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UFPT > SEC Filings for UFPT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for UFP TECHNOLOGIES INC

Form 10-Q for UFP TECHNOLOGIES INC


9-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Forward-looking Statements

This report contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend," "plan," "estimate," and other expressions, which are predictions of or indicate future events and trends and that do not relate to historical matters, identify forward-looking statements. Examples of forward-looking statements included in this report include, without limitation, statements regarding the anticipated financial performance and/or future business prospects of the Company, anticipated trends in the different markets in which the Company competes, including the molded fiber, medical and military markets, anticipated advantages the Company expects to realize from its investments and capital expenditures, including the development of and investments in its molded fiber product line, expectations regarding the manufacturing capacity of the Company's new production equipment, anticipated advantages relating to the Company's decision to cease operations at its Ventura, California plant and to consolidate manufacturing in other facilities, the anticipated impact on the Company and its revenues of the conclusion of a substantial portion of its large automotive door panel program, expected methods of growth for the Company, and the overall economy.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance, or achievements expressed or implied by such forward-looking statements. Other examples of these risks, uncertainties, and other factors include, without limitation, the following: economic conditions that affect sales of the products of the Company's customers, risks associated with the identification of suitable acquisition candidates and the successful, efficient execution and integration of such acquisitions, the implementation of new production 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, actions by the Company's competitors, and the ability of the Company to respond to such actions, the ability of the Company to obtain new customers, the ability of the Company to offset lost revenues, evolving customer requirements, difficulties associated with the roll-out of new products, decisions by customers to cancel or defer orders for the Company's products that previously had been accepted, risks and uncertainties associated with plant closures and expected efficiencies from consolidating manufacturing, the costs of compliance with the requirements of Sarbanes-Oxley, and general economic and industry conditions and other factors. In addition to the foregoing, the Company's actual future results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth elsewhere in this report and changes in general economic conditions, interest rates and the assumptions used in making such forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the risk factors and other disclaimers described in the Company's filings with the Securities and Exchange Commission, in particular its most recent Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

UFP Technologies is a producer of innovative custom-engineered components, products, and specialty packaging. The Company serves a myriad of markets, but specifically targets opportunities in the medical, automotive, aerospace & defense, electronics, consumer, and industrial markets.

In the first nine months of 2012, the Company experienced organic sales growth of 2%, reflecting increased demand from most end-use markets. The increase in sales from these markets was substantially offset by a decrease in sales to the automotive market primarily due to the phase-out of a significant portion of the Company's large door panel program in the Southeast. Excluding the door panel program sales from our results for the nine-month period ended September 30, 2011, our revenues for the nine-month period ended September 30, 2012, grew 6.3%.

In prior periods the Company had a 26.32% ownership interest in a realty limited partnership, United Development Company Limited ("UDT"). The Company had consolidated the financial statements of UDT for prior periods because it determined that UDT was a VIE. On February 29, 2012, the Company purchased the manufacturing building that it leased from UDT for $1,350,000, which management believes approximates fair market value. Since this transaction took place among commonly controlled companies, the building was recorded by the Company at UDT's carrying value. Thus, in effect, the Company has acquired the remaining 73.68% ownership interest in UDT, eliminating the VIE. Subsequently, UDT was dissolved and its assets were distributed. The non-controlling interests' portion of the excess of the amount paid for the building over UDT's carrying value, totaling $521,972, has been


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recorded in stockholders' equity as a reduction to additional paid-in capital. The transaction did not impact the consolidated results of operations.

Due to a redesigned model vehicle, a substantial portion of a large automotive door panel program ended on June 30, 2011, although the Company is still supplying door panels to the customer for other model vehicles. Sales of door panels for the discontinued model vehicle were approximately $2.15 million and $4.0 million, respectively, in the three- and nine-month periods ended September 30, 2011.

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

Sales

Sales for the three-month period ended September 30, 2012, increased approximately 4% to $32.0 million from sales of $30.8 million for the same period in 2011. Sales for the nine-month period ended September 30, 2012, increased approximately 2% to $97.6 million from sales of $95.8 million for the same period in 2011. The increase in sales for the three-month period ended September 30, 2012, is primarily due to increased sales to the medical industry of approximately $556,000 (Component Products segment) as well as an increase in sales of molded fiber packaging of approximately $460,000 (Packaging segment). The increase in sales for the nine-month period ended September 30, 2012, is primarily due to increased sales to the medical industry of approximately $1.7 million (Component Products segment) as well as an increase in sales of molded fiber packaging of approximately $2.0 million (Packaging segment), partially offset by a decrease in sales to the automotive industry of approximately $2.0 million. The decline in sales to the automotive industry for the nine-month period ended September 30, 2012, is due to the phase-out of a significant portion of the Company's large door panel program in the Southeast. Excluding the door panel program sales from our results for the nine-month period ended September 30, 2011, our revenues for the nine-month period ended September 30, 2012, grew 6.3%.

Gross Profit

Gross profit as a percentage of sales ("gross margin") increased to 28.9% for the three-month period ended September 30, 2012, from 27.6% in the same period in 2011. Gross margin increased to 28.8% for the nine-month period ended September 30, 2012, from 28.5% in the same period in 2011. The increase in gross margin for the three-month period ended September 30, 2012, is primarily due to an improved mix of business (material and labor collectively declined 1.0% as a percentage of sales) as well as a slight decline in fixed overhead as a percentage of sales due to organic sales growth. In addition, gross margin for the three-month period ended September 30, 2012, improved from the efficiencies gained by the closure in 2011 of the Company's plant in Alabama and the absence of related moving costs in the current period (operating income in the Company's Packaging segment increased approximately $520,000 during the current period compared to the same period in 2011). The increase in gross margin for the nine-month period ended September 30, 2012, is primarily due to improved mix of business (material and labor collectively declined 0.7% as a percentage of sales) partially offset by slightly higher fixed components of cost of sales as a percentage of sales.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses ("SG&A") decreased approximately $64,000 or 1.2% to $5.16 million for the three-month period ended September 30, 2012, from $5.22 million for the same period in 2011. SG&A decreased approximately $562,000 or 3.5% to $16.1 million for the nine-month period ended September 30, 2012, from $16.6 million for the same period in 2011. The slight decrease in SG&A for the three- and nine-month periods ended September 30, 2012, is primarily due to a decrease in professional fees of approximately $80,000 and $420,000, respectively, due to prior year initiatives as well as the timing of recurring services.

As a percentage of sales, SG&A decreased to 16.1% for the three-month period ended September 30, 2012, from 17.0% for the same three-month period in 2011. As a percentage of sales, SG&A decreased to 16.5% for the nine-month period ended September 30, 2012, from 17.4% for the same nine-month period in 2011. The decrease in SG&A as a percentage of sales for both the three- and nine-month periods ended September 30, 2012, is primarily due to the reduction in general and administrative expenses against increased sales.

Gain on Sale of Fixed Assets

The gain on sale of fixed assets of approximately $834,000 in the nine-month period ended September 30, 2011, was derived primarily from the sale of real estate in Alabama by UDT. Of this $834,000 gain, approximately $428,000 relates to non-controlling interests that have been deducted to determine net income attributable to UFP Technologies, Inc.


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Other Expenses

The Company had net interest expense of approximately $14,000 and $6,000 for the three-month periods ended September 30, 2012, and 2011, respectively. The Company had net interest expense of approximately $43,000 and $19,000 for the nine-month periods ended September 30, 2012, and 2011, respectively. The increase in interest expense for both the three- and nine-month periods ended September 30, 2012, is primarily due to lower interest earned on cash.

The Company recorded a tax expense of approximately 36% of income before income tax expense for the both the three- and nine-month periods ended September 30, 2012, compared to a tax expense of approximately 25% and 32% (excluding income attributable to non-controlling interests) for the comparable three- and nine-month periods in 2011. The increase in the effective income tax rate for both the three and nine-month periods ended September 30, 2012, is primarily due to the reversal during the three-month period ended September 30, 2011, of approximately $385,000 in reserves previously established for uncertain tax benefits due to a favorable outcome on a concluded Federal Internal Revenue Service audit and the statute of limitations expiring on certain other federal income tax filings. The non-controlling interest in UDT was not subject to corporate income tax.

Liquidity and Capital Resources

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

At September 30, 2012, and December 31, 2011, the Company's working capital was approximately $49.9 million and $48.6 million, respectively. The increase in working capital for the nine-month period ended September 30, 2012, is primarily due to an increase in cash of approximately $1.3 million due to strong earnings and an increase in receivables, net of approximately $1.3 million due to strong September 2012 sales.

Net cash provided by operations for the nine-month period ended September 30, 2012, was approximately $10.8 million primarily due to net income from consolidated operations of approximately $7.7 million and depreciation and amortization of approximately $2.1 million, partially offset by an increase in receivables, net of approximately $1.3 million due to strong September sales.

Cash used in investing activities during the nine-month period ended September 30, 2012, was approximately $7.9 million and was primarily the result of additions of manufacturing machinery and equipment and software. Included in the additions to manufacturing machinery and equipment was approximately $4.0 million in progress payments associated with molded fiber machinery.

Cash used in financing activities was approximately $1.6 million in both the nine-month periods ended September 30, 2012, and 2011. The cash used in financing activities for the nine-month period ended September 30, 2012, is due primarily to a distribution to the non-controlling interests of UDT of approximately $1.2 million due to the Company's purchase of the Florida real estate from UDT and subsequent dissolution of UDT.

On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility comprises: (i) a revolving credit facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight line amortization; (iii) a term loan of $1.8 million with a 20-year straight line amortization; and (iv) a term loan of $4.0 million with a 20-year straight line amortization. Extensions of credit under the revolving credit facility are based in part upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. At September 30, 2012, the Company had availability of approximately $16.9 million, based upon collateral levels as of that date. The credit facility calls for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the option 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. The loans are collateralized by a first priority lien on all of the Company's assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the credit facility, the Company is subject to a minimum fixed charge coverage financial covenant with which it was in compliance at September 30, 2012. The Company's $17 million revolving credit facility matures November 30, 2013; the term loans are all due on January 29, 2016. The interest rate on these facilities was approximately 1.2% at September 30, 2012.


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On October 11, 2012, the Company entered a loan agreement with US Bank Equipment Finance to finance the purchase of two new molded fiber machines. One of the machines is operational and the other will be installed in the fourth quarter. The value of the loan is approximately $5.0 million and will be funded in the fourth quarter of 2012.

Through the end of 2012 and into 2013, 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 generated from operations and funds expected to be available to it through any necessary equipment financing and additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.

Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements

The following table summarizes the Company's commitments, contractual obligations, and off balance sheet arrangements at September 30, 2012, and the effect such obligations are expected to have on its liquidity and cash flow in future periods:

                                                                                                       New Molded
                                                                                                         Fiber
                                Grand                                                                  Equipment
Payments        Operating      Rapids        Term       Massachusetts      Debt       Supplemental      Purchase
due in:          Leases       Mortgage       Loans        Mortgage       Interest      Retirement      Commitment       Total
2012           $   464,672   $    50,001   $  72,090   $        23,075   $  35,695   $       18,750   $    935,400   $  1,599,683
2013             1,463,907       200,001     288,360            92,300     133,708           75,000                  $  2,253,276
2014             1,156,134       200,001     288,360            92,300     119,192           45,833                  $  1,901,820
2015               587,036       200,001     288,360            92,300     104,675           25,000                  $  1,297,372
2016               534,060       200,000      48,062            92,300      92,712           25,000                  $    992,134
2017 and
thereafter         321,692     2,433,329           -         1,122,983     163,201           75,000              -   $  4,116,205
Total          $ 4,527,501   $ 3,283,333   $ 985,232   $     1,515,258   $ 649,183   $      264,583   $    935,400   $ 12,160,490

The Company requires cash to pay its operating expenses, purchase capital equipment, and to service the obligations listed above. The Company's principal sources of funds are its operations and its revolving credit facility. Although the Company generated cash from operations during the nine-month period ended September 30, 2012, it cannot guarantee that its operations will generate cash in future periods.

The Company had no off balance sheet arrangements during the nine-month period ended September 30, 2012, other than operating leases.

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