UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
FORM 10-Q
(Mark one)
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBERJUNE 30, 2017 2020
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) | ( |
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange |
Common Stock | UFPT | The NASDAQ Stock Market L.L.C. |
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 checkmarkcheck mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ____;☐ No X ☒
7,267,6627,494,784 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of November 6, 2017.August 1, 2020.
UFP Technologies, Inc.
Index
UFP Technologies, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
| September 30, 2017 | December 31, 2016 | June 30, | December 31, 2019 | |||||||||||||
| Assets | (Unaudited) | |||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 37,246 | $ | 31,359 | $ | 12,266 | $ | 3,743 | ||||||||
| Receivables, less allowance for doubtful accounts of $602 at September 30, 2017 and $567 at December 31, 2016 | 22,044 | 21,249 | ||||||||||||||
Receivables, less allowance for doubtful accounts of $643 at June 30, 2020 and $486 at December 31, 2019 | 27,271 | 28,648 | ||||||||||||||
| Inventories | 13,136 | 14,151 | 20,959 | 18,276 | ||||||||||||
| Prepaid expenses | 2,234 | 2,281 | 3,419 | 2,304 | ||||||||||||
| Refundable income taxes | 979 | 807 | - | 279 | ||||||||||||
| Total current assets | 75,639 | 69,847 | 63,915 | 53,250 | ||||||||||||
| Property, plant and equipment | 103,797 | 96,806 | 117,717 | 116,089 | ||||||||||||
| Less accumulated depreciation and amortization | (51,815 | ) | (48,290 | ) | (62,559 | ) | (59,350 | ) | ||||||||
| Net property, plant and equipment | 51,982 | 48,516 | 55,158 | 56,739 | ||||||||||||
| Goodwill | 7,322 | 7,322 | 51,838 | 51,838 | ||||||||||||
| Intangible assets, net | 79 | 318 | 20,347 | 20,975 | ||||||||||||
Non-qualified deferred compensation plan | 3,164 | 2,775 | ||||||||||||||
Finance lease right of use assets | 108 | - | ||||||||||||||
Operating lease right of use assets | 2,542 | 3,034 | ||||||||||||||
| Other assets | 2,069 | 1,931 | 147 | 147 | ||||||||||||
| Total assets | $ | 137,091 | $ | 127,934 | $ | 197,219 | $ | 188,758 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 4,958 | $ | 4,002 | $ | 5,415 | $ | 4,577 | ||||||||
| Accrued expenses | 5,356 | 4,698 | 7,113 | 8,483 | ||||||||||||
| Short-term debt | 84 | 856 | ||||||||||||||
Deferred revenue | 2,648 | 2,574 | ||||||||||||||
Finance lease liabilities | 15 | - | ||||||||||||||
Operating lease liabilities | 1,170 | 1,150 | ||||||||||||||
Income taxes payable | 204 | - | ||||||||||||||
| Total current liabilities | 10,398 | 9,556 | 16,565 | 16,784 | ||||||||||||
| Deferred income taxes | 3,713 | 3,459 | 5,652 | 4,921 | ||||||||||||
| Non-qualified deferred compensation plan | 1,949 | 1,682 | 3,208 | 2,788 | ||||||||||||
Finance lease liabilities | 93 | - | ||||||||||||||
Operating lease liabilities | 1,428 | 1,940 | ||||||||||||||
| Other liabilities | 118 | 184 | 1,061 | 334 | ||||||||||||
| Total liabilities | 16,178 | 14,881 | 28,007 | 26,767 | ||||||||||||
| 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 | ||||||||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued | - | - | ||||||||||||||
Common stock, $.01 par value, 20,000,000 shares authorized; 7,524,343 and 7,494,784 shares issued and outstanding, respectively, at June 30, 2020; 7,475,768 and 7,446,209 shares issued and outstanding, respectively at December 31, 2019 | 75 | 74 | ||||||||||||||
| Additional paid-in capital | 26,580 | 25,216 | 31,963 | 30,952 | ||||||||||||
| Retained earnings | 94,847 | 88,352 | 137,761 | 131,552 | ||||||||||||
| Treasury stock at cost, 29,559 shares at September 30, 2017 and December 31, 2016 | (587 | ) | (587 | ) | ||||||||||||
Treasury stock at cost, 29,559 shares at June 30, 2020 and December 31, 2019 | (587 | ) | (587 | ) | ||||||||||||
| Total stockholders’ equity | 120,913 | 113,053 | 169,212 | 161,991 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 137,091 | $ | 127,934 | $ | 197,219 | $ | 188,758 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UFP Technologies, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | June 30 | June 30 | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Net sales | $ | 35,684 | $ | 37,220 | $ | 110,623 | $ | 109,626 | $ | 42,644 | $ | 51,399 | $ | 90,921 | $ | 98,726 | ||||||||||||||||
| Cost of sales | 27,491 | 28,768 | 82,973 | 83,161 | 32,695 | 37,028 | 68,148 | 71,859 | ||||||||||||||||||||||||
| Gross profit | 8,193 | 8,452 | 27,650 | 26,465 | 9,949 | 14,371 | 22,773 | 26,867 | ||||||||||||||||||||||||
| Selling, general & administrative expenses | 5,693 | 6,027 | 18,070 | 18,402 | 6,665 | 7,799 | 14,417 | 15,043 | ||||||||||||||||||||||||
| Restructuring costs | - | 25 | 63 | 203 | ||||||||||||||||||||||||||||
| Material overcharge settlement | - | (1,681 | ) | (121 | ) | (2,114 | ) | |||||||||||||||||||||||||
| Loss (Gain) on sale of fixed assets | - | - | 3 | (4 | ) | |||||||||||||||||||||||||||
Loss on sale of fixed assets | 290 | - | 286 | - | ||||||||||||||||||||||||||||
| Operating income | 2,500 | 4,081 | 9,635 | 9,978 | 2,994 | 6,572 | 8,070 | 11,824 | ||||||||||||||||||||||||
| Interest income | 63 | 42 | 147 | 104 | ||||||||||||||||||||||||||||
| Interest expense | (12 | ) | (17 | ) | (39 | ) | (53 | ) | 33 | 194 | 49 | 425 | ||||||||||||||||||||
Other expense | 35 | 198 | 362 | 437 | ||||||||||||||||||||||||||||
| Income before income tax expense | 2,551 | 4,106 | 9,743 | 10,029 | 2,926 | 6,180 | 7,659 | 10,962 | ||||||||||||||||||||||||
| Income tax expense | 856 | 1,437 | 3,248 | 3,550 | 608 | 1,582 | 1,450 | 2,630 | ||||||||||||||||||||||||
| Net income | $ | 1,695 | $ | 2,669 | $ | 6,495 | $ | 6,479 | $ | 2,318 | $ | 4,598 | $ | 6,209 | $ | 8,332 | ||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.23 | $ | 0.37 | $ | 0.90 | $ | 0.90 | $ | 0.31 | $ | 0.62 | $ | 0.83 | $ | 1.12 | ||||||||||||||||
| Diluted | $ | 0.23 | $ | 0.37 | $ | 0.89 | $ | 0.89 | $ | 0.31 | $ | 0.62 | $ | 0.82 | $ | 1.11 | ||||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 7,264 | 7,195 | 7,240 | 7,183 | 7,487 | 7,423 | 7,472 | 7,413 | ||||||||||||||||||||||||
| Diluted | 7,353 | 7,282 | 7,326 | 7,265 | 7,532 | 7,467 | 7,545 | 7,473 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UFP Technologies, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
Three and Six-Month Periods Ended June 30, 2020 | ||||||||||||||||||||||||||||
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Treasury Stock | Stockholders' | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
Balance at December 31, 2019 | 7,446 | $ | 74 | $ | 30,952 | $ | 131,552 | 30 | $ | (587 | ) | $ | 161,991 | |||||||||||||||
Share-based compensation | 28 | - | 537 | - | - | - | 537 | |||||||||||||||||||||
Exercise of stock options | 20 | 1 | 415 | - | - | - | 416 | |||||||||||||||||||||
Net share settlement of restricted stock units | (11 | ) | - | (560 | ) | - | - | - | (560 | ) | ||||||||||||||||||
Net income | - | - | - | 3,891 | - | - | 3,891 | |||||||||||||||||||||
Balance at March 31, 2020 | 7,483 | $ | 75 | $ | 31,344 | $ | 135,443 | 30 | $ | (587 | ) | $ | 166,275 | |||||||||||||||
Share-based compensation | 6 | - | 562 | - | - | - | 562 | |||||||||||||||||||||
Exercise of stock options | 6 | - | 59 | - | - | - | 59 | |||||||||||||||||||||
Net share settlement of restricted stock units | - | - | (2 | ) | - | - | - | (2 | ) | |||||||||||||||||||
Net income | 2,318 | - | - | 2,318 | ||||||||||||||||||||||||
Balance at June 30, 2020 | 7,495 | $ | 75 | $ | 31,963 | $ | 137,761 | 30 | $ | (587 | ) | $ | 169,212 | |||||||||||||||
Three and Six-Month Period Ended June 30, 2019 | ||||||||||||||||||||||||||||
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Treasury Stock | Stockholders' | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
Balance at December 31, 2018 | 7,385 | $ | 74 | $ | 29,168 | $ | 111,802 | 30 | $ | (587 | ) | $ | 140,457 | |||||||||||||||
Share-based compensation | 20 | - | 294 | - | - | - | 294 | |||||||||||||||||||||
Exercise of stock options | 17 | - | 285 | - | - | - | 285 | |||||||||||||||||||||
Net share settlement of restricted stock units | (8 | ) | - | (271 | ) | - | - | - | (271 | ) | ||||||||||||||||||
Net income | - | - | - | 3,734 | - | - | 3,734 | |||||||||||||||||||||
Balance at March 31, 2019 | 7,414 | $ | 74 | $ | 29,476 | $ | 115,536 | 30 | $ | (587 | ) | $ | 144,499 | |||||||||||||||
Share-based compensation | - | - | 402 | - | - | - | 402 | |||||||||||||||||||||
Exercise of stock options | 14 | - | 155 | - | - | - | 155 | |||||||||||||||||||||
Net share settlement of restricted stock units | - | - | - | - | - | - | - | |||||||||||||||||||||
Net income | - | - | - | 4,598 | - | - | 4,598 | |||||||||||||||||||||
Balance at June 30, 2019 | 7,428 | $ | 74 | $ | 30,033 | $ | 120,134 | 30 | $ | (587 | ) | $ | 149,654 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
UFP Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended | ||||||||
June 30 | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 6,209 | $ | 8,332 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,150 | 4,050 | ||||||
Loss on sale of fixed assets | 286 | - | ||||||
Share-based compensation | 1,098 | 696 | ||||||
Deferred income taxes | 731 | 837 | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivables, net | 1,377 | (2,360 | ) | |||||
Inventories | (2,683 | ) | 538 | |||||
Prepaid expenses | (1,115 | ) | (61 | ) | ||||
Refundable income taxes | 483 | 1,568 | ||||||
Other assets | (5 | ) | (178 | ) | ||||
Accounts payable | 735 | (1,222 | ) | |||||
Accrued expenses | (1,370 | ) | 30 | |||||
Deferred revenue | 74 | 444 | ||||||
Non-qualified deferred compensation plan and other liabilities | 766 | (316 | ) | |||||
Net cash provided by operating activities | 10,736 | 12,358 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property, plant, and equipment | (2,151 | ) | (2,819 | ) | ||||
Proceeds from sale of fixed assets | 27 | - | ||||||
Net cash used in investing activities | (2,124 | ) | (2,819 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from advances on revolving line of credit | 5,500 | - | ||||||
Payments on revolving line of credit | (5,500 | ) | (7,000 | ) | ||||
Principal repayments of long-term debt | - | (715 | ) | |||||
Principal payments on finance lease obligation | (3 | ) | - | |||||
Proceeds from exercise of stock options | 475 | 440 | ||||||
Payment of statutory withholdings for restricted stock units vested | (561 | ) | (271 | ) | ||||
Net cash used in financing activities | (89 | ) | (7,546 | ) | ||||
Net increase in cash and cash equivalents | 8,523 | 1,993 | ||||||
Cash and cash equivalents at beginning of period | 3,743 | 3,238 | ||||||
Cash and cash equivalents at end of period | $ | 12,266 | $ | 5,231 | ||||
| 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-Q10-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, 2019, included in the Company's 20162019 Annual Report on Form 10-K,10-K, as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheetsheets as of SeptemberJune 30, 2017, 2020 and December 31, 2019, the condensed consolidated statements of income for the three-three and nine-month periodssix months ended SeptemberJune 30, 2017 2020 and 2016,2019, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30,2020 and 2019, and the condensed consolidated statements of cash flows for the nine-month periodssix months ended SeptemberJune 30, 2017 2020 and 20162019 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, 2016 2019 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-three- and nine-monthssix-month periods ended SeptemberJune 30, 2017, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2017.2020.
Recent Accounting PronouncementsPronouncements
In May 2014, February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, 2016-02, “Revenue from Contracts with CustomersLeases (Accounting Standards Codification (ASC) 842),, which requires an entity” and issued subsequent amendments 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 recognitioninitial guidance when it becomes effective. The standard permits the use of either the full retrospective or modified retrospective transition methods.in January 2018 within ASU No.2018-01 and in July 2018 within ASU Nos. 2018-10 and 2018-11. 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 842 on its revenue streams and accounting policies. Based on the procedures completed to date, the Company expects thatJanuary 1, 2019. See Note 8 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, January 2017, the FASB issued ASU No. 2016-02,2017-04, Leases.Intangibles—Goodwill and Other (ASC 350), Simplifying the Test for Goodwill Impairment. The guidance in this ASU supersedesremoves Step 2 of the leasing guidance in Topic 840, Leases. Undergoodwill impairment test and eliminates the new guidance, lessees are requiredneed to recognize leasedetermine the fair value of individual assets and lease liabilities onto measure goodwill impairment. A goodwill impairment will now be the balance sheet for those leases previously classified as operating leases.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 amendments in ASU No. 2016-02 areguidance will be applied prospectively and is effective for annual reporting periodsand interim goodwill impairment tests in fiscal years beginning after December 15, 2018, including interim periods within that reporting period with early2019. Early adoption permitted.is permitted for any impairment tests performed on testing dates after January 1,2017. The Company is evaluating thedoes not believe adoption will have a material impact of adopting this ASU on its consolidated financial position andcondition or results of operations.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards, forfeitures and classification on the statement of cash flows. The Company adopted this ASU on January 1, 2017. As the Company has not had a significant amount 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.
Revisions
Certain revisions have been made to the 2016 December 31, 2019 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. The reclassification of a reserve for uncertain tax positionslong-term operating lease liabilities to current operating lease liabilities. The reclassification resulted in an increase to the change in refundable income taxes of $315,000current operating lease liabilities of $476 thousand and a decrease to the change in accrued expenses of $315,000. A change in presentationlong-term operating lease liabilities 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.$476 thousand. These revisions had no impact on previously reported earnings, net income or cash flows and are deemed immaterial to the previously issued financial statements.
| Nine Months Ended September 30 | ||||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 37 | $ | 51 | ||||
| Income taxes, net of refunds | 3,167 | 2,178 | ||||||
| Non-cash investing and financing activities: | ||||||||
| Capital additions accrued but not yet paid | $ | 527 | $ | 311 | ||||
(2) Revenue Recognition
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, resulting in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to the Company’s customers (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Net sales of: | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Products | $ | 40,753 | $ | 50,576 | $ | 87,782 | $ | 96,984 | ||||||||
Tooling and Machinery | 646 | 323 | 1,323 | 969 | ||||||||||||
Engineering services | 1,245 | 500 | 1,816 | 773 | ||||||||||||
Total net sales | $ | 42,644 | $ | 51,399 | $ | 90,921 | $ | 98,726 | ||||||||
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has deferred revenue, or contract liabilities, included within “deferred revenue” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract liabilities for the six-month periods ended June 30,2020 and 2019 (in thousands):
Contract Liabilities | ||||||||
Six Months Ended | ||||||||
2020 | 2019 | |||||||
Deferred revenue - beginning of period | $ | 2,574 | $ | 2,507 | ||||
Increases due to consideration received from customers | 1,668 | 1,541 | ||||||
Revenue recognized | (1,594 | ) | (1,097 | ) | ||||
Deferred revenue - end of period | $ | 2,648 | $ | 2,951 | ||||
Revenue recognized during the six-month periods ended June 30, 2020 and 2019 from amounts included in deferred revenue at the beginning of the period were approximately $771 thousand and $613 thousand, respectively.
When invoicing occurs after revenue recognition, the Company has unbilled receivables, or contract assets, included within “receivables” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract assets for the six-month periods ended June 30,2020 and 2019 (in thousands):
Contract Assets | ||||||||
Six Months Ended | ||||||||
2020 | 2019 | |||||||
Unbilled Receivables - beginning of period | $ | 72 | $ | 65 | ||||
Increases due to revenue recognized, not invoiced to customers | 1,488 | 280 | ||||||
Decreases due to customer invoicing | (1,149 | ) | (314 | ) | ||||
Unbilled Receivables - end of period | $ | 411 | $ | 31 | ||||
(3)Supplemental Cash Flow Information
Six Months Ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Cash paid for: | ||||||||
Interest | $ | 40 | $ | 268 | ||||
Income taxes, net of refunds | 235 | 382 | ||||||
Non-cash investing and financing activities: | ||||||||
Capital additions accrued but not yet paid | $ | 103 | $ | 281 | ||||
(4) Allowance for Credit Losses
Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (ASC 326) which is required to be applied by means of a cumulative-effect adjustment to the opening retained earnings balance as of the adoption date. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables and contract assets. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. There was no impact to the Company’s opening retained earnings or its consolidated balance sheet upon adoption.
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and included specific allowance amounts for any customer determined to have been significantly impacted. Estimates are used to determine the allowance. It is based on assessment of anticipated payment and all other historical, current and future information that is reasonably available.
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected for the six months ended June 30, 2020 (in thousands):
Allowance for Credit Losses | ||||
Six Months Ended June 30, 2020 | ||||
Allowance - beginning of period | $ | 486 | ||
Provision for expected credit losses | 167 | |||
Amounts written off against the allowance | (10 | ) | ||
Allowance - end of period | $ | 643 | ||
(5) 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 | June 30, | December 31, | ||||||
(Liabilities) Assets: | ||||||||
Derivative financial instruments | $ | (616 | ) | $ | (325 | ) | ||
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.
(6) Share-Based Compensation
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2016. 2019. 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Share-based compensation related to: | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Common stock grants | $ | 100 | $ | 100 | $ | 200 | $ | 200 | ||||||||
Stock option grants | 54 | 24 | 113 | 32 | ||||||||||||
Restricted Stock Unit Awards ("RSUs") | 408 | 277 | 785 | 464 | ||||||||||||
Total share-based compensation | $ | 562 | $ | 401 | $ | 1,098 | $ | 696 | ||||||||
The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $106,000$205 thousand and $67,000, respectively,$188 thousand for the three-monththree-month periods ended SeptemberJune 30, 2017 2020 and 2016,2019, respectively, and approximately $441,000$553 and $264,000, respectively,$348 thousand for the nine-monthsix-month periods ended September June 30, 20172020 and 2016.2019, respectively.
The following is a summary of stock option activity under all plans for the three-monthsix-month period ended September June 30, 2017:2020:
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, 2019 | 105,614 | $ | 25.34 | |||||||||||||
Granted | 14,892 | 43.95 | ||||||||||||||
Exercised | (25,993 | ) | 18.24 | |||||||||||||
Outstanding at June 30, 2020 | 94,513 | $ | 30.22 | 6.53 | $ | 1,308 | ||||||||||
Exercisable at June 30, 2020 | 75,871 | $ | 27.60 | 6.06 | $ | 1,249 | ||||||||||
Vested and expected to vest at June 30, 2020 | 94,513 | $ | 30.22 | 6.53 | $ | 1,308 | ||||||||||
On June 6, 2017, 10, 2020, the Company granted options to its directors for the purchase of 12,33614,892 shares of common stock at that day’s closing price of $27.05.$43.95. 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 | 32.8% | ||
Expected dividends | NaN | ||
Risk-free interest rate | 0.3% | ||
Exercise price | $ | 43.95 | |
Expected term (in years) | 6.1 | ||
Weighted-average grant date fair value | 14.10 |
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-monthsix-month periods ended SeptemberJune 30, 2017 2020 and 2016,2019, the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $577,000$757 thousand and $564,000,$628 thousand, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $802,000$474 thousand and $529,000,$440 thousand, 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 both the nine-month periodsix-month periods ended SeptemberJune 30, 2017 there2020 and 2019,no shares were 6,511 shares surrendered 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.
On February 21, 2017, 24, 2020, the Company’s Compensation Committee approved the award of $400,000,$400 thousand, payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003Incentive Plan. TheSubject to his continued employment and the terms of his employment agreement, the shares will be issued in December 2017.2020.
The following table summarizes information about Restricted Stock Units (“RSUs”)RSU activity during the nine-monthsix-month period ended SeptemberJune 30, 2017:2020:
| Restricted Stock Units | Weighted Average Award Date Fair Value | |||||||
| Unvested at December 31, 2016 | 46,558 | $ | 20.05 | |||||
| Awarded | 22,770 | 24.70 | ||||||
| Shares vested | (13,419 | ) | 23.54 | |||||
| Unvested at September 30, 2017 | 55,909 | $ | 20.96 | |||||
Restricted Stock Units | Weighted Average | |||||||
Outstanding at December 31, 2019 | 113,866 | $ | 28.36 | |||||
Awarded | 47,509 | 49.36 | ||||||
Shares vested | (33,815 | ) | 28.93 | |||||
Outstanding at June 30, 2020 | 127,560 | $ | 33.78 | |||||
At the Company’s discretion, upon vesting, RSU holders are given the option to net-share settle to cover the required minimum withholding tax and the remaining amount is converted into the equivalent number of common shares.shares and issued to the RSU holder. During the nine-monthsix-month periods ended SeptemberJune 30, 2017 2020 and 2016, 4,3772019, 11,233 and 3,8898,132 shares were surrendered at an average market price of $24.50$49.98 and $22.82,$33.35, respectively.
As of SeptemberJune 30, 2017, 2020, the Company had approximately $754,000$4.0 million of unrecognized compensation expense whichthat is expected to be recognized over a period of 3.5 years.
3.75 years.
(7) 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):
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Raw materials | $ | 12,508 | $ | 10,540 | ||||
Work in process | 2,508 | 2,279 | ||||||
Finished goods | 5,943 | 5,457 | ||||||
Total inventory | $ | 20,959 | $ | 18,276 | ||||
| September 30, 2017 | December 31, 2016 | |||||||
| Raw materials | $ | 6,660 | $ | 7,111 | ||||
| Work in process | 1,161 | 1,354 | ||||||
| Finished goods | 5,315 | 5,686 | ||||||
| Total inventory | $ | 13,136 | $ | 14,151 | ||||
(8) Leases
The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet.
On March 18, 2009,ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets will also be adjusted for any deferred or accrued rent. As the Company's leases do not typically provide an implicit rate, the Company declared a dividenduses its incremental borrowing rate based on the information available at commencement date in determining the present value 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 $25 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The Rights expire on March 19, 2019.
lease payments.
Six Months Ended | ||||||||
June 30, | ||||||||
($ in thousands) | ||||||||
2020 | 2019 | |||||||
Lease Cost: | ||||||||
Finance lease cost: | ||||||||
Amortization of right of use assets | $ | 3 | $ | - | ||||
Operating lease cost | 606 | 613 | ||||||
Variable lease cost | 111 | 111 | ||||||
Short-term lease cost | 14 | 13 | ||||||
Total lease cost | $ | 734 | $ | 737 | ||||
Cash paid for amounts included in measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 607 | $ | 604 | ||||
Financing cash flows from finance leases | 3 | - | ||||||
ROU assets obtained in exchange for finance lease obligations | 110 | - | ||||||
Weighted-average remaining lease term (years): | ||||||||
Finance | 6.83 | - | ||||||
Operating | 2.27 | 3.15 | ||||||
Weighted-average discount rate: | ||||||||
Finance | 2.26 | % | - | % | ||||
Operating | 4.41 | % | 4.45 | % | ||||
The aggregate future lease payments for leases as of June 30, 2020 were as follows
(in thousands):
Finance | Operating | |||||||
Remainder of 2020 | $ | 9 | $ | 604 | ||||
2021 | 17 | 1,132 | ||||||
2022 | 17 | 959 | ||||||
2023 | 17 | 36 | ||||||
2024 | 17 | - | ||||||
Thereafter | 40 | - | ||||||
Total lease payments | 117 | 2,731 | ||||||
Less: Interest | (9 | ) | (133 | ) | ||||
Present value of lease liabilities | $ | 108 | $ | 2,598 | ||||
The aggregate future lease payments as of December 31, 2019 were as follows (in thousands):
Operating | ||||
2020 | $ | 1,173 | ||
2021 | 1,118 | |||
2022 | 957 | |||
2023 | 36 | |||
Total lease payments | 3,284 | |||
Less: Interest | (194 | ) | ||
Present value of lease liabilities | $ | 3,090 | ||
(9) 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Basic weighted average common shares outstanding | 7,487 | 7,423 | 7,472 | 7,413 | ||||||||||||
Weighted average common equivalent shares due to restricted stock, stock options and RSUs | 45 | 44 | 73 | 60 | ||||||||||||
Diluted weighted average common shares outstanding | 7,532 | 7,467 | 7,545 | 7,473 | ||||||||||||
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included in the computation of diluted income per share because the effect would be antidilutive. For both the three-three- and nine-monthsix-month periods ended SeptemberJune 30, 2017, 2020, the number of stock awards excluded from the computation of diluted earnings per share for this reason was zero and 27,336, respectively.14,892. For the three-three- and nine-monthsix-month periods ended September June 30, 2016,2019, the number of stock awards excluded from the computation of diluted earnings per share for this reason was 35,193 and 52,377, respectively.
16,536.
(10) Segment Reporting
The Company consists of a single operating and reportable segment.
Revenues from customers outside of the United States are not material. NoNaN customer comprised more than 10% of the Company’s consolidated revenues for the three-three- and nine-monthsix-month periods ended SeptemberJune 30, 2017.2020 and 2019. 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, Industrial, Automotive, and Electronics markets. Net sales by market for the three-three- and nine-monthsix-month periods ended SeptemberJune 30, 2017 2020 and 2016, respectively,2019 are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
| Market | 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 | % | ||||||||||||||||
| Consumer | 6,006 | 16.8 | % | 5,648 | 15.2 | % | 15,713 | 14.2 | % | 15,303 | 14.0 | % | ||||||||||||||||||||
| Automotive | 5,174 | 14.5 | % | 6,942 | 18.7 | % | 18,018 | 16.3 | % | 20,485 | 18.7 | % | ||||||||||||||||||||
| Aerospace & Defense | 2,682 | 7.5 | % | 2,516 | 6.8 | % | 8,290 | 7.5 | % | 7,929 | 7.2 | % | ||||||||||||||||||||
| Industrial | 2,591 | 7.3 | % | 2,792 | 7.5 | % | 7,629 | 6.9 | % | 8,441 | 7.7 | % | ||||||||||||||||||||
| 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 | % | ||||||||||||||||
Certain amounts for the three- and nine-month periods ended September 30, 2016 were reclassified between markets to conform to the current period presentation.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
Market | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | ||||||||||||||||||||||||
Medical | $ | 31,657 | 74.2 | % | $ | 33,045 | 64.3 | % | $ | 65,345 | 71.9 | % | $ | 61,989 | 62.8 | % | ||||||||||||||||
| Consumer | 3,179 | 7.5 | % | 4,667 | 9.1 | % | 6,618 | 7.3 | % | 9,092 | 9.2 | % | ||||||||||||||||||||
Aerospace & Defense | 3,032 | 7.1 | % | 4,115 | 8.0 | % | 5,743 | 6.3 | % | 7,646 | 7.7 | % | ||||||||||||||||||||
Industrial | 2,143 | 5.0 | % | 2,326 | 4.5 | % | 4,059 | 4.4 | % | 4,811 | 4.9 | % | ||||||||||||||||||||
Automotive | 1,450 | 3.4 | % | 4,950 | 9.6 | % | 6,052 | 6.7 | % | 10,688 | 10.8 | % | ||||||||||||||||||||
Electronics | 1,183 | 2.8 | % | 2,296 | 4.5 | % | 3,104 | 3.4 | % | 4,500 | 4.6 | % | ||||||||||||||||||||
Net Sales | $ | 42,644 | 100.0 | % | $ | 51,399 | 100.0 | % | $ | 90,921 | 100.0 | % | $ | 98,726 | 100.0 | % | ||||||||||||||||
(11) Other Intangible Assets
The carrying values of the Company’s definite lived intangible assets as of SeptemberJune 30, 2017 and December 31, 2016, 2020 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- | Customer | Total | |||||||||||||
Estimated useful life | 10 years | 5 years | 20 years | |||||||||||||
Gross amount | $ | 367 | $ | 462 | $ | 22,555 | $ | 23,384 | ||||||||
Accumulated amortization | (89 | ) | (223 | ) | (2,725 | ) | (3,037 | ) | ||||||||
Net balance | $ | 278 | $ | 239 | $ | 19,830 | $ | 20,347 | ||||||||
Amortization expense related to intangible assets was approximately $79,000$314 for each ofboth the three-monththree-month periods ended SeptemberJune 30, 2017 2020 and 2016,2019, and was approximately $239,000$628 thousand for each ofboth the nine-monthsix-month periods ended SeptemberJune 30, 2017 2020 and 2016. As of September 30, 2017, the2019. The estimated remaining amortization expense for 2017 as of June 30, 2020 is $79,000.
as follows (in thousands):
Remainder of 2020 | $ | 1,257 | ||
2021 | 1,257 | |||
2022 | 1,257 | |||
2023 | 1,172 | |||
2024 | 1,164 | |||
Thereafter | 14,240 | |||
Total | $ | 20,347 |
(12) Income Taxes
The determination of 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 income tax expense of approximately 33.6%20.8% and 35.0%25.6% of income before income tax expense respectively, for each of the three-monththree-month periods ended SeptemberJune 30, 2017 2020 and 2016. The decrease in the effective tax rate for the current period is due to a tax benefit 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).2019, respectively. The Company recorded aincome tax expense of approximately 33.3%18.9% and 35.4%24.0% of income before income tax expense for each of the nine-monthsix-month periods ended SeptemberJune 30, 2017 2020 and 2016. The decrease in the effective tax rate for the current period is due to a tax benefit 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. 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.
2019, respectively.
Restructuring Costs(13) Indebtedness
On March 18, 2015, February 1, 2018, the Company, committedas 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 move forwardtime 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. In the beginning of April, we drew down $5.5 million from our revolving credit facility to maintain cash reserves in the event we experienced a substantial shut down of operations, further or extended increase in manufacturing costs or significant exposure to our ability to timely collect receivables. The Company repaid in full the $5.5 million of the outstanding principal amount, together with a planinterest, under the revolving credit facility prior to cease operations at its Raritan, New Jersey, plantthe end of June. The Amended and consolidate operations into its Newburyport, Massachusetts, facilityRestated Credit Agreement matures on February 1, 2023. The proceeds borrowed pursuant to the Amended and other UFP facilities.Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. The Company’s decisionobligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Agreement calls for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of June 30, 2020, there were $0.7 million in standby letters of credit outstanding drawable as a financial guarantee on worker’s compensation insurance policies. As of June 30, 2020, the applicable interest rate was approximately 1.16%, and the Company was in response to a continued decline in business atcompliance with all covenants under the Raritan facilityAmended and the Company’s purchase of the 137,000-square-foot facility in Newburyport. The activities related to this consolidation are complete.Restated Credit Agreement.
Derivative Financial Instruments
The Company also relocated all operationsuses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on 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.
variable-rate debt instruments. The Company incurred approximately $2.1 milliondoes not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk. The Company minimizes counterparty credit risk in one-time expensesderivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The Company assesses interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the Massachusetts consolidations. Includedterm loan under 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 agreement was established to modify the Company’s interest rate exposure by converting the interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. Because the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $12.9 million at June 30, 2020. The fair value of the swap as of June 30, 2020 and December 31, 2019 was approximately $(616) thousand and $(325) thousand, respectively, and is included in other liabilities on the condensed consolidated balance sheets, respectively. Changes in the fair value of the swap are approximately $180,000 relating to employee severance paymentsrecorded in other expense on the condensed consolidated statements of income and relocation costs, approximately $1.6 millionresulted in moving expensesincome of $8 thousand and expenses associated with vacatingexpense of $292 thousand during the Raritan, Haverhill,three- and Byfield properties,six-month periods ended June 30, 2020. In the same periods in 2019, change in the fair value of the swap resulted in expense of $198 thousand and approximately $360,000 in lease termination costs. Total cash charges were approximately $2.0 million.$437 thousand, respectively.
LIBOR
The Financial Conduct Authority (the authority that regulates LIBOR) announced in 2017 that it intends to phase out LIBOR by the end of 2021. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, the Company recordedmay need to amend certain contracts, including the following restructuring costs associated withAmended and Restated Credit Agreement and related interest rate swap agreement, and the Massachusetts consolidations forCompany cannot guarantee what alternative rate or benchmark would be negotiated or the three-extent to which this would adversely affect its interest rate and nine-month periods ended September 30, 2017 and 2016 (in thousands):the effectiveness of its interest rate hedging activity. The Company cannot assure that it will be able to amend any of these agreements in a timely manner or at all.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Restructuring Costs | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Relocation | $ | - | $ | 25 | $ | 63 | $ | 203 | ||||||||
| Total | $ | - | $ | 25 | $ | 63 | $ | 203 | ||||||||
Costs for the three- and nine- month periods ended September 30, 2017 and 2016 were reclassified in the Condensed Consolidated Statement of Income as “Restructuring Costs” from Cost of Sales.
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”). Management and representatives of UFP Technologies, Inc. (the “Company”) also may from time to time make forward-looking statements. These statements are subject to known and unknown risks, uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about the Company’s prospects,prospects; statements about the potential impact the novel coronavirus ("COVID-19") pandemic may have on the Company’s business, financial condition and results of operations, including with respect to the different markets in which the Company participates, the demand for its products, the well-being and availability of the Company’s employees, the continuing operation of the Company’s locations, delayed payments by the Company’s customers and the potential for reduced or canceled orders, the Company’s efforts to address the pandemic, including regarding the safety of its employees, the maintenance of its facilities and the sufficiency of the Company’s supply chain, inventory, liquidity and capital resources, including increased costs in connection with such efforts, the impact of the pandemic on the businesses of the Company’s suppliers and customers, and the overall impact the pandemic may have on the Company’s financial results in 2020; statements about the Company’s acquisition strategies and opportunities and the Company’s growth potential and strategies for growth; expectations regarding customer demand; expectations regarding the Company’s liquidity and capital resources, including the sufficiency of its cash reserves and the availability of borrowing capacity to fund operations and/or potential future acquisitions; anticipated revenues and the timing of such revenues; expectations regarding the potential impact of the proposed phase out of LIBOR by the end of 2021; expectations about shifting the Company’s book of business to higher-margin, longer-run opportunities; anticipated trends and potential advantages in the different markets in which the Company competes, including the medical, aerospace and defense, automotive, consumer, electronics, and industrial and aerospace and defense markets, anticipated new customer and vendor contracts, statements regarding anticipated advantages relating to the Company’s decisionsplans to consolidate or expand in certain facilities, including the ongoing expansion of its Newburyport facility, and the expected cost savings and efficiencies associated therewith, anticipated advantages and the timing associated with requalification of parts, anticipated advantages of maintaining fewer, larger plants,markets; anticipated advantages the Company expects to realize from its investments and capital expenditures, includingexpenditures; anticipated advantages to improvements and alterations at the development of and investments in its molded fiber product lines,Company’s existing plants; expectations regarding the Company’s manufacturing capacity, operating efficiencies, and efficiencies of the Companynew production equipment; statements about new product offerings and the expected timing associated therewith, statements regarding the end of the Company’s automotive door panel program with Mercedes Benz, and the resulting impact to revenues,launches; statements about the Company’s acquisition opportunities and strategies, itsintegration of Dielectrics and the synergies and other benefits anticipated in connection with the Dielectrics business; the Company’s participation and growth in multiple markets,markets; its business opportunities, the Company’s growth potential and strategies for growth, anticipated revenues and the timing of such revenues,opportunities; and any indication that the Company may be able to sustain or increase its sales, and earnings or earnings per share, or its sales, and earnings or earnings per share growth rates.
Investors are cautioned that such forward-looking statements involve risks and uncertainties that could adversely affect the Company’s business and prospects, and otherwise cause actual results to differ materially from those anticipated by such forward-looking statements, or otherwise, including without limitationlimitation: the severity and duration of the COVID-19 pandemic and its impact on the markets in which the Company participates, including its impact on the Company’s customers, suppliers and employees, as well as the U.S. and worldwide economies; the timing, scope and effect of further governmental, regulatory, fiscal, monetary and public health responses to the COVID-19 pandemic; risks and uncertainties associated with the COVID-19 pandemic and its impact on the Company’s business, financial condition and results of operations, including risks relating to decreased, including substantially decreased, demand for the Company’s products; risks relating to the potential closure of any of the Company’s facilities or the unavailability of key personnel or other employees; risks that the Company’s inventory, cash reserves, liquidity or capital resources may be insufficient; risks relating to delayed payments by our customers and the potential for reduced or canceled orders; risks relating to the increased costs associated with the Company’s efforts to respond to the pandemic; risks relating to the Company’s acquisition and integration of Dielectrics; risks associated with the identification of suitable acquisition candidates and the successful, efficient execution of acquisition transactions, andthe integration of any such acquisition candidates, the value of those acquisitions to our customers and shareholders, and the financing of such acquisitions; risks related to our indebtedness and compliance with covenants contained in our financing arrangements, and whether any available financing may be sufficient to address our needs; risks related to the proposed phase out of LIBOR by the end of 2021;risks associated with efforts to shift the Company’s book of business to higher-margin, longer-run opportunities; risks associated with the Company’s entry into and growth in certain markets; risks and uncertainties associated with plant closuresseeking and consolidationsimplementing manufacturing efficiencies and expected efficiencies from consolidating manufacturing,implementing new production equipment; risks and uncertainties associated with growth of the requalification of parts, the risk that we may not be ableCompany’s business and increases to finalize anticipated new customer contracts,sales, earnings and earnings per share; and risks associated with the implementation of new production equipmentproduct and requalification or recertification of transferred equipment in a timely, 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.program launches. Accordingly, actual results may differ materially.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts, and projections, and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our current beliefs, estimates and assumptions and are only as of the date of this Report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, and “Risk Factors” set forth in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as well as the risks and uncertainties discussed elsewhere in this Report.Report, including without limitation any risks and uncertainties included elsewhere in this “Management's Discussion and Analysis of Financial Condition and Results Of Operations” portion of this Report, or under “Risk Factors” in Part II Item 1A of this report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFP Technologies, Inc. and its consolidated subsidiaries.
Overview
UFP Technologies, Inc. (the “Company”) is an innovative designer and custom convertermanufacturer of components, subassemblies, products and packaging primarily for the medical market. Utilizing highly specialized foams, films and plastics, the Company converts raw materials through laminating, molding, radio frequency welding and natural fiber materials, principally servingfabricating techniques. The Company is diversified by also providing highly engineered solutions to customers in the Medical, Consumer, Automotive, Aerospaceaerospace & defense, automotive, consumer, electronics and Defense, Industrial and Electronicsindustrial markets. The Company consists of a single operating and reportable segment.
TheSales for the Company had a slight increase in sales throughfor the first nine months of 2017, largely fueled by continued growth in salessix-month period ended June 30, 2020 decreased 7.9% to customers$90.9 million from $98.7 million in the medical market, partially offset by declined salessame period last year largely due to customerthe impact in demand for product as a result of the automotive market. The Company improved grossCOVID-19 pandemic. Gross margins for the nine-monthsix-month period ended SeptemberJune 30, 20172020 decreased to 25.0% from 24.1%27.2% in the first nine months of 2016 as the Company has become much more efficient in manufacturing particularly in those plants impacted by recent consolidations. Absent non-recurring restructuringsame period last year. Operating income and material overcharge items, operatingnet income increased by 19% in the first nine months of 2017.
The Company’s previously announced consolidationdecreased 31.7% 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.25.5%, respectively.
The Company’s current strategy includes further organic growth and growth through strategic acquisitions.acquisitions.
Recent Developments
COVID-19
COVID-19 has spread across the country to areas in which our products are designed, manufactured, distributed or sold. Authorities in states in which we do business have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, stay-at-home orders, and business shutdowns. These measures have impacted and will likely further impact us, our customers, consumers, employees, suppliers and other third parties with whom we do business. There is considerable uncertainty regarding how these and any future measures in response to the pandemic will impact our business, including whether and to what extent they will result in further changes in demand for our products or further increases in operating costs (whether as a result of changes to our supply chain or increases in employee or manufacturing costs).
Our operations expose us to risks associated with the COVID-19 pandemic. Although the COVID-19 pandemic did not materially impact our first quarter results, it has since more significantly impacted our operations. While all of our factories are deemed essential, not all of our customers’ operations are essential and, therefore, demand for our products and our customers’ products has been negatively impacted, especially in the automotive and consumer markets, where the impact has been substantial. Partially mitigating this are increased orders from certain customers in the medical market. The COVID-19 pandemic has also impacted the cost of manufacturing our goods, including higher labor costs, maintenance costs and manufacturing inefficiencies due to employee absenteeism and significantly enhanced cleaning and sterilization. With regard to our supply chain, there has thus far been minimal disruption in the availability of raw materials, as most of our major suppliers have also been deemed to be essential businesses. Due to similar concerns regarding supply and shipping challenges at the beginning of the COVID-19 pandemic, we understand that certain of our customers increased their purchasing requirements, as well. We believe this partially mitigated the sales decline for the second quarter of 2020. We anticipate that our customers’ increased supply levels may lead to decreased demand for our products.
In light of the COVID-19 pandemic, elective medical procedures and exams have been delayed or canceled, there has been a significant reduction in physician office visits, and hospitals have postponed or canceled capital purchases. We believe that these responses have had a negative impact on the demand for the Company’s components for medical devices. Additionally, many of our customers in the automotive markets have experienced closures of their businesses in connection with the pandemic. Such closures have negatively impacted the demand for our automobile component products. Any continued reduced demand for our products, including reduced need for components for medical devices, packaging for consumer and electronic goods, or reduced need for automobile components, as well as continued economic uncertainty, could adversely and materially affect our business, financial condition and results of operations, as well as those of our customers, potentially resulting in customers’ inability to pay for our products and reduced or canceled orders of our products. Such adverse changes in our customers’ financial condition may also result in our recording impairment charges for our inability to recover or collect any accounts receivable or owned or leased assets.
We have been notified by several customers that they would be extending payment terms. We anticipate that these extended payment terms will be short-term in nature, but they may continue for a longer duration. In the beginning of April, we drew down $5.5 million from our revolving credit facility to maintain cash reserves in the event we experienced a substantial shut down of operations, further or extended increase in manufacturing costs, or significant exposure to our ability to timely collect receivables. The Company repaid the $5.5 million in full prior to the end of June.
The COVID-19 pandemic and associated economic disruptions have had, and we believe they will continue to have, negative effects on our operating results, cash flows and financial condition. While we began to experience these negative effects towards the end of March, they increased markedly during the second quarter. We expect these negative effects on our financial results will continue in the third quarter, in particular due to continued decreased product demand. As of the date of this report, we anticipate that the negative effects of the pandemic on our business and financial results may start to wane during the fourth quarter of 2020, but the situation is highly dependent on facts unknown at this time, and therefore uncertain, so this may not be the case. In any event, the negative effects of the COVID-19 pandemic on our business and financial results are likely to continue to be significant through the end of 2020.
To ensure the health and safety of our employees and to comply with governmental orders, since March, 2020, we have required or enabled certain employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shifted schedules to facilitate social distancing and sterilization for those who continue to work in our facilities; enhanced cleaning and disinfecting procedures at our facilities; required face coverings and worked to procure and distributed personal protective equipment; implemented health checks and visitor protocols and restricted travel.
Additionally, in response to the economic uncertainties resulting from the COVID-19 pandemic, we have initiated cost-cutting measures, including restrictions on travel and direct and indirect labor cost reduction measures, including employee terminations. Terminated employees were provided with severance pay and accordingly such terminations have not materially affected our results of operations for the second quarter of fiscal 2020. We expect that the impact of these cost-cutting measures will occur primarily starting in the third quarter of fiscal 2020, but they will not likely offset the negative impacts of the COVID-19 pandemic.
While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 on our employees and our business, we believe the extent of the impact of the pandemic on our business and financial results will depend on future developments that are highly uncertain and cannot be predicted, and which may vary by market, including the duration and scope of the pandemic, its severity, economic conditions during and after the pandemic, governmental actions that have or may be taken in response to the pandemic, changes in customer behavior in response to the pandemic, and how quickly and to what extent more predictable economic and operating conditions can resume. As a result, we anticipate that COVID-19 driven demand disruptions and related events will negatively affect our financial results in 2020.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments and estimated income tax payments that we expect to defer to future periods. Accordingly, the Company has deferred social security payments in an amount of $443,000 as of June 30, 2020, which will continue to accrue thereafter. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the CARES Act may have on our business and financial results.
Results of Operations
Sales
Sales for the three-month period ended SeptemberJune 30, 20172020 decreased approximately 4.1%17.0% to $35.7 million compared to $37.2 million in the same period in 2016. The decrease in sales during the three-month period ended September 30, 2017 was primarily due to decreases in sales to customers in the automotive and electronics markets of approximately 25.5% and 9.2%, respectively. These decreases were partially offset by increases in sales to customers in the aerospace and defense and consumer markets of approximately 6.6% and 6.3%, respectively. 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 portion of its southeast 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 sales for the program will total approximately $3.0 million in 2017 and will be modest in 2018. The decline in sales to customers in the electronics market was primarily due to reduced demand for protective packaging. The increase in sales to customers in the aerospace and defense market was primarily due to increased demand for components from our government contractor customers. The increase in sales to customers in the consumer market was primarily due to higher demand for molded fiber protective packaging. Sales 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$42.6 million from sales of $109.6$51.4 million for the same period in 2016. The increase2019. We attribute the decrease in sales primarily to the impact on demand for product as a result of the COVID-19 pandemic. We believe that the cancellation or delay of elective medical procedures in connection with the COVID-19 pandemic has had a negative impact on the demand for the nine-month period ended September 30, 2017 was primarily due to increases in sales to customers in theCompany’s components for medical marketdevices. Additionally, many of approximately 7.9% partially offset by decreases in sales toour customers in the automotive and industrial markets have experienced closures of approximately 12.0% and 9.6% respectively. The increasetheir businesses in sales to customers inconnection with the medical market was primarily due to strongpandemic. Such closures have negatively impacted the demand for our customers’ products as well as selective price increases. The declineautomobile component products.
Sales for the six-month period ended June 30, 2020 decreased approximately 7.9% to $90.9 million from sales of $98.7 million for the same period in 2019. We attribute the decrease in sales primarily to customersthe impact on demand for product as a result of the COVID-19 pandemic, as described in the automotive market was primarily duepreceding paragraph. We refer you to soft demand“Recent Developments—Covid-19” above 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 oneadditional discussion of our customers within this market.product demand.
Gross Profit
Gross profit as a percentage of sales (“gross margin”) increaseddecreased to 23.0%23.3% for the three-month period ended SeptemberJune 30, 2017,2020, from 22.7%28.0% for the same period in 2016.2019. As a percentage of sales, material and labor costs collectively decreased 0.8%1.9%, while overhead increased 0.5%6.6% The decrease in collective material and labor costs as a percentage of sales was primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives and an improvement in the overall book of business. The increase in overhead as a percentage of sales was primarily due to fixed overhead costs against decreased sales.
Gross margin decreased to 25.0% for the six-month period ended June 30, 2020, from 27.2% for the same period in 2019. As a percentage of sales, material and labor costs collectively decreased 1.2%, while overhead increased 3.4%. The decrease in collective material and labor costs as a percentage of sales iswas 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 increase in overhead isas a percentage of sales was primarily due to an increase in indirect laborfixed overhead costs of approximately $700,000 due largely to hires made in the second half of 2016 to support growth.against decreased sales.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) decreased approximately 5.5%14.5% to $5.7$6.7 million for the three-month period ended SeptemberJune 30, 20172020, from $6.0$7.8 million for the same period in 2016.2019. As a percentage of sales, SG&A decreasedincreased slightly to 16.0%15.6% for the three-month period ended SeptemberJune 30, 20172020, from 16.2%15.2% for the same three-month period in 2016.2019. The decrease in SG&A for the three-month period ended SeptemberJune 30, 2017 is2020 was primarily due to reductionsdecreases in generalcompensation-related reserves and administrative payrollcompany-wide travel and recruiting costs.entertainment.
SG&A decreased approximately 1.8%4.2% to $18.1$14.4 million for the nine-monthsix-month period ended SeptemberJune 30, 2017 from $18.42020, compared to $15.0 million forin the same period in 2016.2019. As a percentage of sales, SG&A decreasedincreased to 16.3% for the nine-month period ended September 30, 201715.9% from 16.8%15.2% for the same nine-monththree-month period in 2016.2019. The decrease in SG&A for the nine-monthsix-month period ended SeptemberJune 30, 2017 is2020 was primarily due to reductionsdecreases in consultingcompensation-related reserves and recruiting expenses. The decrease in SG&A as a percentagecompany-wide travel and entertainment.
We refer you to “Recent Developments—Covid-19” above for additional discussion of sales is primarily due to reductions in general and administrative payroll, consulting and recruiting expenses measured against higher sales.cost-reduction measures.
Restructuring 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 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.
Interest Income and Expense
The Company hadNet interest expense was approximately $33 thousand for the three-month period ended June 30, 2020, compared to net interest incomeexpense of $194 thousand in the same period of 2019. The decrease in net interest expense was primarily due to lower debt levels.
Net interest expense was approximately $51,000$49 thousand for the six-month period ended June 30, 2020, compared to net interest expense of $425 thousand in the same period of 2019. The decrease in net interest expense was primarily due to lower debt levels.
Other Expense
Other expense was approximately $35 thousand and $25,000$198 thousand for the three-month periods ended SeptemberJune 30, 20172020 and 2016, respectively. The Company had net interest income of2019, respectively and approximately $108,000$362 thousand and $51,000$437 thousand for the nine-monthsix-month periods ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The increaseOther expense was primarily generated by changes in the fair value of the swap liability, which is driven by anticipated future interest rate changes. Should we choose to keep the swap for the full five-year term, the cumulative net interestimpact to the income is primarilystatement due to an increasechanges in interest earned on money market accounts and certificates of deposit and decreasing interest costs on the Company’s term loans.fair value will be zero.
Income Taxes
The Company recorded tax expense of approximately 33.6%20.8% and 35.0%25.6% of income before income tax expense, respectively, for each of the three-month periods ended SeptemberJune 30, 20172020 and 2016.2019. The decrease in the effective tax rate for the current period iswas largely due to a lower anticipated effective tax benefit of approximately $37,000rate due to credits available for increased research activities as well as share-based payment related tax benefits 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).current period. The Company recorded a tax expense of approximately 33.3%18.9% and 35.4%24.0% of income before income tax expense, respectively, for each of the nine-monthsix-month periods ended SeptemberJune 30, 20172020 and 2016.2019. The decrease in the effective tax rate for the current period iswas largely due to a lower anticipated effective tax benefit of approximately $162,000rate due to credits available for increased research activities as well as 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 assessment of approximately $40,000 from one jurisdiction recorded in the first quarter of 2016.current period. 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. 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 at September 30, 2017. The Company will continue to assess whether the deferred tax assets will be realizable and, when appropriate, will record a valuation allowance against these assets. The amount 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.
Liquidity and Capital Resources
The Company generally funds its operating expenses, capital requirements, and growth plan through internally generated cash and bank credit facilities.
Cash Flows
Net cash provided by operations for the nine-monthsix-month period ended SeptemberJune 30, 20172020 was approximately $13.0$10.7 million and was primarily a result of net income generated of $6.5approximately $6.2 million, depreciation and amortization of approximately $4.2 million, loss on sale of fixed assets of approximately $0.3 million, share-based compensation of $0.8approximately $1.1 million, an increase in deferred taxes of $0.3approximately $0.7 million, a decrease in inventoryaccounts receivable of approximately $1.0$1.4 million due primarily to management initiatives,reduced sales, a decrease in refundable income taxes of approximately $0.5 million, an increase in accounts payable of approximately $0.4$0.7 million, due to the timing of vendor payments in the ordinary course of business, an increase in accrued expenses of approximately $0.7 million due to compensation accruals and an increase inof other long-term liabilities of $0.2 million.approximately $0.8 million due primarily to an increase in the fair value of the interest rate swap and the deferral of employer social security tax payments in connection with the CARES Act. These cash inflows and adjustments to income were partially offset by an increase in accounts receivableinventory of approximately $0.8$2.7 million due to restocking to historical levels and for expected safety stock needs, an increase in prepaid expenses of approximately $1.1 million due primarily to insurance and progress payments on machinery, and a decrease in accrued expenses of approximately $1.4 million due to the timingpayment of customer collections, an increase in refundable income taxes of approximately $0.2 million and an increase in other assets of approximately $0.1 million.2019 accrued compensation.
Net cash used in investing activities during the nine-monthsix-month period ended SeptemberJune 30, 20172020 was approximately $6.9$2.1 million and was primarily the result of additions of manufacturing machinery and equipment andacross the expansion of the Newburyport, Massachusetts plant.Company.
Net cash used in financing activities was approximately $0.2$0.1 million during the nine-monthsix-month period ended SeptemberJune 30, 2017, representing cash used to service term debt2020, resulting from borrowings and repayments on the Company’s credit facility of approximately $0.7$5.5 million and to paypayments of statutory withholding for stock options exercised and restricted stock units vested of approximately $0.1$0.6 million, partially offset by net proceeds received upon stock options exercises of approximately $0.6$0.5 million.
Outstanding and Available Debt
TheOn February 1, 2018, the Company, maintainsas the borrower, entered into an unsecured $40$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, with Bankunder which we may borrow up to $50 million. In the beginning of America, N.A. TheApril, we drew down $5.5 million from our revolving credit facility callsto maintain cash reserves in the event we experienced a substantial shut down of operations, further or extended increase in manufacturing costs or significant exposure to our ability to timely collect receivables. The Company repaid in full the $5.5 million of the outstanding principal amount, together with interest, under the revolving credit facility prior to the end of June. 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, as well as permitted acquisitions. Our obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Facilities call for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the 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. As of SeptemberJune 30, 2017, the Company had no borrowings outstanding under the credit facility. Included in the credit facility2020, there were approximately $300,000$0.7 million in standby letters of credit outstanding drawable as a financial guarantee on worker’s compensation insurance policies. As of SeptemberJune 30, 2017,2020, the applicable interest rate was approximately 1.16% and the Company was in compliance with all covenants under the credit facility.Amended and Restated Credit Agreement.
In 2012,Derivative Financial Instruments
The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company financedto credit risk and market risk. Credit risk is the purchasefailure of two molded fiber machines through five-year term loansthe counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that matureresults from a change in October 2017.interest rates. The annualCompany assesses interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is fixed at 1.83% andprudent to limit the loans are secured by the related molded fiber machines. Asvariability of September 30, 2017, the outstanding balancea portion of its interest payments. To meet this objective, in connection with the term loan facilityunder 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 agreement was established to modify the Company’s interest rate exposure by converting interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. Because the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $84,000.$12.9 million at June 30, 2020. The fair value of the swap as of June 30, 2020 and December 31, 2019 was approximately $(616) thousand and $(325) thousand, respectively, and is included in other liabilities. Changes in the fair value of the swap are recorded in other expense on the condensed consolidated statements of income and resulted in income of $8 thousand and expense of $292 thousand during the three- and six-months ended June 30, 2020. In the same periods in 2019, change in the fair value of the swap resulted in expense of $198 thousand and $437 thousand, respectively.
The Financial Conduct Authority (the authority that regulates LIBOR) announced in 2017 that it intends to phase out LIBOR by the end of 2021. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts, including our Amended and Restated Credit Agreement and related interest rate swap agreement, and we cannot guarantee what alternative rate or benchmark would be negotiated or the extent to which this would adversely affect our interest rate and the effectiveness of our interest rate hedging activity. We cannot assure that we will be able to amend any of these agreements in a timely manner or at all.
Future Liquidity
The Company requiresWe require cash to pay itsour operating expenses, purchase capital equipment, and to service itsour contractual obligations. The Company’sOur principal sources of funds are itscash from operations and itsour $50 million revolving credit facility. The CompanyWe generated cash of approximately $13.0$10.7 million from operations during the nine-month periodsix months ended SeptemberJune 30, 2017;2020; however, the Companywe cannot guarantee that itsour operations will generate cash in future periods. The Company’sAs indicated above, we have been notified by several customers that they intend to extend payment terms due to COVID-19 and, therefore, we anticipate short-term lower operating cash and higher working capital needs. Our longer-term liquidity is contingent upon future operating performance.performance and further draws on our revolving credit facility are possible. Further, the continued economic uncertainty resulting from the COVID-19 pandemic could affect our long-term ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
Throughout fiscal 2017, the Company plans2020, we plan to continue to add capacity to enhance operating efficiencies in itsour manufacturing plants. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The CompanyWe may consider additional acquisitions of companies, technologies, or products that are complementary to itsour business. The Company believesWe believe that itsour existing resources, including itsour revolving credit facility, together with cash expected to be generated from operations and funds expected to be available to itus through any necessary equipment financings and additional bank borrowings, will be sufficient to fund itsour 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.Act. 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 CompanyWe did not repurchase any shares of itsour common stock under this program in the first ninesix months of 2017.2020. Through SeptemberJune 30, 2017,2020, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000.$587 thousand. At SeptemberJune 30, 2017,2020, 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, 2016.2019.
16
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 SeptemberJune 30, 2017,2020, there was approximately $300,000$0.7 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.
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.
| 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 SECExchange Act Rule 13a-15(e) or 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 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.
ThereAn 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. 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.
OTHER INFORMATION |
LEGAL PROCEEDINGS. |
From time to time, the Company may be a party to various suits, claims and complaints arising in the ordinary course of business. In the opinion of management of the Company, these suits, claims and complaints should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations.
RISK FACTORS |
ThereThe Company faces a number of uncertainties and risks that are difficult to predict and many of which are outside of the Company's control. For a detailed discussion of the risks that affect our business, please refer to Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part II - Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.There have been no material changes from the risk factors previously disclosed in Part 1 - Item 1A of the Company’s Annual Report and prior Quarterly Report, except as set forth below.
Our business and operations have been adversely affected, and our business, financial condition and results of operations could in the future be materially adversely impacted by the COVID-19 pandemic and associated economic disruptions.
The pandemic caused by the spread of COVID-19 has created significant volatility, uncertainty and economic disruption in the markets in which we participate. COVID-19 has spread across the country to areas in which our products are designed, manufactured, distributed or sold. Authorities in states in which we do business have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, stay-at-home orders, and business shutdowns. These measures have impacted and will likely further impact us, our customers, consumers, employees, suppliers and other third parties with whom we do business. There is considerable uncertainty regarding how these and any future measures in response to the pandemic will impact our business, including whether and to what extent they will result in further changes in demand for our products or further increases in operating costs (whether as a result of changes to our supply chain or increases in employee or manufacturing costs).
Our operations expose us to risks associated with the COVID-19 pandemic. Although the COVID-19 pandemic did not materially impact our first quarter results, since the end of the first quarter it has more significantly impacted our operations. Adverse impacts relating to the COVID-19 pandemic that we have already experienced include, among others: decreased demand for certain of our products in the medical market, such as orders for products related to elective medical procedures, and a dramatic decrease in demand for products that service our other markets, such as automotive and consumer, as many of our customers’ businesses are currently shut down; increased labor, supply and maintenance costs, as well as manufacturing inefficiencies, as a result of employee attendance issues and enhanced cleaning and other efforts to safeguard our employees and facilities; increased carrying costs associated with the accelerated purchasing of raw materials, to help secure adequate supplies; and extended payment terms imposed by customers. Although we have not yet experienced significant manufacturing or supply chain difficulties as a result of COVID-19, we may in the future. A reduction or interruption in any of our manufacturing processes, or the closure of any of our facilities, could have a material adverse effect on Form 10-Kour business. Our insurance coverage may not adequately compensate us for losses incurred as a direct or indirect result of the fiscal year ended December 31, 2016.COVID-19 pandemic.
Any continued reduced demand for our products including reduced need for components for medical devices, packaging for consumer and electronic goods, or reduced need for automobile components, as well as continued economic uncertainty, could adversely and materially affect our business, financial condition and results of operations, as well as those of our customers, potentially resulting in customers’ inability to pay for our products and reduced or canceled orders of our products. Such adverse changes in our customers’ financial condition may also result in our recording impairment charges for our inability to recover or collect any accounts receivable or owned or leased assets.
We have been notified by several customers that they would be extending payment terms. We anticipate that these extended payment terms will be short-term in nature, but they may continue for a longer duration. Additionally, due to concerns regarding supply and shipping challenges at the beginning of the COVID-19 pandemic, we understand that certain of our customers increased their purchasing requirements. We anticipate that our customers’ increased supply levels may lead to decreased demand for our products in the second half of the year. In the beginning of April, we drew down $5.5 million from our revolving credit facility to maintain sufficient cash reserves in the event we experience a substantial shut down of operations, further or extended increase in manufacturing costs or significant exposure to our ability to timely collect our receivables. The Company repaid the $5.5 million in full prior to the end of June. The terms of our Amended and Restated Credit Facilities contain covenants that restrict our ability to engage in certain transactions and, if not met, may impair our ability to respond to changing business and economic conditions. Our Amended and Restated Credit Facilities also require us to satisfy certain financial covenants. Should our future business and operations be significantly impaired by the continuing COVID-19 pandemic and associated economic disruptions or otherwise, we cannot assure that we will remain in compliance with our current financial covenants. In such event, the factors that adversely affect our business may also similarly adversely affect the capital markets, and we cannot assure that we would be able to negotiate alternative covenants or alternative financing on favorable terms, if at all. Our failure to comply with the covenants contained in our Amended and Restated Credit Facilities, including financial covenants, could result in an event of default, which could materially and adversely affect our results of operations and financial condition.
The COVID-19 pandemic and associated economic disruptions have had, and we believe they will continue to have, negative effects on our operating results, cash flows and financial condition. While we began to experience these negative effects towards the end of March, they increased markedly during the second quarter. We expect these negative effects on our financial results will continue in the third quarter, in particular due to continued decreased product demand. As of the date of this report, we anticipate that the negative effects of the pandemic on our business and financial results may start to wane during the fourth quarter of 2020. However, we believe the extent of the impact of the pandemic on our business and financial results will depend on future developments that are highly uncertain and cannot be predicted, and which may vary by market, including the duration and scope of the pandemic, its severity, economic conditions during and after the pandemic, governmental actions that have or may be taken in response to the pandemic, changes in customer behavior in response to the pandemic, and how quickly and to what extent more predictable economic and operating conditions can resume. As a result, the Company anticipates that COVID-19 driven demand disruptions and related events will negatively affect the Company's financial results in 2020.
We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for additional discussion of the potential impact of the COVID-19 pandemic and associated economic disruptions.
The proposed discontinuation or replacement of LIBOR would require us to amend certain agreements and may otherwise adversely affect our business.
The Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts, including our Amended and Restated Credit Agreement and related interest rate swap agreement, and we cannot guarantee what alternative rate or benchmark would be negotiated. We cannot assure that we will be able to amend any of these agreements in a timely manner or at all. This may result in an increase to our interest expense.
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 ninesix months of 2017.2020. Through SeptemberJune 30, 2017,2020, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000.$587 thousand. At SeptemberJune 30, 2017,2020, approximately $9.4 million was available for future repurchases of the Company’sCompany's common stock under this authorization.
| ITEM 6: | EXHIBITS |
Exhibit No. | Description |
| 10.2 | Form of 2020 Stock Unit Award Agreement #* |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.* |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.* | |
101.INS | XBRL Instance Document.* |
101.SCH | XBRL Taxonomy Extension Schema Document.* |
101.CAL | XBRL Taxonomy Calculation Linkbase Document.* |
101.LAB | XBRL Taxonomy Label Linkbase Document.* |
101.PRE | XBRL Taxonomy Presentation Linkbase Document.* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.* |
__________________
* | Filed herewith. |
** | Furnished herewith. |
# | Indicates management contract or compensatory plan or arrangement. |
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.
| UFP TECHNOLOGIES, INC. | |||||
Date: | By: /s/ | R. Jeffrey Bailly | |||
R. Jeffrey Bailly Chairman, Chief | |||||
| President, and Director (Principal | |||||
Date: August 7, 2020
By: /s/ Ronald J. Lataille
Ronald J. Lataille Chief Financial (Principal Financial Officer) | |
__________________
18