UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 SEPTEMBER 30, 20172018
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) | (IRS 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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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 checkmark 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
7,267,6627,373,207 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of November 6, 2017.2, 2018.
UFP Technologies, Inc.
Index
| PART I: | FINANCIAL INFORMATION |
| ITEM 1: | FINANCIAL STATEMENTS |
Condensed Consolidated Balance Sheets
(In thousands, except share data)
| September 30, 2018 | December 31, 2017 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,088 | $ | 37,978 | ||||
| Receivables, less allowance for doubtful accounts of $786 at September 30, 2018 and $652 at December 31, 2017 | 30,144 | 21,381 | ||||||
| Inventories | 19,902 | 12,863 | ||||||
| Prepaid expenses | 2,219 | 1,835 | ||||||
| Refundable income taxes | 966 | 1,017 | ||||||
| Total current assets | 58,319 | 75,074 | ||||||
| Property, plant and equipment | 112,503 | 106,716 | ||||||
| Less accumulated depreciation and amortization | (54,044 | ) | (53,064 | ) | ||||
| Net property, plant and equipment | 58,459 | 53,652 | ||||||
| Goodwill | 51,838 | 7,322 | ||||||
| Intangible assets, net | 22,546 | - | ||||||
| Non-qualified deferred compensation plan | 2,323 | 2,015 | ||||||
| Other assets | 275 | 144 | ||||||
| Total assets | $ | 193,760 | $ | 138,207 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 7,970 | $ | 4,180 | ||||
| Accrued expenses | 6,569 | 5,466 | ||||||
| Deferred revenue | 3,918 | 297 | ||||||
| Current portion of long-term debt | 2,857 | - | ||||||
| Total current liabilities | 21,314 | 9,943 | ||||||
| Long-term debt, excluding current portion | 31,000 | - | ||||||
| Deferred income taxes | 3,256 | 2,440 | ||||||
| Non-qualified deferred compensation plan | 2,328 | 2,030 | ||||||
| Other liabilities | 65 | 82 | ||||||
| Total liabilities | 57,963 | 14,495 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value, 1,000,000 shares authorized; zero shares issued or outstanding | - | - | ||||||
| Common stock, $.01 par value, 20,000,000 shares authorized; 7,402,766 and 7,373,207 shares issued and outstanding, respectively at September 30, 2018; 7,309,909 and 7,280,350 shares issued and outstanding, respectively at December 31, 2017 | 74 | 73 | ||||||
| Additional paid-in capital | 28,918 | 26,664 | ||||||
| Retained earnings | 107,392 | 97,562 | ||||||
| Treasury stock at cost, 29,559 shares at both September 30, 2018 and December 31, 2017 | (587 | ) | (587 | ) | ||||
| Total stockholders’ equity | 135,797 | 123,712 | ||||||
| Total liabilities and stockholders' equity | $ | 193,760 | $ | 138,207 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| September 30, 2017 | December 31, 2016 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 37,246 | $ | 31,359 | ||||
| Receivables, less allowance for doubtful accounts of $602 at September 30, 2017 and $567 at December 31, 2016 | 22,044 | 21,249 | ||||||
| Inventories | 13,136 | 14,151 | ||||||
| Prepaid expenses | 2,234 | 2,281 | ||||||
| Refundable income taxes | 979 | 807 | ||||||
| Total current assets | 75,639 | 69,847 | ||||||
| Property, plant and equipment | 103,797 | 96,806 | ||||||
| Less accumulated depreciation and amortization | (51,815 | ) | (48,290 | ) | ||||
| Net property, plant and equipment | 51,982 | 48,516 | ||||||
| Goodwill | 7,322 | 7,322 | ||||||
| Intangible assets, net | 79 | 318 | ||||||
| Other assets | 2,069 | 1,931 | ||||||
| Total assets | $ | 137,091 | $ | 127,934 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 4,958 | $ | 4,002 | ||||
| Accrued expenses | 5,356 | 4,698 | ||||||
| Short-term debt | 84 | 856 | ||||||
| Total current liabilities | 10,398 | 9,556 | ||||||
| Deferred income taxes | 3,713 | 3,459 | ||||||
| Non-qualified deferred compensation plan | 1,949 | 1,682 | ||||||
| Other liabilities | 118 | 184 | ||||||
| Total liabilities | 16,178 | 14,881 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value, 1,000,000 shares authorized; zero shares issued or outstanding | - | - | ||||||
| Common stock, $.01 par value, 20,000,000 shares authorized; 7,299,721 and 7,270,162 shares issued and outstanding, respectively at September 30, 2017; and 7,242,023 and 7,212,464 shares issued and outstanding, respectively at December 31, 2016 | 73 | 72 | ||||||
| Additional paid-in capital | 26,580 | 25,216 | ||||||
| Retained earnings | 94,847 | 88,352 | ||||||
| Treasury stock at cost, 29,559 shares at September 30, 2017 and December 31, 2016 | (587 | ) | (587 | ) | ||||
| Total stockholders’ equity | 120,913 | 113,053 | ||||||
| Total liabilities and stockholders' equity | $ | 137,091 | $ | 127,934 | ||||
| 3 |
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net sales | $ | 47,808 | $ | 35,684 | $ | 139,758 | $ | 110,623 | ||||||||
| Cost of sales | 35,377 | 27,491 | 104,156 | 82,973 | ||||||||||||
| Gross profit | 12,431 | 8,193 | 35,602 | 27,650 | ||||||||||||
| Selling, general & administrative expenses | 6,541 | 5,693 | 20,550 | 18,070 | ||||||||||||
| Acquisition-related costs | - | - | 1,089 | - | ||||||||||||
| Restructuring costs | - | - | - | 63 | ||||||||||||
| Material overcharge settlement | - | - | (104 | ) | (121 | ) | ||||||||||
| Loss (Gain) on sale of fixed assets | 5 | - | (51 | ) | 3 | |||||||||||
| Operating income | 5,885 | 2,500 | 14,118 | 9,635 | ||||||||||||
| Interest income | 12 | 63 | 44 | 147 | ||||||||||||
| Interest expense | (355 | ) | (12 | ) | (1,032 | ) | (39 | ) | ||||||||
| Other income | 85 | - | 137 | - | ||||||||||||
| Income before income tax expense | 5,627 | 2,551 | 13,267 | 9,743 | ||||||||||||
| Income tax expense | 1,493 | 856 | 3,366 | 3,248 | ||||||||||||
| Net income | $ | 4,134 | $ | 1,695 | $ | 9,901 | $ | 6,495 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.56 | $ | 0.23 | $ | 1.35 | $ | 0.90 | ||||||||
| Diluted | $ | 0.56 | $ | 0.23 | $ | 1.34 | $ | 0.89 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,366 | 7,264 | 7,338 | 7,240 | ||||||||||||
| Diluted | 7,435 | 7,353 | 7,406 | 7,326 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 9,901 | $ | 6,495 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 5,820 | 4,171 | ||||||
| (Gain) loss on sale of fixed assets | (51 | ) | 3 | |||||
| Share-based compensation | 963 | 842 | ||||||
| Deferred income taxes | 1,007 | 254 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables, net | (4,379 | ) | (795 | ) | ||||
| Inventories | (2,621 | ) | 1,015 | |||||
| Prepaid expenses | (262 | ) | 47 | |||||
| Refundable income taxes | 51 | (172 | ) | |||||
| Other assets | (439 | ) | (138 | ) | ||||
| Accounts payable | 2,249 | 429 | ||||||
| Accrued expenses | (417 | ) | 554 | |||||
| Deferred revenue | 1,446 | 104 | ||||||
| Non-qualified deferred compensation plan and other liabilities | 281 | 201 | ||||||
| Net cash provided by operating activities | 13,549 | 13,010 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant, and equipment | (4,521 | ) | (6,880 | ) | ||||
| Acquisition of Dielectrics, net of cash acquired | (76,978 | ) | - | |||||
| Proceeds from sale of fixed assets | 77 | 6 | ||||||
| Net cash used in investing activities | (81,422 | ) | (6,874 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from advances on revolving line of credit | 36,000 | - | ||||||
| Payments on revolving line of credit | (20,000 | ) | - | |||||
| Proceeds from the issuance of long-term debt | 20,000 | - | ||||||
| Principal repayments of long-term debt | (2,143 | ) | (772 | ) | ||||
| Proceeds from exercise of stock options, net of shares presented for exercise | 1,270 | 630 | ||||||
| Payment of statutory withholdings for stock options exercised and restricted stock units vested | (144 | ) | (107 | ) | ||||
| Net cash provided by (used in) financing activities | 34,983 | (249 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (32,890 | ) | 5,887 | |||||
| Cash and cash equivalents at beginning of period | 37,978 | 31,359 | ||||||
| Cash and cash equivalents at end of period | $ | 5,088 | $ | 37,246 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
UFP Technologies, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net sales | $ | 35,684 | $ | 37,220 | $ | 110,623 | $ | 109,626 | ||||||||
| Cost of sales | 27,491 | 28,768 | 82,973 | 83,161 | ||||||||||||
| Gross profit | 8,193 | 8,452 | 27,650 | 26,465 | ||||||||||||
| Selling, general & administrative expenses | 5,693 | 6,027 | 18,070 | 18,402 | ||||||||||||
| Restructuring costs | - | 25 | 63 | 203 | ||||||||||||
| Material overcharge settlement | - | (1,681 | ) | (121 | ) | (2,114 | ) | |||||||||
| Loss (Gain) on sale of fixed assets | - | - | 3 | (4 | ) | |||||||||||
| Operating income | 2,500 | 4,081 | 9,635 | 9,978 | ||||||||||||
| Interest income | 63 | 42 | 147 | 104 | ||||||||||||
| Interest expense | (12 | ) | (17 | ) | (39 | ) | (53 | ) | ||||||||
| Income before income tax expense | 2,551 | 4,106 | 9,743 | 10,029 | ||||||||||||
| Income tax expense | 856 | 1,437 | 3,248 | 3,550 | ||||||||||||
| Net income | $ | 1,695 | $ | 2,669 | $ | 6,495 | $ | 6,479 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.23 | $ | 0.37 | $ | 0.90 | $ | 0.90 | ||||||||
| Diluted | $ | 0.23 | $ | 0.37 | $ | 0.89 | $ | 0.89 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,264 | 7,195 | 7,240 | 7,183 | ||||||||||||
| Diluted | 7,353 | 7,282 | 7,326 | 7,265 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UFP Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended September 30 | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 6,495 | $ | 6,479 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 4,171 | 4,109 | ||||||
| Loss (Gain) on sale of fixed assets | 3 | (4 | ) | |||||
| Share-based compensation | 842 | 871 | ||||||
| Excess tax benefit on share-based compensation | - | (126 | ) | |||||
| Deferred income taxes | 254 | 224 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables, net | (795 | ) | (4,826 | ) | ||||
| Inventories | 1,015 | (366 | ) | |||||
| Prepaid expenses | 47 | (1,231 | ) | |||||
| Refundable income taxes | (172 | ) | 1,146 | |||||
| Other assets | (138 | ) | (93 | ) | ||||
| Accounts payable | 429 | 197 | ||||||
| Accrued expenses | 658 | (317 | ) | |||||
| Non-qualified deferred compensation plan and other liabilities | 201 | 205 | ||||||
| Net cash provided by operating activities | 13,010 | 6,268 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant and equipment | (6,880 | ) | (5,766 | ) | ||||
| Proceeds from sale of fixed assets | 6 | 4 | ||||||
| Net cash used in investing activities | (6,874 | ) | (5,762 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal repayments of long-term debt | (772 | ) | (758 | ) | ||||
| Proceeds from exercise of stock options, net of attestation | 630 | 529 | ||||||
| Excess tax benefit on share-based compensation | - | 126 | ||||||
| Payment of statutory withholdings for stock options exercised and restricted stock units vested | (107 | ) | (89 | ) | ||||
| Net cash used in financing activities | (249 | ) | (192 | ) | ||||
| Net increase in cash and cash equivalents | 5,887 | 314 | ||||||
| Cash and cash equivalents at beginning of period | 31,359 | 29,804 | ||||||
| Cash and cash equivalents at end of period | $ | 37,246 | $ | 30,118 | ||||
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, 2016,2017, included in the Company's 20162017 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheet as of September 30, 2017,2018, the condensed consolidated statements of income for the three- and nine-month periods ended September 30, 20172018 and 2016,2017, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 20172018 and 20162017 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, 20162017 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- and nine-monthsnine-month periods ended September 30, 2017,2018, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2017.2018.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard will replace most existing revenue recognition guidance when it becomes effective. The standard permits the use of either the full retrospective or modified retrospective transition methods.was subsequently updated (“Accounting Standards Codification (ASC) 606”). The Company expects to adopt the standard in the first quarter of 2018 using the modified retrospective transition method. The Company has identified its primary revenue streams, completed a preliminary review of a representative sample of contracts with its customers and is in the process of evaluating the impact of this ASUadopted ASC 606 on its revenue streams and accounting policies. Based on the procedures completed to date, the Company expects thatJanuary 1, 2018. See Note 2 for a significant portion of its business, the recognition of revenue under the updated standard will occur at a point in time, which is consistent with current practice. The Company has identified certain revenue streams for which the recognition of revenue may occur over time, which is a change from current practice. These revenue streams include certain customer stocking commitments. Additionally, the Company has identified certain revenue streams for which the recognition of revenue may be deferred, which is also a change from current practice. These revenue streams include certain tooling sales. The Company does not expect that the impact of these changes in the timing of revenue recognition for these items to be significant to the financial statements. The Company is also in the process of updating its internal controls and drafting the expanded disclosures as required by this ASU. The Company does not expect significant changes to its systems or internal controls. As the Company continues through the adoption process, it is possible that these preliminary conclusions may change.further details.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.Leases (ASC 842), The” and issued subsequent amendments to the initial guidance in thisJanuary 2018 within ASU supersedes the leasing guidanceNo. 2018-01 and in Topic 840, Leases. Under the new guidance,July 2018 within ASU Nos. 2018-10 and 2018-11. The standard requires lessees are required to recognize lease assets and lease liabilitiesleases on the balance sheet for thoseas a right-of-use asset and a lease liability, other than leases previouslythat meet the definition of a short-term lease. The liability will be equal to the present value of the lease payments. The asset will be based on the liability, subject to adjustment. Currently, under existing U.S. generally accepted accounting principles, the Company does not recognize on the balance sheet a right-of-use asset or lease liability related to its operating leases. For income statement purposes, the leases will continue to be classified as either operating leases.or finance. Operating leases will result in straight-line expense (similar to current operating leases) and finance leases will result in a front-loaded expense pattern (similar to current capital leases). The amendments in ASU No. 2016-02 arestandard is effective for annual reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, including interim periods within that reporting period with early2018. Early adoption is permitted. The standard allows an entity to elect to have a date of initial application as of the beginning of the period of adoption. The standard provides for the option to elect a package of practical expedients upon adoption. The Company is evaluatingintends to adopt the impactstandard on January 1, 2019 and continues to assess its lease population and its option to elect certain practical expedients as defined in the new standard. The Company expects expanded financial statement note disclosure in addition to recognizing a right-of-use asset and lease liability for its operating leases on the balance sheet. The Company continues to evaluate the impacts of adopting this ASU on its consolidated financial position and results of operations.the pending adoption. As such, the Company’s preliminary assessments are subject to change.
In March 2016,January 2017, the FASB issued ASU No. 2016-09,2017-04, Improvements to Employee Share Based Payment AccountingIntangibles—Goodwill and Other (ASC 350), Simplifying the Test for Goodwill Impairment. This ASU simplifies several aspectsThe guidance removes Step 2 of the accountinggoodwill 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 share-based payment transactions, including income tax consequences, classification of awards, forfeituresannual and classificationinterim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed on the statement of cash flows. The Company adopted this ASU ontesting dates after January 1, 2017. As theThe Company hasdoes not hadbelieve adoption will have a significant amountmaterial impact on its financial condition or results of forfeitures historically, under the provisions of this ASU the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The impact of adopting this update to the Company’s Consolidated Financial Statements will depend on market factors and the timing and intrinsic value of future share-based compensation award vests and exercises. Subsequent to adoption, the Company notes the potential for volatility in its effective tax rate as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly to income tax expense in the Condensed Consolidated Statement of Income.operations.
| 6 |
Revisions
Certain revisions have been made to the 2016December 31, 2017 Condensed Consolidated Statement of Cash FlowsBalance Sheet to conform to the current year presentation relating to a reserve for uncertain tax positions and to cash paid for capital expenditures.reclassification of deferred revenue. The reclassification resulted in an increase in deferred revenue and a decrease in accrued expenses in the amount of approximately $297,000. In addition, certain revisions have been made to the Condensed Consolidated Statements of Cash Flows for the nine-month period ended September 30, 2017, also due to a reserve for uncertain tax positionsreclassification of deferred revenue. The reclassification resulted in an increase to the change in refundable income taxes of $315,000deferred revenue and a decrease toin the change in accrued expenses in the amount of $315,000. A change in presentation of cash paid for capital expenditures resulted in a decrease of $311,000 in both the change in accounts payable and in additions to property, plant and equipment, net.approximately $104,000. These revisions had no impact on previously reported net income and are deemed immaterial to the previously issued financial statements.
| (2) | Revenue Recognition |
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective transition method. Under this method, the Company applied ASC 606 to contracts under which all performance obligations were not completed as of January 1, 2018 and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018 are presented in accordance with ASC 606. Prior period amounts are not adjusted and are reported in accordance with requirements in ASC 605, Revenue Recognition, which is also referred to herein as “legacy GAAP”.
The cumulative effect of the adoption on our condensed consolidated balance sheet, by applying the modified retrospective method as of January 1, 2018, is as follows (in thousands):
| As Reported | As Adjusted | |||||||||||
| December 31, 2017 | Cumulative Adjustments | January 1, 2018 | ||||||||||
| Assets: | ||||||||||||
| Property, plant and equipment | $ | 106,716 | $ | 1,027 | $ | 107,743 | ||||||
| Accumulated depreciation and amortization | (53,064 | ) | (548 | ) | (53,612 | ) | ||||||
| Net property, plant and equipment | 53,652 | 479 | 54,131 | |||||||||
| Liabilities: | ||||||||||||
| Deferred revenue | 297 | 574 | 871 | |||||||||
| Deferred income taxes | 2,440 | (25 | ) | 2,415 | ||||||||
| Stockholders' equity: | ||||||||||||
| Retained earnings | 97,562 | (70 | ) | 97,492 | ||||||||
| 7 |
The following reflects the Company’s condensed consolidated balance sheet and condensed consolidated statement of income on an as-reported basis and as if we had continued to recognize revenue under legacy GAAP (in thousands):
| September 30, 2018 | ||||||||||||
| As Reported | Balances without adoption of ASC 606 | Difference | ||||||||||
| Assets: | ||||||||||||
| Property, plant and equipment | $ | 112,503 | $ | 111,230 | $ | 1,273 | ||||||
| Accumulated depreciation and amortization | (54,044 | ) | (53,145 | ) | (899 | ) | ||||||
| Net property, plant and equipment | 58,459 | 58,085 | 374 | |||||||||
| Liabilities: | ||||||||||||
| Deferred revenue | 3,918 | 3,502 | 416 | |||||||||
| Deferred income taxes | 3,256 | 3,281 | (25 | ) | ||||||||
| Stockholders' equity: | ||||||||||||
| Retained earnings | 107,392 | 107,409 | (17 | ) | ||||||||
| For the Nine Months Ended September 30, 2018 | ||||||||||||
| As Reported | Balances without adoption of ASC 606 | Difference | ||||||||||
| Net sales | $ | 139,758 | $ | 139,600 | $ | 158 | ||||||
| Cost of sales | 104,156 | 104,051 | 105 | |||||||||
| Gross profit | 35,602 | 35,549 | 53 | |||||||||
The following summarizes the significant changes under ASC 606 as compared to legacy GAAP:
| · | Under legacy GAAP, the Company recognized revenue for certain customer tooling at the time the tooling was complete and accepted by the customer. Under ASC 606, as “control” of this tooling does not transfer to the customer, the related purchase orders do not qualify as an “accounting contract” and as a result the consideration received is recorded as deferred revenue and recognized over the estimated time for which parts are produced on each respective tool (approximately two years). The related costs to produce the tooling are capitalized and depreciated over the estimated useful life of the tool (approximately two years). |
| · | Under legacy GAAP, the Company recognized revenue on long-term agreements with variable pricing at the selling price that was in effect for the current period at the time of shipment. Under ASC 606, the Company will recognize revenue at the weighted average selling price for each part over the term of the agreement for any agreements where the Company estimates that we will not be able to achieve the corresponding cost changes necessary to maintain a consistent margin over the term of the agreement. The Company has a small number of long-term agreements with variable pricing. |
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, which results in revenue being recognized over the estimated time for which parts are produced on each respective tool. 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.
| 8 |
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) (See Note 9 for further information regarding net sales by market):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net sales of: | ||||||||||||||||
| Products | $ | 46,423 | $ | 35,301 | $ | 135,670 | $ | 109,196 | ||||||||
| Tooling and Machinery | 537 | 277 | 2,135 | 1,150 | ||||||||||||
| Engineering services | 848 | 106 | 1,953 | 277 | ||||||||||||
| Total net sales | $ | 47,808 | $ | 35,684 | $ | 139,758 | $ | 110,623 | ||||||||
Contract balances
The 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 (contract liabilities), included within “deferred revenue” on the condensed consolidated balance sheets.
The following table presents opening and closing balances of contract liabilities for the nine-month period ended September 30, 2018 (in thousands):
| Contract Liabilities | ||||
| Deferred revenue - January 1, 2018 | $ | 871 | ||
| Acquired in Dielectrics business combination | 2,175 | |||
| Increases due to consideration received from customers | 3,088 | |||
| Revenue recognized | (2,216 | ) | ||
| Deferred revenue - September 30, 2018 | $ | 3,918 | ||
Revenue recognized during the nine-month period ended September 30, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $527,000.
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 $48,000 at September 30, 2018.
| 9 |
| (3) | Supplemental Cash Flow Information |
| Nine Months Ended September 30 | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Cash paid for: | ||||||||||||||||
| Interest | $ | 37 | $ | 51 | $ | 853 | $ | 37 | ||||||||
| Income taxes, net of refunds | 3,167 | 2,178 | 2,308 | 3,167 | ||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||
| Capital additions accrued but not yet paid | $ | 527 | $ | 311 | $ | 216 | $ | 527 | ||||||||
| 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 | September 30, 2018 | |||
| Assets: | ||||
| Derivative financial instruments | $ | 137 | ||
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, whichthat 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.Company.
| 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(the vesting period of the equity grant).
| 10 |
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, 2016.2017. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Share-based compensation related to: | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Common stock granted to the Board of Directors | $ | - | $ | - | $ | 105 | $ | 105 | ||||||||
| Common stock granted to the Chief Executive Officer | 100 | 100 | 300 | 300 | ||||||||||||
| Stock options granted to directors | - | - | 105 | 105 | ||||||||||||
| Stock options granted to employees | 4 | 34 | 25 | 107 | ||||||||||||
| Restricted Stock Unit awards to employees | 102 | 95 | 307 | 254 | ||||||||||||
| Total share-based compensation | $ | 206 | $ | 229 | $ | 842 | $ | 871 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Share-based compensation related to: | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Common stock grants | $ | 100 | $ | 100 | $ | 405 | $ | 405 | ||||||||
| Stock option grants | 9 | 4 | 143 | 130 | ||||||||||||
| Restricted Stock Unit awards ("RSUs") | 163 | 102 | 415 | 307 | ||||||||||||
| Total share-based compensation | $ | 272 | $ | 206 | $ | 963 | $ | 842 | ||||||||
The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $106,000$289,000 and $67,000, respectively,$106,000 for the three-month periods ended September 30, 2018 and 2017, and 2016,respectively, and approximately $441,000$649,000 and $264,000, respectively,$441,000 for the nine-month periods ended September 30, 2018 and 2017, and 2016.respectively.
The following is a summary of stock option activity under all plans for the three-monthnine-month period ended September 30, 2017:2018:
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, 2016 | 232,578 | $ | 16.53 | |||||||||||||
| Granted | 12,336 | 27.05 | ||||||||||||||
| Exercised | (51,285 | ) | 26.88 | |||||||||||||
| Expired | (3,750 | ) | 18.85 | |||||||||||||
| Outstanding at September 30, 2017 | 189,879 | $ | 17.41 | 3.55 | $ | 2,029 | ||||||||||
| Exercisable at September 30, 2017 | 184,879 | $ | 17.23 | 3.60 | $ | 2,011 | ||||||||||
| Vested and expected to vest at September 30, 2017 | 189,879 | $ | 17.41 | 3.55 | $ | 2,029 | ||||||||||
| 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, 2017 | 202,379 | $ | 18.23 | |||||||||||||
| Granted | 10,344 | 31.20 | ||||||||||||||
| Exercised | (78,680 | ) | 16.14 | |||||||||||||
| Outstanding at September 30, 2018 | 134,043 | $ | 20.46 | 4.75 | $ | 2,183 | ||||||||||
| Exercisable at September 30, 2018 | 122,793 | $ | 19.71 | 4.80 | $ | 2,093 | ||||||||||
| Vested and expected to vest at September 30, 2018 | 134,043 | $ | 20.46 | 4.75 | $ | 2,183 | ||||||||||
On June 6, 2017,2018, the Company granted options to its directors for the purchase of 12,33610,344 shares of common stock at that day’s closing price of $27.05.$31.20. The compensation expense related to these grants was determined as the fair value of the options using the Black ScholesBlack-Scholes option pricing model based on the following assumptions:
| Expected volatility | 27.7 | % | |||
| Expected dividends | None | ||||
| Risk-free interest rate | 2.70 | % | |||
| Exercise price | $ | 31.20 | |||
| Expected term (in years) | 6.0 | ||||
| Weighted-average grant date fair value | $ | 10.15 |
The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term, and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option. The expected term is estimated based on historical option exercise activity.
During the nine-month periodsperiod ended September 30, 20172018 and 2016,2017, 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 $577,000$1.2 million and $564,000,$577,000, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $802,000$1.3 million and $529,000,$802,000, respectively. At its discretion, the Company allows option holders to surrender previously ownedpreviously-owned common stock in lieu of paying the exercise price and withholding taxes. During the nine-month period ended September 30, 2018, no shares were surrendered for this purpose. During the nine-month period ended September 30, 2017, there were 6,511 shares were surrendered for this purpose at an average market price of $26.45. During the nine-month period ended September 30, 2016 there were no shares surrendered for this purpose.
| 11 |
On February 21, 2017,21, 2018, the Company’s Compensation Committee approved the award of $400,000, payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan. TheSubject to his continued employment and the terms of his employment agreement, the shares will be issued in December 2017.2018.
The following table summarizes information about Restricted Stock Units (“RSUs”) activity during the nine-month period ended September 30, 2017:2018:
| Restricted Stock Units | Weighted Average Award Date Fair Value | Restricted Stock Units | Weighted Average Award Date Fair Value | |||||||||||||
| Unvested at December 31, 2016 | 46,558 | $ | 20.05 | |||||||||||||
| Outstanding at December 31, 2017 | 57,395 | $ | 21.03 | |||||||||||||
| Awarded | 22,770 | 24.70 | 29,867 | 29.30 | ||||||||||||
| Shares vested | (13,419 | ) | 23.54 | (16,050 | ) | 23.55 | ||||||||||
| Unvested at September 30, 2017 | 55,909 | $ | 20.96 | |||||||||||||
| Outstanding at September 30, 2018 | 71,212 | $ | 23.48 | |||||||||||||
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 nine-month periods ended September 30, 2018 and 2017, 5,328 and 2016, 4,377 and 3,889 shares were surrendered at an average market price of $24.50$27.60 and $22.82,$24.50, respectively.
As of September 30, 2017,2018, the Company had approximately $754,000$1.2 million of unrecognized compensation expense whichthat is expected to be recognized over a period of 3.5 years.years.
| Inventories |
Inventories are stated at the lower of cost (first-in, first-out)(determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):
| September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
| Raw materials | $ | 6,660 | $ | 7,111 | $ | 10,226 | $ | 6,898 | ||||||||
| Work in process | 1,161 | 1,354 | 4,105 | 1,207 | ||||||||||||
| Finished goods | 5,315 | 5,686 | 5,571 | 4,758 | ||||||||||||
| Total inventory | $ | 13,136 | $ | 14,151 | $ | 19,902 | $ | 12,863 | ||||||||
| (7) | Preferred Stock |
On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, to the stockholders of record on March 20, 2009. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Share”) of the Company, at a price of $25 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The Rights expire on March 19, 2019.
| 12 |
| 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 September 30, | | Nine Months Ended September 30, | ||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Weighted average common shares outstanding, basic | 7,264 | 7,195 | 7,240 | 7,183 | ||||||||||||
| Weighted average common equivalent shares due to stock options and RSUs | 89 | 87 | 86 | 82 | ||||||||||||
| Weighted average common shares outstanding, diluted | 7,353 | 7,282 | 7,326 | 7,265 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Basic weighted average common shares outstanding | 7,366 | 7,264 | 7,338 | 7,240 | ||||||||||||
| Weighted average common equivalent shares due to stock options and RSUs | 69 | 89 | 68 | 86 | ||||||||||||
| Diluted weighted average common shares outstanding | 7,435 | 7,353 | 7,406 | 7,326 | ||||||||||||
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- and nine-month periods ended September 30, 2017,2018, the number of antidilutive stock awards excluded from the computation of diluted earnings per share for this reason was zero and 27,336,10,344, respectively. For the three- and nine-month periods ended September 30, 2016,2017, the number of antidilutive stock awards excluded from the computation of diluted earnings per share for this reason was 35,193zero and 52,377,27,336, respectively.
| 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- and nine-month periods ended September 30, 2017.2018. All of the Company’s assets are located in the United States.
The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Aerospace and Defense, IndustrialElectronics and ElectronicsIndustrial markets. Net sales by market for the three- and nine-month periods ended September 30, 20172018 and 2016, respectively,2017 are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Market | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Medical | $ | 16,712 | 46.8 | % | $ | 16,548 | 44.5 | % | $ | 52,822 | 47.7 | % | $ | 48,953 | 44.7 | % | $ | 27,629 | 57.8 | % | $ | 16,811 | 47.1 | % | $ | 80,994 | 58.0 | % | $ | 53,001 | 47.9 | % | ||||||||||||||||||||||||||||||||
| Consumer | 6,006 | 16.8 | % | 5,648 | 15.2 | % | 15,713 | 14.2 | % | 15,303 | 14.0 | % | 6,588 | 13.8 | % | 5,714 | 16.0 | % | 17,825 | 12.8 | % | 14,928 | 13.5 | % | ||||||||||||||||||||||||||||||||||||||||
| Automotive | 5,174 | 14.5 | % | 6,942 | 18.7 | % | 18,018 | 16.3 | % | 20,485 | 18.7 | % | 4,572 | 9.6 | % | 5,174 | 14.5 | % | 14,993 | 10.7 | % | 18,018 | 16.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Aerospace & Defense | 2,682 | 7.5 | % | 2,516 | 6.8 | % | 8,290 | 7.5 | % | 7,929 | 7.2 | % | 3,814 | 8.0 | % | 2,657 | 7.4 | % | 9,381 | 6.7 | % | 8,255 | 7.5 | % | ||||||||||||||||||||||||||||||||||||||||
| Electronics | 2,800 | 5.9 | % | 2,821 | 7.9 | % | 8,641 | 6.2 | % | 8,898 | 8.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Industrial | 2,591 | 7.3 | % | 2,792 | 7.5 | % | 7,629 | 6.9 | % | 8,441 | 7.7 | % | 2,405 | 5.0 | % | 2,507 | 7.0 | % | 7,924 | 5.7 | % | 7,523 | 6.8 | % | ||||||||||||||||||||||||||||||||||||||||
| Electronics | 2,519 | 7.1 | % | 2,774 | 7.5 | % | 8,151 | 7.4 | % | 8,515 | 7.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Sales | $ | 35,684 | 100.0 | % | $ | 37,220 | 100.0 | % | $ | 110,623 | 100.0 | % | $ | 109,626 | 100.0 | % | $ | 47,808 | 100.0 | % | $ | 35,684 | 100.0 | % | $ | 139,758 | 100.0 | % | $ | 110,623 | 100.0 | % | ||||||||||||||||||||||||||||||||
Certain immaterial amounts for the three- and nine-month periodsnine-months ended September 30, 20162017 were reclassified between markets to conform to the current period presentation.
| 13 |
| (10) | Other Intangible Assets |
The carrying values of the Company’s definite lived intangible assets as of September 30, 2017 and December 31, 2016,2018, are as follows (in thousands):
| Patents | Non- Compete | Customer List | Total | |||||||||||||
| Estimated useful life (in years) | 14 | 5 | 5 | |||||||||||||
| Gross amount at September 30, 2017 | $ | 429 | $ | 512 | $ | 2,046 | $ | 2,987 | ||||||||
| Accumulated amortization at September 30, 2017 | (429 | ) | (496 | ) | (1,983 | ) | $ | (2,908 | ) | |||||||
| Net balance at September 30, 2017 | $ | - | $ | 16 | $ | 63 | $ | 79 | ||||||||
| Estimated useful life (in years) | 14 | 5 | 5 | |||||||||||||
| Gross amount at December 31, 2016 | $ | 429 | $ | 512 | $ | 2,046 | $ | 2,987 | ||||||||
| Accumulated amortization at December 31, 2016 | (429 | ) | (449 | ) | (1,791 | ) | $ | (2,669 | ) | |||||||
| Net balance at December 31, 2016 | $ | - | $ | 63 | $ | 255 | $ | 318 | ||||||||
| 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 | (24 | ) | (62 | ) | (752 | ) | $ | (838 | ) | |||||||
| Net balance | $ | 343 | $ | 400 | $ | 21,803 | $ | 22,546 | ||||||||
The weighted-average amortization period for all intangible assets is 19.6 years. Amortization expense related to intangible assets was approximately $314,000 and $79,000 for each of the three-month periods ended September 30, 2018 and 2017, respectively, and 2016,$838,000 and was approximately $239,000 for each of the nine-month periods ended September 30, 2018 and 2017, and 2016. As of September 30, 2017, therespectively. The estimated remaining amortization expense for 2017as of September 30, 2018 is $79,000.as follows (in thousands):
| Remainder of: | |||||
| 2018 | $ | 314 | |||
| 2019 | 1,257 | ||||
| 2020 | 1,257 | ||||
| 2021 | 1,257 | ||||
| 2022 | 1,257 | ||||
| Thereafter | 17,204 | ||||
| Total | $ | 22,546 | |||
| 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 33.6%26.5% and 35.0%33.6% of income before income tax expense, respectively, for each of the three-month periods ended September 30, 2018 and 2017, and 2016.respectively. The decrease in the effective tax rate for the current period is largely due to a change in the statutory federal tax benefit of approximately $37,000rate for 2018 and share-based payment related tax benefits recorded in the three-month period ended September 30, 2017 as a result2018 of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1).approximately $36,000. The Company recorded a tax expense of approximately 33.3%25.4% and 35.4%33.3% of income before income tax expense, for each of the nine-month periods ended September 30, 2018 and 2017, and 2016.respectively. The decrease in the effective tax rate for the current period is largely due to a change in the statutory federal tax benefit of approximately $162,000rate for 2018 and share-based payment related tax benefits recorded in the nine-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1); and a tax assessment2018 of approximately $40,000 from one jurisdiction recorded in the first quarter of 2016.$220,000. The Company notes the potential for volatility in its effective tax rate, as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly into income tax expense.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), resulting in significant modifications to existing law. The 2017 Tax Act effected a reduction in the corporate tax rate from 35% to 21%, and changes to executive compensation limitations under IRC Section 162(m), among other changes. The Company made what it considers to be a reasonable estimate of the impact of the 2017 Tax Act in its financials for the year ended December 31, 2017. The Company has not recorded any changes to this estimate for the three-month period ended September 30, 2018.
Staff Accounting Bulletin (“SAB”) No. 118, issued by the Securities and Exchange Commission (“SEC”), provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies and changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017 by the U.S. Department of the Treasury.
| 14 |
| (12) | Indebtedness |
On December 2, 2013, the Company entered into an unsecured $40 million revolving credit facility with Bank of America, N.A. The credit facility called for interest of LIBOR plus a margin that ranged from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranged from 0.25% to zero. In both cases the applicable margin was dependent upon Company performance. Under the credit facility, the Company was subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The credit facility was amended effective December 31, 2014, to modify the definition of “consolidated fixed-charge coverage ratio”. The Company’s $40 million credit facility was to mature on November 30, 2018.
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 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, including funding the acquisition of Dielectrics Inc. (“Dielectrics”) (See Note 13), 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 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 .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 September 30, 2018, the applicable interest rate was approximately 3.26% and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
Included in the Amended and Restated Credit Facilities were approximately $0.6 million in standby letters of credit as a financial guarantee on worker’s compensation insurance policies.
Long-term debt consists of the following (in thousands):
| September 30, 2018 | |||||
| Revolving credit facility | $ | 16,000 | |||
| Term loan | 17,857 | ||||
| Total long-term debt | 33,857 | ||||
| Current portion | (2,857 | ) | |||
| Long-term debt, excluding current portion | $ | 31,000 | |||
Derivative Financial Instruments
The Company uses 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. 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, 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 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.
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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 in order to hedge against the possibility of rising interest rates during the term of the loan. The notional amount was $17,857,142 at September 30, 2018. The fair value of the swap as of September 30, 2018 was approximately $137,000 and is included in other assets. Changes in the fair value of the swap are recorded in other income/expense and resulted in income of approximately $85,000 and $137,000 during the three- and nine-month periods ended September 30, 2018, respectively.
Restructuring CostsOn 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 $250,000 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.
On March 18, 2015,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 committeda 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.
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The following table summarizes the preliminary allocation of consideration paid to move forward with a plan to cease operations at its Raritan, New Jersey, plant and consolidate operations into its Newburyport, Massachusetts, facility and other UFP facilities. The Company’s decision was in response to a continued decline in business at the Raritan facility and the Company’s purchaseacquisition date fair value of the 137,000-square-foot facility in Newburyport.assets acquired and liabilities assumed based on management’s estimates of fair value. The activities related to this consolidation are complete.final purchase price allocation may change based on final appraisals, valuations and analysis of the fair value of the acquired assets and assumed liabilities (in thousands):
The Company also relocated all operations in its Haverhill, Massachusetts, and Byfield, Massachusetts, facilities and relocated certain operations in its Georgetown, Massachusetts, facility to Newburyport. The Haverhill and Byfield relocations were complete at December 31, 2015, and the partial Georgetown relocation was complete at June 30, 2017.
| 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 | |||
The Company incurred approximately $2.1 million in one-time expenses in connection with the Massachusetts consolidations. Included in this amount are approximately $180,000 relating to employee severance payments and relocation costs, approximately $1.6 million in moving expenses and expenses associated with vacating the Raritan, Haverhill, and Byfield properties, and approximately $360,000 in lease termination costs. Total cash charges were approximately $2.0 million.
The Company recorded the following restructuringAcquisition costs associated with the Massachusetts consolidationstransaction were approximately $1.1 million and were charged to expense in the nine-month period ended September 30, 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- and nine-month periods ended September 30, 2018 and 2017, and 2016as if the Dielectrics acquisition had occurred at the beginning of each of the respective periods (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Restructuring Costs | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Relocation | $ | - | $ | 25 | $ | 63 | $ | 203 | ||||||||
| Total | $ | - | $ | 25 | $ | 63 | $ | 203 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Sales | $ | 47,808 | $ | 46,141 | $ | 142,813 | $ | 143,199 | ||||||||
| Operating Income | $ | 5,885 | $ | 4,606 | $ | 13,970 | $ | 14,194 | ||||||||
| Net Income | $ | 4,134 | $ | 2,834 | $ | 9,700 | $ | 8,788 | ||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.56 | $ | 0.39 | $ | 1.32 | $ | 1.21 | ||||||||
| Diluted | $ | 0.56 | $ | 0.39 | $ | 1.31 | $ | 1.20 | ||||||||
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.
CostsThe amount of revenue and net income of Dielectrics recognized since the acquisition date, which is included in the condensed consolidated statement of income for the three- and nine-nine month periodsperiod ended September 30, 20172018, was approximately $25.1 million and 2016 were reclassified in the Condensed Consolidated Statement of Income as “Restructuring Costs” from Cost of Sales.$4.4 million, respectively.
Daniel Croteau, who has been a member of the Company’s board of directors since December 16, 2015, was the Chief Executive Officer (through March 2017) of Vention Medical, Inc. (“Vention”), a customer of the Company. Sales to Vention for the three-months ended March 31, 2017 were approximately $148,000. As a result of the sale of Vention, Mr. Croteau’s employment ended in March 2017 and sales to Vention are no longer considered related party transactions.
The Company was a participant in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that was settled during the second quarter of 2016. The suit was filed to recover damages and obtain injunctive relief for Defendants’ alleged violations of the federal antitrust laws with respect to the fixing of prices of polyurethane foam sold from January 1, 1999 through August 2010. During the three- and nine-month periods ended September 30, 2017, the Company received settlement amounts of $0 and approximately $121,000, respectively. During the three- and nine-month periods ended September 30, 2016, the Company received settlement amounts of approximately $1.7 million and $2.1 million, respectively. The settlement amounts for the three- and nine-month periods ended September 30, 2017 and 2016 are recorded as “Material overcharge settlement” in the operating income section of the Condensed Consolidated Statements of Income.
| 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 future operating results, prospects, anticipated trends in the different markets in which the Company competes, including the medical, automotive, consumer, electronics, industrial andautomotive, aerospace and defense, electronics and industrial markets, statements regarding the Company's acquisition and integration of Dielectrics and synergies associated with the Dielectrics business, anticipated advantages the Company expects to realize from its investments and capital expenditures, statements about new customerproduct offerings and vendor contracts,program launches and the expected timing thereof, statements regarding anticipated advantages relating to the Company’s decisions to consolidate or expand certainits facilities including the ongoing expansion of its Newburyport facility, and the expected cost savings and efficiencies associated therewith, statements regarding the end of the Company’s automotive door panel program with Mercedes Benz, the closure of the Company’s Georgia plant and the resulting impact to revenues, 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, including the development of and investments in its molded fiber product lines, expectations regarding the manufacturing capacity and efficiencies of the Company, statements about the Company’s entry into new contracts, and the expected timing and anticipated advantages associated therewith, statements regarding the end of the Company’s automotive door panel program with Mercedes Benz, and the resulting impact to revenues, statements about the Company’s acquisition opportunities and strategies, itsthe 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 and earnings or sales and earnings growth rates. Investors are cautioned that such forward-looking statements involve risks and uncertainties includingthat could cause actual results to differ materially from those anticipated. New product and program launches are often subject to lengthy manufacturing qualification processes, and the Company cannot assure that it will be able to launch new programs on a timely basis, if at all. New program launches may require significant start-up and other expenses prior to launch, as tooling and related manufacturing processes are developed, and the Company may experience manufacturing inefficiencies in connection with new program launches. As a result, new programs may not generate profits in accordance with anticipated timetables, or at all. Additional risks and uncertainties include, without limitation, risks and uncertainties associated with the Company's acquisition and integration of Dielectrics, risks associated with the effect of the acquisition of Dielectrics on the Company's earnings, risks and uncertainties associated with the identification of suitable acquisition candidates and the successful and efficient execution of acquisition transactions and integration of any such acquisition candidates, risks and uncertainties associated with plant closures and consolidations, including the closure of the Company’s Georgia plant and expected efficiencies from consolidating manufacturing, risks and uncertainties associated with the requalification and relocation of parts, the risk that we may not be able to finalize anticipated new customer contracts, risks associated with the implementation of new production equipment and requalification or recertification of transferred equipment in a timely and cost-efficient manner, and 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.capacity, 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 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, 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.
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Overview
UFP Technologies is an innovative designer and custom converter of foams, plastics, composites, and natural fiber materials,products, principally serving the Medical, Consumer, Automotive, Aerospacemedical, consumer, automotive, aerospace and Defense, Industrialdefense, electronics and Electronicsindustrial markets. The Company consists of a single operating and reportable segment. As previously disclosed, on February 1, 2018, the Company acquired Dielectrics, Inc. pursuant to a stock purchase agreement and related agreements for an aggregate purchase price of $77 million net of Dielectrics’ cash.
TheSales for the Company had a slight increase in sales through the first nine months of 2017, largely fueled by continued growth in sales to customers in the medical market, partially offset by declined sales to customer in the automotive market. The Company improved gross margins for the nine-month period ended September 30, 20172018 grew 26.3% to 25.0%$139.8 million from 24.1%$110.6 million in the first nine monthssame 2017 period largely due to sales of 2016 asapproximately $25.1 million from Dielectrics. Although Dielectrics contributed significantly to earnings, the Company has become much more efficientabsorbed $1.1 million in transaction costs during the nine-month period ended September 30, 2018 as well as approximately $760,000 in losses associated with the closure of its manufacturing particularlyplant in those plants impacted by recent consolidations. Absent non-recurring restructuringGeorgia. Despite these costs, for the nine-month period ended September 30, 2018, the Company generated increases of 46.5% and material overcharge items,52.4% in operating income increased by 19% in the first nine months of 2017.
The Company’s previously announced consolidation and relocation efforts were complete as of June 30, 2017. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The Company constantly evaluates ways to enhance operating efficiencies and will consider additional expansions, consolidations, or relocations of operations from time to time.net income, respectively.
The Company’s current strategy includes further organic growth and growth through strategic acquisitions.acquisitions.
Results of Operations
Sales
Sales for the three-month period ended September 30, 2017 decreased2018 increased approximately 4.1%34.0% to $47.8 million from sales of $35.7 million compared to $37.2 million infor the same period in 2016.2017. The decreaseincrease in sales during the three-month period ended September 30, 2017 was primarily due to decreasesDielectric’s sales of approximately $9.5 million, which were all in the medical market. On a market basis, sales to customers in the medical, aerospace and defense and consumer markets grew 64.3%, 43.6% and 15.3%, respectively, while sales to customers in the automotive market declined 11.6%. The increase in sales to customers in the automotive and electronics markets of approximately 25.5% and 9.2%, respectively. These decreases were partially offsetmedical market was primarily due to sales by increasesDielectrics as well as a 7.6% increase in demand from the Company’s legacy medical customers. The increase in sales to customers in the aerospace and defense andmarket was largely due to a general uptick in government contract based orders. The increase in sales to customers in the consumer marketsmarket was primarily due to sales of approximately 6.6% and 6.3%, respectively.molded fiber protective packaging to a new customer. The decline in sales to customers in the automotive market was primarily due to soft demand for interior trim components in certain legacy programs. The Company has been notified that the remaining portionphase-out of its southeastthe automotive door panel program for Mercedes Benz, which began in 2004, will end with modest sales anticipated into the first quarter of 2018. The Company estimates salesMercedes-Benz.
Sales for the program will totalnine-month period ended September 30, 2018 increased approximately $3.026.3% to $139.8 million from sales of $110.6 million for the same period in 20172017. The increase in sales was primarily due to Dielectric’s sales of approximately $25.1 million, which were all in the medical market. On a market basis, sales to customers in the medical, aerospace and will be modestdefense and consumer markets grew 52.8%, 13.6% and 19.4%, respectively, while sales to customers in 2018.the automotive market declined 16.8%. The declineincrease in sales to customers in the electronicsmedical market was primarily due to reducedsales by Dielectrics as well as a 5.4% increase in demand for protective packaging.from the Company’s legacy medical customers. The increase in sales to customers in the aerospace and defense market was primarilylargely due to increased demand for components from oura general uptick in government contractor customers.contract based orders. The increase in sales to customers in the consumer market was primarily due to higher demand forsales of molded fiber protective packaging. Salespackaging to customers in the medical market grew at 1% for the quarter—a rate slower than recent historical levels—as two large customers in this market added second suppliers to meet their internal risk mitigation requirements and certain customers ordered less due to storm related disruptions to their business.
Sales for the nine-month period ended September 30, 2017 increased approximately 0.9% to $110.6 million from sales of $109.6 million for the same period in 2016. The increase in sales for the nine-month period ended September 30, 2017 was primarily due to increases in sales to customers in the medical market of approximately 7.9% partially offset by decreases in sales to customers in the automotive and industrial markets of approximately 12.0% and 9.6% respectively. The increase in sales to customers in the medical market was primarily due to strong demand for our customers’ products as well as selective price increases.new customer. The decline in sales to customers in the automotive market was primarily due to soft demandthe phase-out of the automotive door panel program for interior trim components in certain legacy programs. The decline in sales to customers in the industrial market was primarily due to a credit issue at one of our customers within this market.Mercedes-Benz.
Gross Profit
Gross profit as a percentage of sales (“gross margin”) increased to 23.0%26.0% for the three-month period ended September 30, 2017,2018, from 22.7%23.0% for the same period in 2016.2017. As a percentage of sales, material and labor costs collectively decreased 0.8%1.4%, while overhead increased 0.5%. The decrease in collective material and labor costs as a percentage of sales is primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives. The increase in overhead as a percentage of sales is primarily due to fixed overhead costs measured against reduced sales.
Gross margin increased to 25.0% for the nine-month period ended September 30, 2017, from 24.1% for the same period in 2016. As a percentage of sales, material and labor costs collectively decreased 1.6%, while overhead increased 0.7%. The decrease in collective material and labor costs as a percentage of sales is primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives, strategic price increases and an improvement in the overall book of business. The increasedecrease in overhead as a percentage of sales is primarily due to anthe increase in indirectsales on fixed overhead costs.
Gross margin increased to 25.5% for the nine-month period ended September 30, 2018, from 25.0% for the same period in 2017. As a percentage of sales, material and labor costs of approximately $700,000collectively decreased 0.5% primarily due largely to hires madegains in manufacturing efficiencies resulting from continuous improvement initiatives, strategic price increases and an improvement in the second halfoverall book of 2016 to support growth.business.
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Selling, General and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) decreasedincreased approximately 5.5%14.9% to $5.7$6.5 million for the three-month period ended September 30, 20172018, from $6.0$5.7 million for the same period in 2016.2017. As a percentage of sales, SG&A decreased to 16.0%13.7% for the three-month period ended September 30, 20172018, from 16.2%16.0% for the same three-month period in 2016.2017. The decreaseincrease in SG&A for the three-month period ended September 30, 20172018 is due to approximately $900,000 in SG&A expenses from Dielectrics and the decrease in SG&A as a percentage of sales is primarily due to reductions in general and administrative payroll and recruiting costs.lower SG&A as a percentage of sales at Dielectrics.
SG&A decreasedincreased approximately 1.8%13.7% to $18.1$20.5 million for the nine-month period ended September 30, 20172018, from $18.4$18.1 million for the same period in 2016.2017. As a percentage of sales, SG&A decreased to 16.3%14.7% for the nine-month period ended September 30, 20172018, from 16.8%16.3% for the same nine-month period in 2016.2017. The decreaseincrease in SG&A for the nine-month period ended September 30, 20172018 is primarily due to reductionsapproximately $2.6 million in consulting and recruiting expenses.SG&A expenses from Dielectrics. The decrease in SG&A as a percentage of sales is primarily due to reductions in general and administrative payroll, consulting and recruiting expenses measured against higher sales.lower SG&A as a percentage of sales at Dielectrics.
RestructuringAcquisition Costs
For the three-month period ended September 30, 2017 the Company did not incur any restructuring costs compared to approximately $25,000 for the same period in 2016.
Additional information regarding restructuring costs can be found in Note 11 of the Notes to Interim Condensed Consolidated Financial Statements.
Material Overcharge Settlement
The Company was a participantincurred approximately $1.1 million in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that was settled duringcosts associated with the second quarter of 2016. The suit was filedDielectrics acquisition which were charged to recover damages and obtain injunctive relief for Defendants’ alleged violations ofexpense in the federal antitrust laws with respect to the fixing of prices of polyurethane foam sold from January 1, 1999 through August 2010. During the three- and nine-month periodsperiod ended September 30, 2017,2018. These costs were primarily for investment banking and legal fees and are reflected on the Company received settlement amounts of $0 and approximately $121,000, respectively. During the three- and nine-month periods ended September 30, 2016, the Company received settlement amounts of approximately $1.7 million and $2.1 million, respectively. The settlement amounts for the three- and nine-month periods ended September 30, 2017 and 2016 are recorded as “Material overcharge settlement” in the operating income sectionface of the Condensed Consolidated Statements of Income.income statement.
Interest Income and Expense
The Company had net interest expense of approximately $343,000 and net interest income of approximately $51,000 and $25,000 for the three-month periods ended September 30, 2018 and 2017, and 2016, respectively. The increase in net interest expense is primarily due to interest paid on the debt incurred to finance the Dielectrics acquisition.
The Company had net interest expense of approximately $988,000 and net interest income of approximately $108,000 and $51,000 for the nine-month periods ended September 30, 20172018 and 2016,2017, respectively. The increase in net interest incomeexpense is primarily due to an increase in interest earned on money market accounts and certificates of deposit and decreasing interest costspaid on the Company’s term loans.debt incurred to finance the Dielectrics acquisition.
Income Taxes
The Company recorded tax expense of approximately 33.6%26.5% and 35.0%33.6% of income before income tax expense respectively, for each of the three-month periods ended September 30, 2018 and 2017, and 2016.respectively. The decrease in the effective tax rate for the current period is largely due to a change in the statutory federal tax benefitrate for 2018 and share-based payment related tax benefits recorded of approximately $37,000 recorded in the three-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1).$36,000. The Company recorded a tax expense of approximately 33.3%25.4% and 35.4%33.3% of income before income tax expense for each of the nine-month periods ended September 30, 2018 and 2017, and 2016.respectively. The decrease in the effective tax rate for the current period is largely due to a change in the statutory federal tax benefitrate for 2018 and share-based payment related tax benefits recorded of approximately $162,000 recorded in the nine-month period ended September 30, 2017 as a result of the adoption of ASU No. 2016-09 on January 1, 2017 (See Note 1); and a tax assessment of approximately $40,000 from one jurisdiction recorded in the first quarter of 2016.$220,000. The Company notes the potential for volatility in its effective tax rate, as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly into income tax expense.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), resulting in significant modifications to existing law. The 2017 Tax Act effected a reduction in the corporate tax rate from 35% to 21%, and changed executive compensation limitations under IRC Section 162(m), among other changes. The Company made what it considers to be a reasonable estimate of the impact of the 2017 Tax Act in its financials for the year ended December 31, 2017. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has considered both positive and negative available evidence in its determination that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance atany changes to this estimate for the three month period ended September 30, 2017. The Company will continue2018.
Staff Accounting Bulletin (“SAB”) No. 118, issued by the Securities and Exchange Commission (“SEC”), provides for a measurement period of one year from the enactment date to assess whetherfinalize the deferred tax assetsaccounting for effects of the 2017 Tax Act. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies and changes in assumptions. In the subsequent period, provisional amounts will be realizable and, when appropriate, will record a valuation allowance against these assets. The amountadjusted for the effects, if any, of interpretative guidance issued after December 31, 2017 by the U.S. Department of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.Treasury.
Liquidity and Capital Resources
The Company generally funds its operating expenses, capital requirements, and growth plan through internally generated cash and bank credit facilities.
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Cash Flows
Net cash provided by operations for the nine-month period ended September 30, 20172018 was approximately $13.0$13.5 million and was primarily a result of net income generated of $6.5$9.9 million, depreciation and amortization of approximately $4.2$5.8 million, share-based compensation of $0.8$1.0 million, an increase in deferred taxes of $0.3 million, a decrease in inventory of approximately $1.0 million, due primarily to management initiatives, an increase in accounts payable of approximately $0.4$2.2 million due to the timing of vendor payments in the ordinary course of business, an increase in accrued expensesdeferred revenue of approximately $0.7$1.4 million due primarily to compensation accrualsadvanced billings on customer tooling projects and an increase in other long-term liabilities of $0.2approximately $0.3 million. These cash inflows and adjustments to income were partially offset by an increase in accounts receivable of approximately $0.8$4.4 million primarily due to increased sales in the timinglast two months of customer collections,the third quarter of 2018 over the same period of 2017, an increase in refundable income taxesinventory of approximately $0.2$2.6 million primarily due to in-process customer tooling and the building of inventory to support the higher sales, an increase in prepaid expenses of approximately $0.3 million, an increase in other assets of approximately $0.1 million.$0.4 million, and a decrease in accrued expenses of approximately $0.4 million due to payments of year-end variable compensation.
Net cash used in investing activities during the nine-month period ended September 30, 20172018 was approximately $6.9$81.4 million and was primarily the result of the acquisition of Dielectrics and additions of manufacturing machinery and equipment and various building improvements across the expansion of the Newburyport, Massachusetts plant.Company.
Net cash used inprovided by financing activities was approximately $0.2$35.0 million during the nine-month period ended September 30, 2017,2018, representing cash usedborrowings under our credit facility to service term debtfund the Dielectrics acquisition of $56.0 million and net proceeds received upon stock options exercises of approximately $0.7$1.3 million, partially offset by repayments on our credit facility and term loan of approximately $22.1 million, and to paypayments of statutory withholding for stock options exercised and restricted stock units vested of approximately $0.1 million, partially offset by net proceeds received upon stock options exercises of approximately $0.6$0.2 million.
Outstanding and Available Debt
TheOn December 2, 2013, the Company maintainsentered into an unsecured $40 million revolving credit facility with Bank of America, N.A. The credit facility callscalled for interest of LIBOR plus a margin that ranged from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranged from 0.25% to zero. In both cases the applicable margin was dependent upon Company performance. Under the credit facility, the Company was subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The credit facility was amended effective December 31, 2014, to modify the definition of “consolidated fixed-charge coverage ratio”. The Company’s $40 million credit facility was to mature on November 30, 2018.
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%.25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the credit facility,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 Company’s $40 million credit facility maturesAmended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on November 30, 2018.certain payments, permitted indebtedness and permitted investments.
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As of September 30, 2017, the Company had no borrowings outstanding under the credit facility.
Included in the credit facilityAmended and Restated Credit Facilities were approximately $300,000$0.6 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies. As of September 30, 2017,2018, the Company was in compliance with all covenants under the credit facility.
In 2012, the Company financed the purchase of two molded fiber machines through five-year term loans that mature in October 2017. The annual interest rate is fixed at 1.83% and the loans are secured by the related molded fiber machines. As of September 30, 2017, the outstanding balanceLong-term debt consists of the term loan facility was approximately $84,000.following (in thousands):
| September 30, 2018 | ||||
| Revolving credit facility | $ | 16,000 | ||
| Term loan | 17,857 | |||
| Total long-term debt | 33,857 | |||
| Current portion | (2,857 | ) | ||
| Long-term debt, excluding current portion | $ | 31,000 | ||
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 revolving credit facility.Amended and Restated Credit Facilities. The Company generated cash of approximately $13.0$13.5 million fromin operations during the nine-month periodnine months ended September 30, 2017;2018; 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 the remainder of fiscal 2017,2018, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The Company may consider additional acquisitions of companies, technologies, or products that are complementary to its business. The Company plans to use available cash to pay down amounts outstanding under its credit facility in an expeditious manner. 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.
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 nine months of 2017.2018. Through September 30, 2017,2018, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000. At September 30, 2017,2018, 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, 2016.2017.
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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 September 30, 2017,2018, there was approximately $300,000$0.6 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.
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| 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, 2016.2017.
| 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.
ThereThe Company closed the acquisition of Dielectrics on February 1, 2018, and Dielectrics’ total assets and revenues constituted 42.4% and 18.0%, respectively, of the Company’s consolidated total assets and revenues as shown on our consolidated financial statements as of and for the nine months ended September 30, 2018. As the acquisition occurred in the first quarter of fiscal 2018, the Company excluded Dielectrics’ 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 in the 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 been nomaterially 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 the most recentour 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 606, Revenue from Contracts with Customers (“ASC 606”), did not require significant changes in our internal controls over financial reporting or disclosure controls and procedures. However, the Company made enhancements to existing controls and procedures to ensure compliance with the new guidance.
| 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, 2016.2017.
| 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 nine months of 2017.2018. Through September 30, 2017,2018, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000. At September 30, 2017,2018, approximately $9.4 million was available for future repurchases of the Company’sCompany's common stock under this authorization.
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| ITEM 6: | EXHIBITS |
| Exhibit No. | Description |
| 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. |
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: November 9, | 2018 | By: /s/ R. Jeffrey Bailly | ||
R. Jeffrey Bailly Chairman, Chief Executive Officer, President, and Director (Principal Executive Officer) | ||||
| Date: November 9, | 2018 | By: /s/ Ronald J. Lataille | ||
Ronald J. Lataille | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
__________________
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