198 thousand for the three-month periods ended March 31, 2019 and 2018, respectively. The estimated remaining amortization expense as of March 31, 2019 is as follows (in thousands):

 

Remainder of:   
2019  $943 
2020   1,257 
2021   1,257 
2022   1,257 
2023   1,172 
Thereafter   16,032 
Total  $21,918 

 

(11)Income Taxes

 

The income tax expense included in the accompanying unaudited condensed consolidated statements of income principally relates to the Company’s proportionate share of the pre-tax income of its wholly-owned subsidiaries. The determination of income tax expense for interim reporting purposes 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 tax expense of approximately 21.9% and 24.9% of income before income tax expense, for the three-month periods ended March 31, 2019 and 2018, respectively.

 

(12)Indebtedness

 

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 amends and restates the Company’s prior credit agreement.

 

The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”) consist of a $20 million unsecured term loan and an unsecured revolving credit facility, under which the Company may borrow up to $50 million.  The Amended and Restated Credit Agreement matures on February 1, 2023.  The proceeds borrowed pursuant to the Amended and Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.

 

The Amended and Restated Credit Agreement calls 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. In both cases the applicable margin is dependent upon Company performance.  Under the 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 Amended and 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, 2019 there were $0.7 million in standby letters of credit outstanding drawable as a financial guarantee on worker’s compensation insurance policies. As of March 31, 2019, the applicable interest rate was approximately 3.50% and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.

 

15

 

 

Long-term debt consists of the following (in thousands):

 

   March 31,
2019
  December 31,
2018
Revolving credit facility  $5,000   $8,000 
Term loan   17,143    17,143 
Total long-term debt   22,143   25,143 
Current portion   (2,857)   (2,857)
Long-term debt, excluding current portion  $19,286  $22,286 

 

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. The Company does not speculate using derivative instruments. By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself 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 in those circumstances. 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 market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. 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 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 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 modifies the Company’s interest rate exposure by converting 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. The notional amount was approximately $16.4 million at March 31, 2019. The fair value of the swap as of March 31, 2019 and 2018 was approximately $(175) thousand and $50 thousand, respectively and is included in other liabilities and other assets, respectively. Changes in the fair value of the swap are recorded in other expense (income) and were approximately $239 thousand and $(50) thousand during the three-months ended March 31, 2019 and 2018, respectively.

 

(13)Acquisition

 

On February 1, 2018 the Company purchased 100% of the outstanding shares of common stock of Dielectrics Inc., pursuant to a stock purchase agreement and related agreements, for an aggregate purchase price of $80 million in cash. The purchase price was subject to adjustment based upon Dielectrics’ working capital at closing. An additional $250 thousand of consideration was paid by the Company as a result of the final working capital adjustment. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses and liabilities. The Purchase Agreement contains customary representations, warranties and covenants customary for transactions of this type.

 

Founded in 1954 and based in Chicopee, Massachusetts, Dielectrics is a leader in the design, development, and manufacture of medical devices using thermoplastic materials. They primarily use radio frequency and impulse welding to design and manufacture solutions for the medical industry. In addition to the long-standing customer relationships, they bring to the Company a seasoned management team and a profitable book of business. The Company has leased the Chicopee location from a realty trust owned by the selling shareholder and affiliates. The lease is for five years with two five-year renewal options.

 

16

 

 

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):

 

Consideration Paid:   
Cash paid at closing  $80,000 
Working capital adjustment   250 
Cash from Dielectrics   (3,272)
Total consideration  $76,978 
      
Purchase Price Allocation:     
Accounts receivable  $4,384 
Inventory   4,418 
Other current assets   122 
Property, Plant and Equipment   4,600 
Customer list   22,555 
Non-compete   462 
Trade name and brand   367 
Goodwill   44,516 
Total identifiable assets  $81,424 
Accounts payable   (1,325)
Accrued expenses   (946)
Deferred revenue   (2,175)
Net Assets acquired  $76,978 

 

Acquisition costs associated with the transaction were approximately $1.1 million and were charged to expense in the three-month period ended March 31, 2018. These costs were primarily for investment banking and legal fees and are reflected on the face of the income statement.

 

The following table contains an unaudited pro forma condensed consolidated statement of operations for the three-month period ended March 31, 2018, as if the Dielectrics acquisition had occurred at the beginning of the period (in thousands):

 

   Three-month
Period Ended
March 31,
2018
   (Unaudited)
Sales  $45,986 
Operating Income  $3,489 
Net Income  $2,375 
Earnings per share:     
Basic  $0.33 
Diluted  $0.32 

 

The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred had the Dielectrics acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.

 

 

17

 

 

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 (“Securities Act”), 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, anticipated trends in the different markets in which the Company competes, including the medical, automotive, consumer, aerospace and defense, industrial and electronics markets, statements regarding anticipated new customer and vendor contracts, anticipated advantages and the timing associated with requalification of parts, anticipated advantages of maintaining fewer, larger plants, anticipated advantages the Company expects to realize from its investments and capital expenditures, expectations regarding the manufacturing capacity and efficiencies of the Company’s new production equipment, statements about new product offerings and program launches and the expected timing thereof, statements about the Company’s acquisition opportunities and strategies, statements about the Company’s acquisition of Dielectrics and the integration of the Dielectrics business, the Company’s participation and growth in multiple markets, its business opportunities, the Company’s growth potential and strategies for growth, anticipated revenues and the timing of such revenues, and any indication that the Company may be able to sustain or increase its sales or earnings or sales and earnings growth rates. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including without limitation risks and uncertainties associated with the Company’s acquisition and integration of Dielectrics, risks associated with plant closures and consolidations, and expected efficiencies from consolidating manufacturing, risks and uncertainties associated with the requalification of parts, the risk that the Company may not be able to finalize anticipated new and existing customer and vendor contracts, risks associated with new product and program launches, including lengthy manufacturing qualification processes, the ability launch on a timely basis, significant start-up and other expenses prior to launch, such as tooling and related manufacturing processes, and manufacturing inefficiencies that may affect the ability to generate profits, risks associated with the implementation of new production equipment and requalification or recertification of transferred equipment in a timely, cost-efficient manner, risks that any benefits from such new equipment may be delayed or not fully realized, or that the Company may be unable to fully utilize its expected production capacity, risks and uncertainties associated with the identification of suitable acquisition candidates and the successful, efficient execution of acquisition transactions and integration of any such acquisition candidates, and risks related to our indebtedness and compliance with covenants contained in our financing arrangements. 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 estimates and assumptions 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 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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.

 

18

 

 

Overview

 

The Company is an innovative designer and custom manufacturer of components, subassemblies, products, and packaging primarily for the medical market. The Company consists of a single operating and reportable segment.

 

As anticipated, the Company’s sales to customers in the consumer packaging markets were softer during the three- month period ended March 31, 2019. Despite this, overall and organic (first quarter 2019 sales excluding sales of Dielectrics for the month of January) sales grew by 10.2% and 4.5%, respectively during this period. Manufacturing efficiencies helped gross margins to improve to 26.4% in the three- month period ended March 31, 2019 compared to 23.7% in the same period in 2018. The increased sales, improved gross margins and a favorable effective tax rate allowed the Company to more than double net income to $3.7 million for this period from $1.8 million for the same period in 2018.

 

The Company’s current strategy includes further organic growth and growth through strategic acquisitions.

 

Results of Operations

 

Sales

 

Sales for the three-month period ended March 31, 2019 increased 10.2% to $47.3 million from $42.9 million in the same period in 2018. Organic sales increased 4.5% from the same period last year. The increase in sales for the three-month period ended March 31, 2019 was primarily due to increased sales to the medical, aerospace and defense and automotive markets of 19.4%, 42.0% and 7.1%, respectively. On a combined basis, sales to the consumer, electronics and industrial markets for the three-month period ended March 31, 2019 declined 15.6%. The increased sales to the medical market was primarily due to an extra month of sales at Dielectrics as well as a general increase in demand for medical components. The increase in sales to the aerospace and defense market was primarily due to increased government spending. The increase in sales to the automotive market was primarily due to a new program awarded to us by one of our existing customers. The decline in sales to the consumer, electronics and industrial markets was primarily due to declined orders for protective packaging from several customers due to excess inventories on hand.

 

Gross Profit

 

Gross profit as a percentage of sales (“gross margins”) increased to 26.4% for the three-month period ended March 31, 2019 from 23.7% in the same period in 2018. The improvement in gross margins was primarily due to the Company’s ability to leverage the increased sales over the fixed components of overhead as well as achieve further manufacturing efficiencies during the first quarter of 2019.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (“SG&A”) for the three-month period ended March 31, 2019 increased 9.9% to $7.2 million from $6.6 million in the same period in 2018. As a percentage of sales SG&A for the three-month period ended March 31, 2019 declined slightly to 15.3% from 15.4% in the same period in 2018. The increase in SG&A was largely attributable to an extra month of SG&A at Dielectrics of approximately $0.4 million.

 

Acquisition Costs

 

The Company incurred approximately $1.1 million in costs associated with the Dielectrics acquisition which were charged as an expense in the three-month period ended March 31, 2018. These costs were primarily for investment banking and legal fees and are reflected on the face of the income statement.

 

Interest Income and Expense

 

The Company had net interest expense of approximately $231 thousand and $248 thousand for the three-month periods ended March 31, 2019 and 2018, respectively. The decrease in net interest expense is primarily due to a reduction in the outstanding balance of debt.

 

Other Expense (Income)

 

The Company had other expense (income) of approximately $239 thousand and $(50) thousand for the three-month periods ended March 31, 2019 and 2018, respectively. This increase is due to an increase in the fair value of the swap liability which was caused by a decrease in expectations of future interest rate increases. Should the Company choose to keep the swap for the full five-year term, the net impact to the income statement due to changes in fair value will be zero.

 

19

 

 

Income Taxes

 

The Company recorded tax expense of approximately 21.9% and 24.9% of income before income tax expense, respectively, for each of the three-month periods ended March 31, 2019 and 2018. The decrease in the effective tax rate was primarily due to a settlement during this period with a specific state resulting in a receipt of $156 thousand and a corresponding reduction in income tax expense.

 

Liquidity and Capital Resources

 

The Company generally funds its operating expenses, capital requirements, and growth plan through internally generated cash and bank credit facilities.

 

Cash Flows

 

Net cash provided by operations for the three-month period ended March 31, 2019 was approximately $3.6 million and was primarily a result of net income generated of approximately $3.7 million, depreciation and amortization of approximately $2.0 million, share-based compensation of approximately $0.3 million, an increase in deferred taxes of approximately $0.4 million, a decrease in inventory of approximately $0.1 million, a decrease in prepaid expenses of approximately $0.4 million, a decrease in refundable income taxes of approximately $0.8 million, an increase in deferred revenue of approximately $0.4 million and an increase in other liabilities of approximately $0.6 million. These cash inflows and adjustments to income were partially offset by an increase in accounts receivable of approximately $1.4 million primarily due to increased sales in the last two months of the first quarter of 2019 over the same period of the fourth quarter of 2018, an increase in other assets of approximately $0.3 million and a decrease in accounts payable and accrued expenses of approximately $3.4 million due to the timing of vendor payments in the ordinary course of business and payments of year-end variable compensation.

 

Net cash used in investing activities during the three-month period ended March 31, 2019 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 $3.0 million during the three-month period ended March 31, 2019, resulting from repayments on our credit facility of approximately $3.0 million and to pay statutory withholding for stock options exercised and restricted stock units vested of approximately $0.3 million, partially offset by net proceeds received upon stock options exercises of approximately $0.3 million.

 

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 amends and restates the Company’s prior credit agreement.

 

The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”) 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 Amended and Restated Credit Facilities mature on February 1, 2023.  The proceeds of the Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of Dielectrics, as well as certain other permitted acquisitions. The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.

 

The Amended and Restated Credit Facilities call 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. In both cases the applicable margin is dependent upon Company performance. Under the 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 Amended and 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, 2019 there were $0.7 million in standby letters of credit outstanding drawable as a financial guarantee on worker’s compensation insurance policies. As of March 31, 2019, the applicable interest rate was approximately 3.50% and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.

 

20

 

 

Long-term debt consists of the following (in thousands):

 

   March 31,
2019
  December 31,
2018
Revolving credit facility  $5,000   $8,000 
Term loan   17,143    17,143 
Total long-term debt   22,143   25,143 
Current portion   (2,857)   (2,857)
Long-term debt, excluding current portion  $19,286  $22,286 

 

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. The Company does not speculate using derivative instruments. By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself 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 in those circumstances. 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 market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. 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 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 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 modifies the Company’s interest rate exposure by converting 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. The notional amount was approximately $16.4 million at March 31, 2019. The fair value of the swap as of March 31, 2019 and 2018 was approximately $(175) thousand and $50 thousand, respectively and is included in other liabilities and other assets, respectively. Changes in the fair value of the swap are recorded in other expense (income) and were approximately $239 thousand and $(50) thousand during the three-months ended March 31, 2019 and 2018, respectively.

 

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 Facilities. The Company generated cash of approximately $3.6 million from operations during the three months ended March 31, 2019, 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.

 

Throughout fiscal 2019, 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 and funds expected to be available to it through any necessary equipment financings and additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.

 

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Stock Repurchase Program

 

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 2019. Through March 31, 2019, the Company repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587 thousand. At March 31, 2019, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.

 

Commitments and Contractual Obligations

 

There have been no material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Off-Balance-Sheet Arrangements

 

In addition to operating leases, the Company’s off-balance-sheet arrangements include standby letters of credit which are included in the Company’s revolving credit facility. As of March 31, 2019, there was approximately $0.7 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.

 

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 SEC 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 Securities Exchange Act of 1934, as amended, 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.

 

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. 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.

 

The adoption of Accounting Standards Codification 842, Leases (“ASC 842”), did not require significant changes in our internal controls and procedures over financial reporting and disclosures.

 

 

PART II:OTHER INFORMATION

 

ITEM 1A:RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in Part 1 - Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

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ITEM 2:UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer’s Purchases of Equity Securities

 

On June 16, 2015, the Company issued a press release announcing that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. The Company did not repurchase any shares of its common stock under this program in the first three months of 2019. Through March 31, 2019, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587 thousand. At March 31, 2019, approximately $9.4 million was available for future repurchases of the Company's common stock under this authorization.

 

 

ITEM 6:EXHIBITS

 

Exhibit No. Description
   
10.1 Form of 2019 CEO Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on February 25, 2019 (SEC File No. 001-12648)). #
10.2 Form of 2019 Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on February 25, 2019 (SEC File No. 001-12648)). #
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*
32.1 Certifications pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS XBRL Instance Document.*
101.SCH XBRL Taxonomy Extension Schema Document.*
101.CAL XBRL Taxonomy Calculation Linkbase Document.*
101.LAB XBRL Taxonomy Label Linkbase Document.*
101.PRE XBRL Taxonomy Presentation Linkbase Document.*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.*

__________________

*Filed herewith.
**Furnished herewith.

# Indicates management contract or compensatory plan or arrangement.

 

 

 

 

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SIGNATURES

 

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, 2019 By:    /s/ R. Jeffrey Bailly  
 

R. Jeffrey Bailly

Chairman, Chief Executive Officer, President, and Director

(Principal Executive Officer)

 
     
Date: May 10, 2019 By:    /s/ Ronald J. Lataille   
 

Ronald J. Lataille

Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

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