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 SEPTEMBER 30, 2017 2022
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 ☒
7,267,6627,578,605 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of November 6, 2017.1, 2022.
UFP Technologies, Inc.
Index
Page
UFP Technologies, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
September 30, | December 31, 2021 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,937 | $ | 11,117 | ||||
Receivables, net | 61,477 | 39,384 | ||||||
Inventories | 53,821 | 33,436 | ||||||
Prepaid expenses and other current assets | 2,421 | 3,383 | ||||||
Refundable income taxes | 2,590 | - | ||||||
Total current assets | 133,842 | 87,320 | ||||||
Property, plant and equipment | 107,809 | 126,837 | ||||||
Less accumulated depreciation and amortization | (51,463 | ) | (70,268 | ) | ||||
Net property, plant and equipment | 56,346 | 56,569 | ||||||
Goodwill | 112,657 | 107,905 | ||||||
Intangible assets, net | 69,041 | 67,585 | ||||||
Non-qualified deferred compensation plan | 3,882 | 4,327 | ||||||
Finance lease right of use assets | 226 | 271 | ||||||
Operating lease right of use assets | 12,114 | 9,053 | ||||||
Other assets | 3,807 | 1,102 | ||||||
Total assets | $ | 391,915 | $ | 334,132 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 20,899 | $ | 10,611 | ||||
Accrued expenses | 26,019 | 12,700 | ||||||
Deferred revenue | 4,173 | 4,247 | ||||||
Finance lease liabilities | 59 | 58 | ||||||
Operating lease liabilities | 2,250 | 2,181 | ||||||
Income taxes payable | - | 909 | ||||||
Current installments of long-term debt | 4,000 | 4,000 | ||||||
Total current liabilities | 60,996 | 34,706 | ||||||
Long-term debt, excluding current installments | 67,000 | 71,000 | ||||||
Deferred income taxes | 4,127 | 3,263 | ||||||
Non-qualified deferred compensation plan | 3,886 | 4,337 | ||||||
Finance lease liabilities | 171 | 215 | ||||||
Operating lease liabilities | 10,029 | 6,903 | ||||||
Other liabilities | 19,547 | 19,262 | ||||||
Total liabilities | 165,756 | 139,686 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued | - | - | ||||||
Common stock, $.01 par value, 20,000,000 shares authorized; 7,608,164 and 7,578,605 shares issued and outstanding, respectively, at September 30, 2022; 7,564,645 and 7,535,086 shares issued and outstanding, respectively, at December 31, 2021 | 76 | 75 | ||||||
Additional paid-in capital | 35,396 | 34,151 | ||||||
Retained earnings | 194,134 | 160,807 | ||||||
Accumulated other comprehensive loss | (2,860 | ) | - | |||||
Treasury stock at cost: 29,559 shares at September 30, 2022 and December 31, 2021 | (587 | ) | (587 | ) | ||||
Total stockholders’ equity | 226,159 | 194,446 | ||||||
Total liabilities and stockholders' equity | $ | 391,915 | $ | 334,132 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| September 30, 2017 | December 31, 2016 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 37,246 | $ | 31,359 | ||||
| Receivables, less allowance for doubtful accounts of $602 at September 30, 2017 and $567 at December 31, 2016 | 22,044 | 21,249 | ||||||
| Inventories | 13,136 | 14,151 | ||||||
| Prepaid expenses | 2,234 | 2,281 | ||||||
| Refundable income taxes | 979 | 807 | ||||||
| Total current assets | 75,639 | 69,847 | ||||||
| Property, plant and equipment | 103,797 | 96,806 | ||||||
| Less accumulated depreciation and amortization | (51,815 | ) | (48,290 | ) | ||||
| Net property, plant and equipment | 51,982 | 48,516 | ||||||
| Goodwill | 7,322 | 7,322 | ||||||
| Intangible assets, net | 79 | 318 | ||||||
| Other assets | 2,069 | 1,931 | ||||||
| Total assets | $ | 137,091 | $ | 127,934 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 4,958 | $ | 4,002 | ||||
| Accrued expenses | 5,356 | 4,698 | ||||||
| Short-term debt | 84 | 856 | ||||||
| Total current liabilities | 10,398 | 9,556 | ||||||
| Deferred income taxes | 3,713 | 3,459 | ||||||
| Non-qualified deferred compensation plan | 1,949 | 1,682 | ||||||
| Other liabilities | 118 | 184 | ||||||
| Total liabilities | 16,178 | 14,881 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value, 1,000,000 shares authorized; zero shares issued or outstanding | - | - | ||||||
| Common stock, $.01 par value, 20,000,000 shares authorized; 7,299,721 and 7,270,162 shares issued and outstanding, respectively at September 30, 2017; and 7,242,023 and 7,212,464 shares issued and outstanding, respectively at December 31, 2016 | 73 | 72 | ||||||
| Additional paid-in capital | 26,580 | 25,216 | ||||||
| Retained earnings | 94,847 | 88,352 | ||||||
| Treasury stock at cost, 29,559 shares at September 30, 2017 and December 31, 2016 | (587 | ) | (587 | ) | ||||
| Total stockholders’ equity | 120,913 | 113,053 | ||||||
| Total liabilities and stockholders' equity | $ | 137,091 | $ | 127,934 | ||||
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net sales | $ | 96,970 | $ | 50,723 | $ | 262,555 | $ | 149,977 | ||||||||
Cost of sales | 71,447 | 38,707 | 195,575 | 111,938 | ||||||||||||
Gross profit | 25,523 | 12,016 | 66,980 | 38,039 | ||||||||||||
Selling, general & administrative expenses | 11,822 | 6,806 | 33,909 | 21,343 | ||||||||||||
Acquisition costs | 10 | 154 | 1,027 | 154 | ||||||||||||
Change in fair value of contingent consideration | 3,346 | - | 9,348 | - | ||||||||||||
Gain on sale of Molded Fiber business | (15,623 | ) | (15,623 | ) | ||||||||||||
Loss (Gain) on sale of property, plant & equipment | 3 | (21 | ) | (6,206 | ) | (42 | ) | |||||||||
Operating income | 25,965 | 5,077 | 44,525 | 16,584 | ||||||||||||
Interest income | (11 | ) | - | (33 | ) | 11 | ||||||||||
Interest expense | 841 | 16 | 1,924 | - | ||||||||||||
Other (income) expenses | (104 | ) | 4 | (313 | ) | (2 | ) | |||||||||
Income before income tax expense | 25,239 | 5,057 | 42,947 | 16,575 | ||||||||||||
Income tax expense | 5,699 | 1,268 | 9,620 | 3,908 | ||||||||||||
Net income | $ | 19,540 | $ | 3,789 | $ | 33,327 | $ | 12,667 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 2.58 | $ | 0.50 | $ | 4.41 | $ | 1.68 | ||||||||
Diluted | $ | 2.56 | $ | 0.50 | $ | 4.37 | $ | 1.67 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 7,570 | 7,531 | 7,559 | 7,522 | ||||||||||||
Diluted | 7,638 | 7,597 | 7,629 | 7,585 | ||||||||||||
Comprehensive Income | ||||||||||||||||
Net Income | $ | 19,540 | $ | 3,789 | $ | 33,327 | $ | 12,667 | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustment | (1,725 | ) | - | (2,860 | ) | - | ||||||||||
Other comprehensive loss | (1,725 | ) | - | (2,860 | ) | - | ||||||||||
Comprehensive income | $ | 17,815 | $ | 3,789 | $ | 30,467 | $ | 12,667 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UFP Technologies, Inc.
Condensed Consolidated Statements of IncomeStockholders’ Equity
(In thousands, except per share data)thousands)
(Unaudited)
Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
Additional | Accumulated | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Other Comprehensive | Treasury Stock | Shareholders' | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Equity | |||||||||||||||||||||||||
Balance at December 31, 2021 | 7,535 | $ | 75 | $ | 34,151 | $ | 160,807 | - | 30 | $ | (587 | ) | 194,446 | |||||||||||||||||||
Share-based compensation | 46 | 1 | 691 | - | - | - | - | 692 | ||||||||||||||||||||||||
Net share settlement of RSUs | (20 | ) | - | (1,299 | ) | - | - | - | - | (1,299 | ) | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | 381 | - | - | 381 | ||||||||||||||||||||||||
Net income | - | - | - | 4,858 | - | - | - | 4,858 | ||||||||||||||||||||||||
Balance at March 31, 2022 | 7,561 | 76 | 33,543 | 165,665 | 381 | 30 | (587 | ) | 199,078 | |||||||||||||||||||||||
Share-based compensation | 4 | - | 781 | - | - | - | - | 781 | ||||||||||||||||||||||||
Exercise of stock options | 1 | - | 21 | - | - | - | - | 21 | ||||||||||||||||||||||||
Net share settlement of RSUs | - | - | (3 | ) | - | - | - | - | (3 | ) | ||||||||||||||||||||||
Other comprehensive income | - | - | - | - | (1,516 | ) | - | - | (1,516 | ) | ||||||||||||||||||||||
Net income | - | - | - | 8,929 | - | - | - | 8,929 | ||||||||||||||||||||||||
Balance at June 30, 2022 | 7,566 | 76 | 34,342 | 174,594 | (1,135 | ) | 30 | (587 | ) | 207,290 | ||||||||||||||||||||||
Share-based compensation | - | - | 897 | - | - | - | - | 897 | ||||||||||||||||||||||||
Exercise of stock options | 14 | - | 346 | - | - | - | - | 346 | ||||||||||||||||||||||||
Net share settlement of RSUs | (11 | ) | - | (189 | ) | - | - | - | - | (189 | ) | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | (1,725 | ) | - | - | (1,725 | ) | ||||||||||||||||||||||
Net income | - | - | - | 19,540 | - | - | - | 19,540 | ||||||||||||||||||||||||
Balance at September 30, 2022 | 7,569 | 76 | 35,396 | 194,134 | (2,860 | ) | 30 | (587 | ) | 226,159 | ||||||||||||||||||||||
Three and Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
Additional | Accumulated | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Other Comprehensive | Treasury Stock | Shareholders' | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Equity | |||||||||||||||||||||||||
Balance at December 31, 2020 | 7,500 | $ | 75 | $ | 32,484 | $ | 144,921 | - | 30 | $ | (587 | ) | 176,893 | |||||||||||||||||||
Share-based compensation | 34 | - | 501 | - | - | - | - | 501 | ||||||||||||||||||||||||
Net share settlement of RSUs | (14 | ) | - | (738 | ) | - | - | - | - | (738 | ) | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net income | - | - | - | 4,163 | - | - | - | 4,163 | ||||||||||||||||||||||||
Balance at March 31, 2021 | 7,520 | 75 | 32,247 | 149,084 | - | 30 | (587 | ) | 180,819 | |||||||||||||||||||||||
Share-based compensation | 4 | - | 620 | - | - | - | - | 620 | ||||||||||||||||||||||||
Exercise of stock options | 7 | - | 162 | - | - | - | - | 162 | ||||||||||||||||||||||||
Net share settlement of RSUs | - | - | (2 | ) | - | - | - | - | (2 | ) | ||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net income | - | - | - | 4,715 | - | - | - | 4,715 | ||||||||||||||||||||||||
Balance at June 30, 2021 | 7,531 | 75 | 33,027 | 153,799 | - | 30 | (587 | ) | 186,314 | |||||||||||||||||||||||
Share-based compensation | - | - | 650 | - | - | 650 | ||||||||||||||||||||||||||
Exercise of stock options | - | - | - | - | - | - | ||||||||||||||||||||||||||
Net share settlement of RSUs | - | - | - | - | - | - | ||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | ||||||||||||||||||||||||||
Net income | - | - | - | 3,789 | - | 3,789 | ||||||||||||||||||||||||||
Balance at September 30, 2021 | 7,531 | 75 | 33,677 | 157,588 | - | 30 | (587 | ) | 190,753 | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net sales | $ | 35,684 | $ | 37,220 | $ | 110,623 | $ | 109,626 | ||||||||
| Cost of sales | 27,491 | 28,768 | 82,973 | 83,161 | ||||||||||||
| Gross profit | 8,193 | 8,452 | 27,650 | 26,465 | ||||||||||||
| Selling, general & administrative expenses | 5,693 | 6,027 | 18,070 | 18,402 | ||||||||||||
| Restructuring costs | - | 25 | 63 | 203 | ||||||||||||
| Material overcharge settlement | - | (1,681 | ) | (121 | ) | (2,114 | ) | |||||||||
| Loss (Gain) on sale of fixed assets | - | - | 3 | (4 | ) | |||||||||||
| Operating income | 2,500 | 4,081 | 9,635 | 9,978 | ||||||||||||
| Interest income | 63 | 42 | 147 | 104 | ||||||||||||
| Interest expense | (12 | ) | (17 | ) | (39 | ) | (53 | ) | ||||||||
| Income before income tax expense | 2,551 | 4,106 | 9,743 | 10,029 | ||||||||||||
| Income tax expense | 856 | 1,437 | 3,248 | 3,550 | ||||||||||||
| Net income | $ | 1,695 | $ | 2,669 | $ | 6,495 | $ | 6,479 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.23 | $ | 0.37 | $ | 0.90 | $ | 0.90 | ||||||||
| Diluted | $ | 0.23 | $ | 0.37 | $ | 0.89 | $ | 0.89 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,264 | 7,195 | 7,240 | 7,183 | ||||||||||||
| Diluted | 7,353 | 7,282 | 7,326 | 7,265 | ||||||||||||
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 33,327 | $ | 12,667 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 9,137 | 6,209 | ||||||
Gain on disposal of property, plant & equipment | (6,206 | ) | (43 | ) | ||||
Gain on sale of Molded Fiber business | (15,623 | ) | - | |||||
Share-based compensation | 2,370 | 1,771 | ||||||
Interest expense on finance leases | 4 | 2 | ||||||
Deferred income taxes | 415 | 482 | ||||||
Change in fair value of contingent consideration | 9,348 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivables, net | (19,841 | ) | (6,028 | ) | ||||
Inventories | (20,085 | ) | (3,032 | ) | ||||
Prepaid expenses and other current assets | 118 | (517 | ) | |||||
Refundable income taxes | (3,624 | ) | (848 | ) | ||||
Other assets | (2,637 | ) | 72 | |||||
Accounts payable | 6,334 | 3,210 | ||||||
Accrued expenses | 12,987 | 417 | ||||||
Deferred revenue | 501 | (216 | ) | |||||
Non-qualified deferred compensation plan and other liabilities | (6,669 | ) | (469 | ) | ||||
Net cash provided by operating activities | (144 | ) | 13,677 | |||||
Cash flows from investing activities: | ||||||||
Additions to property, plant, and equipment | (10,816 | ) | (4,277 | ) | ||||
Acquisition of Advant, net of cash acquired | (20,768 | ) | - | |||||
Acquisition of DAS Medical, working capital adjustment | 115 | - | ||||||
Proceeds from sale of Molded Fiber | 29,007 | - | ||||||
Proceeds from sale of fixed assets | 6,717 | 51 | ||||||
Net cash provided by (used in) investing activities | 4,255 | (4,226 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from advances on revolving line of credit | 44,000 | - | ||||||
Payments on revolving line of credit | (45,000 | ) | - | |||||
Principal payments of long-term debt | (3,000 | ) | - | |||||
Principal payments on finance lease obligations | (47 | ) | (13 | ) | ||||
Proceeds from exercise of stock options | 367 | 162 | ||||||
Payment of statutory withholdings for restricted stock units vested | (1,491 | ) | (740 | ) | ||||
Net cash used in financing activities | (5,171 | ) | (591 | ) | ||||
Effect of foreign currency exchange rates on cash and cash equivalents | (120 | ) | - | |||||
Net (decrease) increase in cash and cash equivalents | (1,180 | ) | 8,860 | |||||
Cash and cash equivalents at beginning of period | 11,117 | 24,234 | ||||||
Cash and cash equivalents at end of period | $ | 9,937 | $ | 33,094 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 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, 2021, included in the Company's 20162021 Annual Report on Form 10-K,10-K, as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheetsheets as of September 30, 2017, 2022 and December 31, 2021, the condensed consolidated statements of income for the three-three and nine-month periodsnine months ended September 30, 2017 2022 and 2016,2021, the con‐densed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated statements of cash flows for the nine-month periodsnine months ended September 30, 2017 2022 and 20162021 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 2021 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm, but does not include all of the information and footnotes required for complete annual financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The results of operations for the three-three- and nine-monthsnine-month periods ended September 30, 2017, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2017.2022.
New Accounting Policy
The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of this translation is recorded in the consolidated financial statements as a component of Accumulated Other Comprehensive Income (AOCI). Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company’s foreign subsidiaries.
Recent Accounting Pronouncements
In May 2014,There are no newly issued accounting pronouncements that the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, RevenueCompany expects to have a material effect on the financial statements.
(2) | Acquisitions and Divestiture |
Molded Fiber
On July 26, 2022, pursuant to a share purchase agreement and related agreements, the Company sold its molded fiber business (“MFT”) and related real estate in Iowa to CKF USA INCORPORATED (“CKF”) (a Delaware Corporation) for approximately $31.4 million (including a working capital adjustment of approximately $0.2 million that decreased the total consideration). The net book value of the assets sold were approximately $15.4 million and the Company recorded a net gain on sale of approximately $15.6 million, which was recorded in the three- and nine-month period ended September 30, 2022. $2.6 million of the purchase price is being held in escrow to indemnify CKF against certain claims, losses, and liabilities. The Securities Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type. MFT’s annual revenue was approximately $21.3 million for the year ended December 31, 2021. Proceeds from Contractsthe sale were used to pay down debt on the Company’s revolving credit facility, as well as income tax obligations on the related gain.
Advant Medical
On March 16, 2022, the Company purchased 100% of the outstanding shares of common stock of Advant Medical, Ltd., Advant Medical Inc. and Advant Medical Costa Rica, Limitada, (together Advant), pursuant to a Stock Purchase Agreement and related agreements, for an aggregate purchase price of €19.0 million in cash along with Customers,a working capital adjustment at closing (total consideration in U.S. Dollars amounted to approximately $21.2 million). The purchase price was subject to additional adjustment based upon Advant’s final working capital at closing. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Stock Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type.
Founded in 1993, Advant is headquartered in Galway, Ireland, with operations in Costa Rica and partner manufacturing in Mexico. Advant is a developer and manufacturer of Class I, II, and III medical devices and packaging, primarily for catheters and guide wires.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s preliminary estimates of fair value (in thousands):
Fair value of considerations transferred | ||||
Cash paid at closing | $ | 23,608 | ||
Other liability | 395 | |||
Cash from Advant | (2,840 | ) | ||
Total consideration | $ | 21,163 | ||
Purchase price allocation | ||||
Accounts receivable | $ | 2,299 | ||
Inventory | 2,410 | |||
Other current assets | 213 | |||
Property, plant, and equipment | 5,704 | |||
Customer contracts & relationships | 2,925 | |||
Intellectual property | 2,127 | |||
Non-compete agreement | 259 | |||
Lease right of use assets | 289 | |||
Other assets | 41 | |||
Goodwill | 7,140 | |||
Total identifiable assets | $ | 23,407 | ||
Accounts payable | (772 | ) | ||
Accrued expenses | (668 | ) | ||
Income taxes | (66 | ) | ||
Deferred taxes | (449 | ) | ||
Lease liabilities | (289 | ) | ||
Net assets acquired | $ | 21,163 |
Acquisition costs associated with the transaction were approximately $789 thousand, of which requires an entity$759 thousand was charged to recognizeexpense in thenine months ended September 30, 2022, and $30 thousand was charged to expense in the year ended December 31, 2021. These costs were primarily for legal, investment banking, and valuation services, as well as stamp duty filings and are reflected on the face of the income statement.
The amount of revenue and earnings of Advant recognized since the acquisition date, which is included in the condensed consolidated statement of income for the nine months ended September 30, 2022, was approximately $13.6 million and $1.8 million, respectively.
Pro-forma statements
The following table contains an unaudited pro forma condensed consolidated statement of operations for the nine-month periods ended September 30, 2022 and 2021 and the three-month period ended September 30, 2021, as if the Advant acquisition had occurred at the beginning of the respective periods (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2021 | 2022 | 2021 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
Sales | $ | 56,194 | $ | 266,782 | $ | 166,273 | ||||||
Operating Income | $ | 5,440 | $ | 45,268 | $ | 18,187 | ||||||
Net Income | $ | 4,018 | $ | 33,881 | $ | 13,796 | ||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.53 | $ | 4.48 | $ | 1.83 | ||||||
Diluted | $ | 0.53 | $ | 4.44 | $ | 1.82 | ||||||
The above unaudited pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have occurred had the acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
DAS Medical
On December 22, 2021 the Company purchased 100% of the outstanding membership interests of DAS Medical Holdings, LLC, (DAS Medical) pursuant to a Securities Purchase Agreement, for a net purchase price of $66.7 million in cash. The purchase price was subject to adjustment based upon DAS Medical’s final working capital at closing, and the purchase price may be increased by up to $20.0 million in earn-out payments based upon the performance of the business during the four-year period following the closing. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Securities Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type. As a result of the final working capital adjustment, the total consideration was reduced by approximately $115 thousand.
In connection with its entry into the Purchase Agreement, the Company also entered into an Agreement for the Purchase and Sale of Personal Goodwill (the “Goodwill Agreement”) with the purchase price beneficiaries. Pursuant to the terms of the Goodwill Agreement, on December 22, 2021, the Company purchased from the beneficiaries their personal goodwill, including business relationships, trade secrets and knowledge in connection with DAS Medical’s business, for a purchase price of $20 million in cash.
The Company has also entered into Non-Competition Agreements with the beneficiaries and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments over the ten years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of certain key owners.
Founded in 2010, DAS Medical is headquartered in Atlanta, Georgia, with manufacturing in the Dominican Republic. DAS Medical is a medical device contract manufacturer specializing in the design, development and production of single-use surgical equipment covers, robotic draping systems and fluid control pouches.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s preliminary estimates of fair value (in thousands):
Fair value of considerations transferred | ||||
Cash paid at closing | $ | 95,000 | ||
Contingent liability (Earn-out) | 5,188 | |||
Non-compete agreements | 8,855 | |||
Cash from DAS | (8,316 | ) | ||
Working capital adjustment | (115 | ) | ||
Total consideration | $ | 100,612 | ||
Purchase price allocation | ||||
Accounts receivable | $ | 2,351 | ||
Inventory | 7,570 | |||
Other current assets | 68 | |||
Property, plant, and equipment | 3,314 | |||
Customer contracts & relationships | 36,730 | |||
Intellectual property | 2,380 | |||
Non-compete agreement | 4,697 | |||
Lease right of use assets | 1,221 | |||
Goodwill | 51,985 | |||
Total identifiable assets | $ | 110,316 | ||
Accounts payable | (5,238 | ) | ||
Accrued expenses | (3,238 | ) | ||
Deferred revenue | (7 | ) | ||
Lease liabilities | (1,221 | ) | ||
Net assets acquired | $ | 100,612 |
Acquisition costs associated with the transaction were approximately $448 thousand, of which it$155 thousand were charged to expense in the nine months ended September 30, 2022, and $293 thousand were charged to expense in the year ended December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income statement.
Contech Medical
On October 12, 2021, the Company purchased 100% of the outstanding shares of common stock of Contech Medical, Inc., pursuant to a stock purchase agreement and related agreements, for an aggregate purchase price of $9.5 million in cash, the assumption of a contingent liability of $0.5 million plus up to an additional $5 million in purchase price based upon the achievement of certain EBITDA targets of Contech for the 12-month period ended June 30, 2022. The purchase price was subject to adjustment based upon Contech’s working capital at closing. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Stock Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type.
Founded in 1987, Contech is based in Providence, Rhode Island with partner manufacturing in Costa Rica. Contech is a global leader in the design, development, and manufacture of Class III medical device packaging primarily for catheters and guide wires. The Company has leased the Providence location from a realty trust owned by the selling shareholders and affiliates. The lease is for five years with one five-year renewal option.
The following table summarizes the allocation of consideration paid to the acquisition date fair value of the assets acquired and liabilities assumed based on management’s estimates of fair value (in thousands):
Fair value of considerations transferred | ||||
Cash paid at closing | $ | 9,766 | ||
Contingent liability (Earn-out) | 4,543 | |||
Other liability | 500 | |||
Cash from Contech | (266 | ) | ||
Total consideration | $ | 14,543 | ||
Purchase price allocation | ||||
Accounts receivable | $ | 2,851 | ||
Inventory | 2,320 | |||
Other current assets | 37 | |||
Property, plant, and equipment | 1,170 | |||
Customer contracts & relationships | 3,043 | |||
Intellectual property | 2,247 | |||
Non-compete agreement | 86 | |||
Lease right of use assets | 1,523 | |||
Goodwill | 4,278 | |||
Total identifiable assets | $ | 17,555 | ||
Accounts payable | (1,015 | ) | ||
Accrued expenses | (414 | ) | ||
Deferred revenue | (60 | ) | ||
Lease liabilities | (1,523 | ) | ||
Net assets acquired | $ | 14,543 |
Acquisition costs associated with the transaction were approximately $153 thousand, of which $113 thousand were charged to expense in the nine months ended September 30, 2022, and $40 thousand were charged to expense in the year ended December 31, 2021. These costs were primarily for legal and valuation services and are reflected on the face of the income statement.
Pro-forma statements
The following table contains an unaudited pro forma condensed consolidated statement of operations for the three- and six-month periods ended September 30, 2021, as if both the DAS Medical and Contech Medical acquisitions had occurred at the beginning of the period (in thousands):
Three-month Period Ended September 30, 2021 | Nine-month Period Ended September 30, 2021 | |||||||
(Unaudited) | (Unaudited) | |||||||
Sales | $ | 69,055 | $ | 201,660 | ||||
Operating income | $ | 7,627 | $ | 23,030 | ||||
Net income | $ | 5,707 | $ | 18,526 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.76 | $ | 2.46 | ||||
Diluted | $ | 0.75 | $ | 2.44 | ||||
The above unaudited pro forma information is presented for illustrative purposes only and may not be indica‐tive of the results of operations that would have occurred had both acquisitions occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
(3) | Revenue Recognition |
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for the transfer of promised goods or servicesservices. 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 customers. This standard will replace most existingthe performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue recognition guidance when it becomes effective. The standard permitsfrom 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 either the full retrospective or modified retrospective transition methods.each respective tool. The Company expects to adoptrecognizes revenue from engineering services, which are primarily product development services, as the standard inservices are performed or as otherwise determined based on the first quartersubstance of 2018 using the modified retrospective transition method.agreement. The Company has identified its primaryrecognizes revenue streams, completed a preliminary reviewfrom bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of a representative sample of contracts with its customers and is in the process of evaluating the impact of this ASU on its revenue streams and accounting policies. Based on the procedures completed to date,business, the Company expects thataccepts sales returns from customers for a significant portiondefective goods, such amounts being immaterial. Although only applicable to an insignificant number 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,transactions, the Company has identified certain revenue streams for whichelected to exclude sales taxes from the recognition of revenue may be deferred, which is also a change from current practice. These revenue streams include certain tooling sales.transaction price. 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.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its consolidated financial position and 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 forfeituresshipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as they occur,performance obligations but rather than estimate expected forfeitures. 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 impactfollowing table presents the Company’s revenue disaggregated by the major types of adopting this updategoods and services sold 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.customers (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Net sales of: | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Products | $ | 92,860 | $ | 49,613 | $ | 251,996 | $ | 146,402 | ||||||||
Tooling and Machinery | 2,659 | 405 | 5,984 | 1,149 | ||||||||||||
Engineering services | 1,451 | 705 | 4,575 | 2,426 | ||||||||||||
Total net sales | $ | 96,970 | $ | 50,723 | $ | 262,555 | $ | 149,977 | ||||||||
RevisionsContract balances
Certain revisions have been madeTiming of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the 2016 Condensed Consolidated StatementCompany has contract liabilities included within “deferred revenue” on the condensed consolidated balance sheet.
The following table presents a roll-forward of Cash Flows to conform tocontract liabilities activity for the current year presentation relating tonine-month periods ended September 30,2022 and 2021 (in thousands):
Contract Liabilities | ||||||||
Nine Months Ended | ||||||||
2022 | 2021 | |||||||
Deferred revenue - beginning of period | $ | 4,247 | $ | 1,887 | ||||
Increases due to consideration received from customers | 4,836 | 2,111 | ||||||
Revenue recognized | (4,335 | ) | (1,192 | ) | ||||
Decrease due to sale of Molded Fiber | (575 | ) | - | |||||
Deferred revenue - end of period | $ | 4,173 | $ | 2,806 | ||||
Revenue recognized during the nine-month periods ended September 30, 2022 and 2021 from amounts included in deferred revenue at the beginning of the period were approximately $2.2 million and $659 thousand, respectively.
When invoicing occurs after revenue recognition, the Company has contract assets, included within “receivables” on the condensed consolidated balance sheet.
Contract Assets | ||||||||
Nine Months Ended | ||||||||
2022 | 2021 | |||||||
Unbilled receivables - beginning of period | $ | 74 | $ | 271 | ||||
Increases due to revenue recognized, not invoiced to customers | 3,065 | 1,461 | ||||||
Decreases due to customer invoicing | (2,429 | ) | (1,509 | ) | ||||
Unbilled receivables - end of period | $ | 710 | $ | 223 | ||||
The following table presents a reserveroll-forward of contract assets activity for uncertain tax positions the nine-month periods ended September 30, 2022 and to cash paid for capital expenditures. The reclassification of a reserve for uncertain tax positions resulted in an increase to the change in refundable income taxes of $315,000 and a decrease to the change in accrued expenses of $315,000. A change in presentation of cash paid for capital expenditures resulted in a decrease of $311,000 in both the change in accounts payable and in additions to property, plant and equipment, net. These revisions had no impact on previously reported net income and are deemed immaterial to the previously issued financial statements.
2021 (in thousands):
(4) | Supplemental Cash Flow Information |
Nine Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
(in thousands) | ||||||||
Cash paid for: | ||||||||
Interest | $ | 1,869 | $ | 39 | ||||
Income taxes, net of refunds | 12,315 | 4,274 | ||||||
Non-cash investing and financing activities: | ||||||||
Capital additions accrued but not yet paid | $ | 133 | $ | 225 | ||||
(5) | Receivables and Allowance for Credit Losses |
| 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 | ||||
Receivables consist of the following (in thousands):
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Accounts receivable–trade | $ | 65,814 | $ | 39,903 | ||||
Less allowance for credit losses | (741 | ) | (519 | ) | ||||
Receivables, net | $ | 65,073 | $ | 39,384 | ||||
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. Estimates based on an assessment of anticipated payment and all other historical, current, and future information that is reasonably available are used to determine the allowance.
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected as of September 30, 2022 and 2021 (in thousands):
Allowance for Credit | ||||||||
Nine Months Ended | ||||||||
2022 | 2021 | |||||||
Allowance - beginning of period | $ | 519 | $ | 484 | ||||
Provision for expected credit losses | 275 | 92 | ||||||
Amounts written off against the allowance | (53 | ) | (54 | ) | ||||
Allowance - end of period | $ | 741 | $ | 522 | ||||
(6) | Fair Value of Financial Instruments |
Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820,Fair Value Measurements and Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:
Level 1
Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3
Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The following table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):
September 30, 2022 | December 31, 2021 | |||||||
Level 2 | ||||||||
Assets (Liabilities): | ||||||||
Derivative financial instruments | $ | 26 | $ | (176 | ) | |||
Level 3 | ||||||||
Purchase price contingent consideration (Note 2): | ||||||||
Accrued contingent consideration (earn-out) | $ | (19,079 | ) | $ | (9,731 | ) | ||
Present value of non-competition payments | (9,746 | ) | (8,855 | ) | ||||
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.
In connection with the acquisitions discussed in Note 2, “Acquisitions,” the Company is required to make contingent payments, subject to the entities achieving certain financial performance thresholds. The contingent consideration payments for both the DAS Medical and Contech Medical acquisitions combined are up to $25 million. The fair value of the liabilities for the contingent consideration payments recognized upon the acquisition as part of the purchase accounting opening balance sheets totaled approximately $9.7 million and was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in this calculation were managements financial forecasts, discount rate and various volatility factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period. The fair value of the liabilities for the contingent consideration payments recognized at September 30, 2022 for both the DAS Medical and Contech Medical acquisitions combined totaled approximately $19.1 million. Subsequent to the September 30, 2022 quarter-end, the Contech Medical contingent consideration balance of $5,000,000 was paid in full. The change in fair value of contingent consideration for the DAS Medical and Contech Medical acquisitions for the three and nine-month periods ended September 30, 2022, resulted in an expense of approximately $3.3 million and $9.3 million, respectively, and was included in change in fair value of contingent consideration in the consolidated statements of income.
In connection with the DAS Medical acquisition, the Company has entered into Non-Competition Agreements with the beneficiaries and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments over the ten years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of certain key owners. In connection with the Advant Medical acquisition, the Company has entered into Non-Competition Agreements with the beneficiaries and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of €375 thousand in payments over the final three years of the five years following the closing of the Advant Medical acquisition for the 5-year noncompetition covenants of certain key owners.
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.
(7) | Share-Based Compensation |
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2016. 2021. 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Share-based compensation related to: | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Common stock grants | $ | 100 | $ | 100 | $ | 300 | $ | 300 | ||||||||
Stock option grants | 75 | 52 | 188 | 157 | ||||||||||||
Restricted Stock Unit Awards ("RSUs") | 722 | 498 | 1,882 | 1,314 | ||||||||||||
Total share-based compensation | $ | 897 | $ | 650 | $ | 2,370 | $ | 1,771 | ||||||||
The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensationcompensa‐tion arrangements was approximately $106,000$485 thousand and $67,000, respectively,$167 thousand for the three-monththree-month periods ended September 30, 2017 2022 and 2016,2021, respectively, and approximately $441,000$1.1 million and $264,000, respectively,$608 thousand for the nine-monthnine-month periods ended September 30,2022 and 2021, respectively.
Common stock grants
The compensation expense for common stock grants during the nine-month period ended September 30, 2017 and 2016.2022, was determined based on an approved fixed dollar amount with the number of shares to be determined on the date of issuance.
Stock Option grants
The following is a summary of stock option activity under all plans for the three-monthnine-month period ended September 30, 2017:2022:
Shares Under Options | Weighted Average Exercise Price (per share) | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at December 31, 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, 2021 | 98,671 | $ | 33.53 | |||||||||||||
Granted | 9,876 | 77.28 | ||||||||||||||
Exercised | (15,245 | ) | 24.10 | |||||||||||||
Outstanding at September 30, 2022 | 93,302 | $ | 39.70 | 6.13 | $ | 4,305 | ||||||||||
Exercisable at September 30, 2022 | 83,426 | $ | 35.26 | 5.71 | $ | 4,220 | ||||||||||
Vested and expected to vest at September 30, 2022 | 93,302 | $ | 39.70 | $ | 6.13 | $ | 4,305 | |||||||||
On June 6, 2017, 8, 2022, the Company granted options to its directors for the purchase of 12,3369,876 shares of the Company’s common stock at that day’s closing price of $27.05.$77.28. 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 | 34.7 | % | ||
Expected dividends | None | |||
Risk-free interest rate | 2.9 | % | ||
Exercise price | $ | 77.28 | ||
Expected term (years) | 6.2 | |||
Weighted-average grant date fair value | $ | 30.37 | ||
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 correspondingcorrespond‐ing with the expected term of the option. The expected term is estimated based on historical option exercise activity.
During the nine-monthnine-month periods ended September 30, 2017 2022 and 2016,2021, the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $577,000$1.1 million and $564,000,$164 thousand, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $802,000$367 thousand and $529,000,$162 thousand, respectively. At its discretion, the Company allows option holders to surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During the nine-monthnine-month period ended September 30, 2017 there2022, 1,876 shares were 6,511 shares surrendered at an average market price of $26.45. During$95.82. Zero shares were surrendered during the nine-monthsame period ended September 30, 2016 there were no shares surrendered for this purpose.in 2021.
On February 21, 2017, the Company’s Compensation Committee approved the award of $400,000, payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan. The shares will be issued in December, 2017.Restricted Stock Unit awards
The following table summarizes information about Restricted Stock Units (“RSUs”)RSU activity during the nine-monthnine-month period ended September 30, 2017:2022:
| 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, 2021 | 101,168 | $ | 41.78 | |||||
Awarded | 51,981 | 74.94 | ||||||
Shares vested | (49,575 | ) | 41.05 | |||||
Shares forfeited | (947 | ) | 64.32 | |||||
Outstanding at September 30, 2022 | 102,627 | $ | 55.29 | |||||
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-monthnine-month periods ended September 30, 2017 2022 and 2016, 4,3772021, 19,425 and 3,88914,112 shares were surrendered at an average market price of $24.50$67.05 and $22.82,$52.47, respectively.
As of September 30, 2017, 2022, the Company had approximately $754,000$4.4 million of unrecognized compensation expense whichthat is expected to be recognized over a period of 3.5 years.
2.5 years.
(8) |
Inventories |
Inventories are stated at the lower of cost (first-in, first-out)(determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| 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 | ||||
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Raw materials | $ | 39,071 | $ | 22,184 | ||||
Work in process | 5,981 | 4,205 | ||||||
Finished goods | 8,769 | 7,047 | ||||||
Total inventory | $ | 53,821 | $ | 33,436 | ||||
(9) | Leases |
On March 18, 2009,The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet.
ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments pursuant to the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's assumed lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets are also adjusted for any deferred or accrued rent. As the Company's leases do not typically provide an implicit rate, the Company 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 $25 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The Rights expire on March 19, 2019.
lease payments.
Nine Months Ended | ||||||||
September 30, | ||||||||
($ in thousands) | ||||||||
2022 | 2021 | |||||||
Lease Cost: | ||||||||
Finance lease cost: | ||||||||
Amortization of right of use assets | $ | 45 | $ | 12 | ||||
Interest on lease liabilities | 4 | 2 | ||||||
Operating lease cost | 1,962 | 896 | ||||||
Variable lease cost | 228 | 169 | ||||||
Short-term lease cost | 49 | 30 | ||||||
Total lease cost | $ | 2,288 | $ | 1,109 | ||||
Nine Months Ended | ||||||||
September 30, | ||||||||
($ in thousands) | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 1,839 | $ | 909 | ||||
Financing cash flows from finance leases | 47 | 11 | ||||||
Weighted-average remaining lease term (years): | ||||||||
Finance | 3.79 | 5.58 | ||||||
Operating | 3.88 | 1.39 | ||||||
Weighted-average discount rate: | ||||||||
Finance | 2.10 | % | 2.26 | % | ||||
Operating | 2.75 | % | 3.95 | % | ||||
The aggregate future lease payments for leases as of September 30, 2022 are as follows (in thousands):
Finance | Operating | |||||||
Remainder of 2022 | $ | 16 | $ | 611 | ||||
2023 | 63 | 2,211 | ||||||
2024 | 63 | 2,190 | ||||||
2025 | 63 | 1,957 | ||||||
2026 | 28 | 1,733 | ||||||
Thereafter | 6 | 4,775 | ||||||
Total lease payments | 239 | 13,477 | ||||||
Less: Interest | (9 | ) | (1,198 | ) | ||||
Present value of lease liabilities | $ | 230 | $ | 12,279 | ||||
(10) |
Net 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Basic weighted average common shares outstanding | 7,570 | 7,531 | 7,559 | 7,522 | ||||||||||||
Weighted average common equivalent shares due to restricted stock, stock options and RSUs | 68 | 66 | 70 | 63 | ||||||||||||
Diluted weighted average common shares outstanding | 7,638 | 7,597 | 7,629 | 7,585 | ||||||||||||
The computation of diluted earningsnet income 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 stock options during the period. These outstanding stock awardsoptions are not included in the computation of diluted net income per share because the effect would be antidilutive. For both the three-three- and nine-monthnine-month periods ended September 30, 2017, 2022, the number of stock awardsoptions excluded from the computation of diluted earningsnet income per share for this reason was zero9,876. For both the three- and 27,336, respectively. For the three- and nine-monthnine-month periods ended September 30, 2016,2021, the number of stock awardsoptions excluded from the computation of diluted earningsnet income per share for this reason was 35,193 and 52,377, respectively.
10,716.
(11) |
Segment Reporting |
The Company consists of a single operating and reportable segment.
Revenues from customers outside of the United States are not material. NoOne customer comprised more than 10%25.1% and 20.5% of the Company’s consolidated revenues for the three-three- and nine-monthnine-month periods ended September 30, 2017. All2022, respectively. No customer comprised more than 10% of the Company’s assets are locatedconsolidated revenues for the same periods in the United States.2021. At September 30, 2022, one customer represented approximately 10.7% of gross accounts receivable. At December 31, 2021, no customer exceeded 10% of gross accounts receivable.
The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Aerospace and& Defense, Consumer, Industrial, and Electronics markets. Net sales by market for the three-three- and nine-monthnine-month periods ended September 30, 2017 2022 and 2016, respectively,2021 are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2022 | 2021(1) | 2022 | 2021(1) | |||||||||||||||||||||||||||||
Market | Net Sales | % | Net Sales | % | Net Sales | % | Net Sales | % | ||||||||||||||||||||||||
Medical | $ | 81,591 | 84.1 | % | $ | 32,376 | 63.8 | % | $ | 208,464 | 79.4 | % | $ | 95,088 | 63.4 | % | ||||||||||||||||
Automotive | 4,681 | 4.8 | % | 3,852 | 7.6 | % | 13,383 | 5.1 | % | 12,065 | 8.0 | % | ||||||||||||||||||||
Aerospace & Defense | 3,590 | 3.7 | % | 3,881 | 7.7 | % | 11,097 | 4.2 | % | 12,636 | 8.4 | % | ||||||||||||||||||||
Consumer | 3,099 | 3.2 | % | 6,449 | 12.7 | % | 15,644 | 6.0 | % | 18,125 | 12.1 | % | ||||||||||||||||||||
Industrial | 2,748 | 2.8 | % | 2,162 | 4.3 | % | 7,924 | 2.9 | % | 6,508 | 4.2 | % | ||||||||||||||||||||
Electronics | 1,261 | 1.3 | % | 2,003 | 4.0 | % | 6,043 | 2.4 | % | 5,555 | 3.7 | % | ||||||||||||||||||||
Net Sales | $ | 96,970 | 100.0 | % | $ | 50,723 | 100.0 | % | $ | 262,555 | 100.0 | % | $ | 149,977 | 100.0 | % | ||||||||||||||||
(1) | Certain amounts for the three and nine months ended September 30, 2021, were reclassified between markets to conform to the current period presentation. |
| 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 | % | ||||||||||||||||
(12) | Goodwill and Other Intangible Assets |
Certain amountsThe changes in the carrying amount of goodwill for the three- and nine-month periodsnine months ended September 30, 2016 were reclassified between markets to conform to the current period presentation.
2022 are as follows (in thousands):
Goodwill | ||||
December 31, 2021 | $ | 107,905 | ||
Acquired in Advant Medical business combination (See Note 2) | 7,140 | |||
DAS working capital adjustment | 196 | |||
Sale of Molded Fiber | (1,778 | ) | ||
Foreign currency translation | (806 | ) | ||
September 30, 2022 | $ | 112,657 | ||
The carrying values of the Company’s definite lived intangible assets as of September 30, 2017 and December 31, 2016, 2022 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 | ||||||||
Intellectual Property / | Non- | Customer | Total | |||||||||||||
Weighted-average amortization period (years) | 11.9 | 9.3 | 20 | |||||||||||||
Gross amount | $ | 6,881 | $ | 5,474 | $ | 64,922 | $ | 77,277 | ||||||||
Accumulated amortization | (570 | ) | (822 | ) | (6,844 | ) | (8,236 | ) | ||||||||
Net balance | $ | 6,311 | $ | 4,652 | $ | 58,078 | $ | 69,041 | ||||||||
Amortization expense related to intangible assets was approximately $79,000$1.1 million and $314 thousand, respectively, for each of the three-monththree-month periods ended September 30, 2017 2022 and 2016,2021, and was approximately $239,000$3.3 million and $943 thousand, respectively, for each of the nine-monthnine-month periods ended September 30, 2017 2022 and 2016. As of September 30, 2017, the2021. The estimated remaining amortization expense for 2017 as of September 30, 2022 is $79,000.
as follows (in thousands):
Remainder of 2022 | $ | 1,123 | ||
2023 | 4,409 | |||
2024 | 4,401 | |||
2025 | 4,401 | |||
2026 | 4,398 | |||
Thereafter | 50,309 | |||
Total | $ | 69,041 |
(13) | Other Long-Term Liabilities |
Other long-term liabilities consist of the following (in thousands):
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Accrued contingent consideration (earn-out) | $ | 9,079 | $ | 9,731 | ||||
Present value of non-competition payments | 9,746 | 8,855 | ||||||
Other | 722 | 676 | ||||||
| $ | 19,547 | $ | 19,262 | |||||
(14) | 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%22.6% and 35.0%24.9% of income before income tax expense respectively, for each of the three-monththree-month periods ended September 30, 2017 2022 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).2021, respectively. The Company recorded aincome tax expense of approximately 33.3%22.4% and 35.4%23.6% of income before income tax expense for each of the nine-monthnine-month periods ended September 30, 2017 2022 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.
2021, respectively.
(15) | Indebtedness |
Restructuring Costs
On March 18, 2015, December 22, 2021, the Company, committedas the borrower, entered into a secured $130 million Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time-to-time party thereto. The Second Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of February 1, 2018.
The credit facilities under the Second Amended and Restated Credit Agreement consist of a $40 million secured term loan to move forward withthe Company and a plansecured revolving credit facility, under which the Company may borrow up to cease operations at its Raritan, New Jersey, plant$90 million. The Second Amended and consolidate operations into its Newburyport, Massachusetts, facilityRestated Credit Agreement matures on December 21, 2026. The secured term loam requires quarterly principal payments of $1,000,000 commencing on March 31, 2022. The proceeds of the Second Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of DAS Medical, as well as certain other UFP facilities.permitted acquisitions. The Company’s decisionobligations under the Second Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Second Amended and Restated Credit Agreement calls for interest determined by the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus a margin that ranges from 1.25% to 2.0% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from .25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the Second Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Second Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness, and permitted investments.
At September 30, 2022, the Company had approximately $71 million in borrowings outstanding under the Second Amended and Restated Credit Agreement, which were used as partial consideration for the DAS Medical and Advant acquisitions, and also had approximately $0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies. At September 30, 2022, the applicable interest rate was approximately 4.6% and the Company was in response to a continued decline in business atcompliance with all covenants under the Raritan facilitySecond Amended and the Company’s purchaseRestated Credit Agreement.
Long-term debt consists of the 137,000-square-foot facility in Newburyport. The activities related to this consolidation following (in thousands):
September 30, 2022 | ||||
Revolving credit facility | $ | 34,000 | ||
Term loan | 37,000 | |||
Total long-term debt | 71,000 | |||
Current portion | (4,000 | ) | ||
Long-term debt, excluding current portion | $ | 67,000 | ||
Future maturities of long-term debt at September 30, 2022 are complete.as follows (in thousands):
Term Loan | Revolving credit facility | Total | ||||||||||
Remainder of 2022 | $ | 1,000 | $ | - | $ | 1,000 | ||||||
2023 | $ | 4,000 | $ | - | $ | 4,000 | ||||||
2024 | $ | 4,000 | $ | - | $ | 4,000 | ||||||
2025 | $ | 4,000 | $ | - | $ | 4,000 | ||||||
2026 | $ | 24,000 | $ | 34,000 | $ | 58,000 | ||||||
| $ | 37,000 | $ | 34,000 | $ | 71,000 | |||||||
Derivative Financial Instruments
The Company also relocated all operationsused interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on certain of its Haverhill, Massachusetts,variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and Byfield, Massachusetts, facilitiesmarket risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, creating credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, relocated certain operationstherefore, in its Georgetown, Massachusetts, facilitythese circumstances the Company is not exposed to Newburyport.the counterparty’s credit risk. The Haverhill and Byfield relocations were complete at December 31, 2015, andCompany 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 partial Georgetown relocation was complete at June 30, 2017.adverse effect on the value of a derivative instrument that results from a change in interest rates.
The Company incurred approximately $2.1 millionassesses interest rate risk by continually identifying and monitoring changes in one-time expensesinterest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations exposed the Company to variability in interest payments due to changes in interest rates. The Company believed that it was prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the Massachusetts consolidations. IncludedFirst Amended and Restated Credit Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap modified the Company’s interest rate exposure by converting the previous term loan from a variable rate to a fixed rate in this amount are approximately $180,000 relatingorder to employee severance payments and relocation costs, approximately $1.6 million in moving expenses and expenses associated with vacatinghedge against the Raritan, Haverhill, and Byfield properties, and approximately $360,000 in lease termination costs. Total cash charges were approximately $2.0 million.possibility of rising interest rates during the term of the loan.
The notional amount was approximately $6.4 million at September 30, 2022. The fair value of the swap as of September 30,2022 was approximately $26 thousand and is included in other assets. The fair value of the swap as of December 31, 2021 was approximately $(176) thousand and is included in other liabilities. Changes in the fair value and net cash settlement amounts related to the swap are recorded in other income/expense and resulted in income of approximately $20 thousand and $202 thousand, respectively, during the three- and nine-month periods ended September 30, 2022. Changes in the fair value of the swap resulted in income of $2 thousand and expense of $4 thousand, respectively during the three- and nine-month periods ended September 30, 2021.
As the Company recordedhas paid the following restructuring costsremaining balance of the term loan that was associated with the Massachusetts consolidationsswap in its entirety, there is no longer underlying debt to hedge against the swap. The changes in the fair value of the swap will continue to be accounted for as a financial instrument until the three- and nine-month periods ended September 30, 2017 and 2016 (in thousands):sooner of the time that the Company elects to cancel it or until its maturity, which will occur on February 1, 2023.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Restructuring Costs | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Relocation | $ | - | $ | 25 | $ | 63 | $ | 203 | ||||||||
| Total | $ | - | $ | 25 | $ | 63 | $ | 203 | ||||||||
ITEM 2:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTSOFOPERATIONS
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.
Forward-looking Statements
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFP Technologies, Inc. and its consolidated subsidiaries.
Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements are subject to known and unknown risks, uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about the Company’s prospects,prospects; statements about the impact of the COVID-19 and its effect on our business and financial condition; statements about the Company’s acquisition strategies and opportunities and the Company’s growth potential and strategies for growth; expectations regarding customer demand; expectations regarding the Company’s liquidity and capital resources, including the sufficiency of its cash reserves and the availability of borrowing capacity to fund operations and/or potential future acquisitions; anticipated revenues and the timing of such revenues; expectations about shifting the Company’s book of business to higher-margin, longer-run opportunities; anticipated trends and potential advantages in the different markets in which the Company competes, including the medical, aerospace and defense, automotive, consumer, electronics, and industrial markets, and aerospace and defense markets, anticipated new customer and vendor contracts,the Company’s plans to expand in certain of its markets; statements regarding anticipated advantages relating to the Company’s decisions to consolidate or expand 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, anticipated advantages the Company expects to realize from its investments and capital expenditures, includingexpenditures; statements regarding 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, its participation and growth in multiple markets, its business opportunities,markets; statements about the Company’s growth potentialbusiness opportunities; statements about the Company’s ability to integrate and strategies for growth, anticipated revenuesrealize the benefits expected from the acquisitions of Contech Medical, DAS Medical and Advant, including any related synergies; statements regarding our supply chain arrangements; statements about fluctuations in commodity prices and foreign currency exchange rates and political unrest and regulatory changes in international markets from various events, such as the timing of such revenues,current conflict in Ukraine 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 impact of the COVID-19 pandemic and its effect on our business and financial conditions; risks relating to decreased demand for our 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 uncertaintiesthe potential for reduced or canceled orders; risks associated with the Company’s participation and growth in multiple markets; 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 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; risks associated with the implementation ofCompany’s ability to pay the contingent liability payments to Contech Medical and DAS Medical, if and when due; risks relating to disruptions and delays in our supply chain; risks associated with fluctuations in commodity prices and foreign currency exchange rates and political unrest and regulatory changes in international markets; risks associated with new production equipmentproduct and requalification or recertification of transferred equipment in a timely, cost-efficient manner,program launches 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.and uncertainties associated with increasing sales, earnings and earnings per share. 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’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2021, and our Quarterly Report on Form-Q for the quarter ended June 30, 2022, as well as the risks and uncertainties discussed elsewhere in this Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFP Technologies, Inc. and its consolidated subsidiaries.
Overview
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.
The Company had a slight increase in sales through the first nine months of 2017, largely fueled by continued growth in sales to customers in the medical market, partially offset by declined sales to customer in the automotive market. The Company improved gross margins for the nine-month period ended September 30, 2017 to 25.0% from 24.1% 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 restructuring and material overcharge items, operating income increased by 19% in the first nine months of 2017.
The Company’s previously announced consolidation and relocation efforts were complete as of June 30, 2017. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The Company constantly evaluates ways to enhance operating efficiencies and will consider additional expansions, consolidations, or relocations of operations from time to time.
The Company’s current strategy includes further organic growth and growth through strategic acquisitions.acquisitions.
Sales for the Company for the nine-month period ended September 30, 2022 increased 75.1% to $262.6 million from $150.0 million in the same period last year due to the Company’s acquisitions of Contech Medical, DAS Medical, and Advant Medical, and an organic sales increase of approximately 16.5%. Gross margins for the nine-month period ended September 30, 2022 increased slightly to 25.5% from 25.4% in the same period last year. Operating income and net income increased 168.5% and 163.1%, respectively.
Results of Operations
Sales
Sales for the three-month period ended September 30, 2017 decreased2022 increased approximately 4.1%91.2% to $35.7$97.0 million compared to $37.2from sales of $50.7 million infor the same period in 2016.2021. The decreaseincrease in sales during the three-month period ended September 30, 2017 wasis 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 marketsMedical market of approximately 6.6% and 6.3%, respectively.152.0%. The declineincreases in sales to customers in the automotiveMedical market waswere primarily due to soft demand for interior trim components in certain legacy programs. The Company has been notified thatsales from the remaining portionCompany’s recently acquired companies of its southeast automotive door panel program for Mercedes Benz, which began in 2004, will end with modest$40.3 million as well as an organic sales anticipated into the first quarterincrease 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.27.6%. 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 lessall other markets decreased 16.2% largely due to storm related disruptions to their business.the sale of Molded Fiber.
Sales for the nine-month period ended September 30, 20172022 increased approximately 0.9%75.1% to $110.6$262.6 million from sales of $109.6$150.0 million for the same period in 2016.2021. The increase in sales for the nine-month period ended September 30, 2017 wasis primarily due to increases in sales to customers in the medicalMedical market of approximately 7.9% partially offset by decreases119.2%. The increases in sales in the Medical market were primarily due to sales from the Company’s recently acquired companies of $92.9 million, as well as an organic sales increase of 21.6%. Sales to customers in the automotive and industrialall other markets of approximately 12.0% and 9.6% respectively. The increase in sales to customers in the medical market was primarily due to strong demand for our customers’ products as well as selective price increases. 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 decline in sales to customers in the industrial market was primarily due to a credit issue at one of our customers within this market.decreased 1.5%.
Gross Profit
Gross profit as a percentage of sales (“gross margin”) increased to 23.0%26.3% for the three-month period ended September 30, 2017,2022, from 22.7%23.7% for the same period in 2016.2021. As a percentage of sales, material and labor costs collectively decreased 0.8%increased 5.7%, while overhead increased 0.5%costs decreased 8.3%. The decreaseincrease in collective materialgross margin is primarily due to the leverage of organic sales growth over the fixed portion of overhead, partially offset by inflationary cost increases in both raw materials and labor costslabor.
Gross profit as a percentage of sales is primarily due(“gross margin”) increased slightly 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%25.5% for the nine-month period ended September 30, 2017,2022, from 24.1%25.4% for the same period in 2016.2021. As a percentage of sales, material and labor costs collectively decreased 1.6%increased 5.5%, while overhead increased 0.7%costs decreased 5.6%. The decreaseincrease in collective material and labor costs as a percentage of salesgross margin is primarily due to gainsthe leverage of organic sales growth over the fixed portion of overhead, partially offset by inflationary cost increases in manufacturing efficiencies resulting from continuous improvement initiatives, strategic price increasesboth raw materials and an improvement in the overall book of business. The increase in overhead is primarily due to an increase in indirect labor costs of approximately $700,000 due largely to hires made in the second half of 2016 to support growth.labor.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) decreasedincreased approximately 5.5%73.7% to $5.7$11.8 million for the three-month period ended September 30, 20172022, from $6.0$6.8 million for the same period in 2016.2021, primarily due to the additional SG&A from recent acquisitions. As a percentage of sales, SG&A decreased to 16.0%12.2% for the three-month period ended September 30, 20172022, from 16.2%13.4% for the same three-month period in 2016. The decrease in SG&A for the three-month period ended September 30, 2017 is primarily due to reductions in general and administrative payroll and recruiting costs.
SG&A decreased approximately 1.8% to $18.1 million for the nine-month period ended September 30, 2017 from $18.4 million for the same period in 2016. As a percentage of sales, SG&A decreased to 16.3% for the nine-month period ended September 30, 2017 from 16.8% for the same nine-month period in 2016. The decrease in SG&A for the nine-month period ended September 30, 2017 is primarily due to reductions in consulting and recruiting expenses.2021. The decrease in SG&A as a percentage of sales is primarily due to reductions in general and administrative payroll, consulting and recruiting expenses measured against higher sales.
Restructuring Costs
Forfor the three-month period ended September 30, 20172022 was primarily due to increased sales measured against relatively fixed SG&A.
SG&A increased approximately 58.9% to $33.9 million for the Company did not incur any restructuring costs compared to approximately $25,000nine-month period ended September 30, 2022, from $21.3 million for the same period in 2016.
Additional information regarding restructuring costs can be found2021, primarily due to the additional SG&A from recent acquisitions. As a percentage of sales, SG&A decreased to 12.9% for the three-month period ended September 30, 2022, from 14.2% for the same three-month period in Note 112021. The decrease in SG&A as a percentage of sales for the Notesthree-month period ended September 30, 2022 was primarily due to Interim Condensed Consolidated Financial Statements.increased sales measured against relatively fixed SG&A.
Material Overcharge SettlementAcquisition Costs
The Company was a participantincurred approximately $10 thousand and $1.0 million in a class action lawsuit against a number of polyurethane foam suppliers (“Defendants”) that was settled duringcosts associated with acquisition related activities which were charged to expense for the second quarter of 2016. The suit was filed to recover damagesthree and obtain injunctive reliefnine months ended September 30, 2022, respectively. These costs were primarily for Defendants’ alleged violationslegal services, valuation services and stamp duty filings and are reflected on the face of the federal antitrust lawsincome statement.
Change in fair value of contingent consideration
In connection with respectthe acquisitions discussed in Note 2, “Acquisitions,” the Company is required to make contingent payments, subject to the fixingentities achieving certain financial performance thresholds. The contingent consideration payments for both the DAS Medical and Contech Medical acquisitions combined are up to $25 million. The fair value of pricesthe liabilities for the contingent consideration payments recognized upon the acquisition as part of polyurethane foamthe purchase accounting opening balance sheets totaled approximately $9.7 million and was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in this calculation were managements financial forecasts, discount rate and various volatility factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period. The fair value of the liabilities for the contingent consideration payments recognized at September 30, 2022 for both the DAS Medical and Contech Medical acquisitions combined totaled approximately $19.1 million. The change in fair value of contingent consideration for the DAS Medical and Contech Medical acquisitions for the three and nine-month periods ended September 30, 2022, resulted in an expense of approximately $3.3 million and $9.3 million, respectively, and was included in change in fair value of contingent consideration in the consolidated statements of income.
Gain on sale of Molded Fiber business
On July 26, 2022, pursuant to a share purchase agreement and related agreements, the Company sold its molded fiber business (“MFT”) and related real estate in Iowa to CKF USA INCORPORATED (“CKF”) (a Delaware Corporation) for approximately $31.4 million. The net book value of the assets sold were approximately $15.4 million and the Company recorded a net gain on sale of approximately $15.6 million, which was recorded in the three- and nine-month period ended September 30, 2022. A portion of the purchase price is being held in escrow to indemnify CKF against certain claims, losses, and liabilities. The Securities Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type. MFT’s annual revenue was approximately $21.3 million for the year ended December 31, 2021. Proceeds from January 1, 1999 through August 2010. Duringthe sale were used to pay down debt on the Company’s revolving credit facility, as well as income tax obligations on the related gain.
Gain on sale of fixed assets
For the three- and nine-month periods ended September 30, 2017,2022, the Company received settlement amountsrecorded a gain on the sale of $0 and approximately $121,000, respectively. During the three- and nine-month periods ended September 30, 2016, the Company received settlement amountsfixed assets of approximately $1.7 million$3 thousand and $2.1$6.2 million, respectively. The settlement amounts forThis was primarily the three- and nine-month periods ended September 30, 2017 and 2016 are recorded as “Material overcharge settlement” in the operating income sectionresult of the Condensed Consolidated Statementssale of Income.the Company’s Georgetown, Massachusetts manufacturing facility. The operations previously housed in this location have been fully absorbed by the nearby Newburyport manufacturing facility. The gain on the Georgetown manufacturing facility was determined by a sales price of approximately $6.7 million measured against a net book value and selling expenses of approximately $0.5 million.
Interest Income and Expense
The Company hadNet interest expense was approximately $830 thousand for the three-month period ended September 30, 2022, compared to net interest income of approximately $51,000$16 thousand for the same period in 2021. The increase in net interest expense for the three-month period ended September 30, 2022 was primarily due to interest paid on funds drawn on the Company’s credit facility used to finance recent acquisitions.
Net interest expense was approximately $1.9 million for the nine-month period ended September 30, 2022 compared to net interest expense of $11 thousand in the same period of 2021. The increase in net interest expense for the nine-month period ended September 30, 2022 was primarily due to interest paid on funds drawn on the Company’s credit facility used to finance recent acquisitions.
Other (Income) Expense
Other income was approximately $104 thousand and $25,000other expense approximately $4 thousand for the three-month periods ended September 30, 20172022 and 2016, respectively. The Company had net interest2021, respectively, and other income ofwas approximately $108,000 and $51,000$313 thousand compared to $2 thousand for the nine-month periods ended September 30, 20172022 and 2016,2021, respectively. The increaseincreases in other income in both periods are primarily generated by foreign currency transaction gains and changes in the fair value of the swap liability, which is driven by anticipated future interest rate changes, offset by net interest income is primarily duecash settlement amounts related to an increase in interest earned on money market accounts and certificates of deposit and decreasing interest costs on the Company’s term loans.swap.
Income Taxes
The Company recorded tax expense of approximately 33.6%22.6% and 35.0%24.9% of income before income tax expense, respectively, for each of the three-month periods ended September 30, 20172022 and 2016.2021. The decrease in the effective tax rate for the current period isas compared to the prior period was largely due to a tax benefitlower statutory rates on certain foreign taxable income related to the Company’s acquisitions 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). DAS Medical and Advant Medical.
The Company recorded a tax expense of approximately 33.3%22.4% and 35.4%23.6% of income before income tax expense, respectively, for each of the nine-month periods ended September 30, 20172022 and 2016.2021. The decrease in the effective tax rate for the current period isas compared to the prior period was largely due to a tax benefit of approximately $162,000 recordedlower statutory rates on certain foreign taxable income that was new to the Company 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 2016.2022. 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 operationsused for operating activities for the nine-month period ended September 30, 20172022 was approximately $13.0 million$144 thousand and was primarily a result of net income generated of $6.5approximately $33.3 million, depreciation and amortization of approximately $4.2$9.1 million, share-based compensation of $0.8approximately $2.4 million, a change in the fair value of contingent consideration of approximately $9.3 million, an increase in deferred taxes of $0.3approximately $0.4 million, a decrease in inventory of approximately $1.0 million due primarily to management initiatives, an increase in accounts payable of approximately $0.4$6.3 million due to the building of inventory to meet demand and the timing of vendor payments in the ordinary course of business, an increase in accrued expenses of approximately $0.7$13.0 million due primarily to compensation accrualsthe current portion of contingent consideration, and an increase in other long-term liabilitiesdeferred revenue of $0.2approximately $0.5 million.
These cash inflows and adjustments to income were partially offset by a gain on disposal of property, plant and equipment of approximately $6.2 million, a gain on the sale the Molded Fiber business of approximately $15.6 million, a decrease in deferred taxes of approximately $0.4 million, an increase in accounts receivable of approximately $0.8$19.8 million due to higher sales in the timinglast two months of customer collections,the third quarter of 2022 as compared to the same period in the fourth quarter of 2021 and the addition of Advant receivables, an increase in inventory of approximately $20.1 million due to inventory build for upcoming demand, restocking to historical levels and the addition of Advant inventory, an increase in refundable income taxes of approximately $0.2$3.6 million due to the timing of estimated tax payments, and an increase in other assets of approximately $0.1$2.6 million due to increased right of use lease assets and a decrease in other long-term liabilities of approximately $6.7 million.
Net cash used inprovided by investing activities during the nine-month period ended September 30, 20172022 was approximately $6.9$4.3 million and was primarily the result of the sale of Molded Fiber and the sale of the Georgetown manufacturing facility, offset by the acquisition of Advant, as well as additions of manufacturing machinery and equipment and various building improvements across the expansion of the Newburyport, Massachusetts plant.Company.
Net cash used infor financing activities was approximately $0.2$5.2 million during the nine-month period ended September 30, 2017, representing cash used to service term2022 and was primarily the result of payments on the revolving line of credit of approximately $45 million, principal payments of long-term debt of approximately $0.7$3 million, and to paypayments of statutory withholding for stock options exercised and restricted stock units vested of approximately $0.1 million,$1.5 million. These payments were partially offset by net proceeds received upon stock options exercisesborrowings under our credit facility to fund acquisitions of approximately $0.6$44 million.
Outstanding and Available Debt
On December 22, 2021, the Company, as the borrower, entered into a secured $130 million Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time-to-time party thereto. The Company maintains an unsecuredSecond Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of February 1, 2018.
The credit facilities under the Second Amended and Restated Credit Agreement consist of a $40 million secured term loan to the Company and a secured revolving credit facility, with Bankunder which the Company may borrow up to $90 million. The Second Amended and Restated Credit Agreement matures on December 21, 2026. The secured term loam requires quarterly principal payments of America, N.A.$1,000,000 commencing on March 31, 2022. The credit facilityproceeds of the Second Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of DAS Medical, as well as certain other permitted acquisitions. The Company’s obligations under the Second Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Second Amended and Restated Credit Agreement calls for interest of LIBORdetermined by the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus a margin that ranges from 1.0%1.25% to 1.5%2.0% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25%.25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the credit facility,Second Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Company’s $40 million credit facility maturesSecond Amended 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 ofAt September 30, 2017,2022, the Company had noapproximately $71 million in borrowings outstanding under the credit facility. Included inSecond Amended and Restated Credit Agreement, which were used as partial consideration for the credit facility wereDAS Medical and Advant acquisitions, and also had approximately $300,000$0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies. As ofAt September 30, 2017,2022, the applicable interest rate was approximately 4.6% and the Company was in compliance with all covenants under the credit facility.Second Amended and Restated Credit Agreement.
In 2012,Long-term debt consists of the following (in thousands):
September 30, 2022 | ||||
Revolving credit facility | $ | 34,000 | ||
Term loan | 37,000 | |||
Total long-term debt | 71,000 | |||
Current portion | (4,000 | ) | ||
Long-term debt, excluding current portion | $ | 67,000 | ||
Future maturities of long-term debt at September 30, 2022 are as follows (in thousands):
Term Loan | Revolving credit facility | Total | ||||||||||
Remainder of 2022 | $ | 1,000 | $ | - | $ | 1,000 | ||||||
2023 | $ | 4,000 | $ | - | $ | 4,000 | ||||||
2024 | $ | 4,000 | $ | - | $ | 4,000 | ||||||
2025 | $ | 4,000 | $ | - | $ | 4,000 | ||||||
2026 | $ | 24,000 | $ | 34,000 | $ | 58,000 | ||||||
| $ | 37,000 | $ | 34,000 | $ | 71,000 | |||||||
Derivative Financial Instruments
The Company used interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on certain of its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company 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, creating credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, in these circumstances the Company is not exposed to the counterparty’s credit risk. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that matureresults from a change in October 2017. interest rates.
The annualCompany assesses interest rate isrisk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations exposed the Company to variability in interest payments due to changes in interest rates. The Company believed that it was prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the First Amended and Restated Credit Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap modified the Company’s interest rate exposure by converting the previous term loan from a variable rate to a fixed rate in order to hedge against the possibility of rising interest rates during the term of the loan.
The notional amount was approximately $6.4 million at 1.83% andSeptember 30, 2022. The fair value of the loans are secured by the related molded fiber machines. Asswap as of September 30, 2017,2022 was approximately $26 thousand and is included in other assets. The fair value of the outstandingswap as of December 31, 2021 was approximately $(176) thousand and is included in other liabilities. Changes in the fair value and net cash settlement amounts related to the swap are recorded in other income/expense and resulted in income of approximately $20 thousand and $202 thousand, respectively, during the three- and nine-month periods ended September 30, 2022. Changes in the fair value of the swap resulted in income of $2 thousand and expense of $4 thousand, respectively during the three- and nine-month periods ended September 30, 2021.
As the Company has paid the remaining balance of the term loan facilitythat was approximately $84,000.associated with the swap in its entirety, there is no longer underlying debt to hedge against the swap. The changes in the fair value of the swap will continue to be accounted for as a financial instrument until the sooner of the time that the Company elects to cancel it or until its maturity, which will occur on February 1, 2023.
Future Liquidity
The Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations. The Company’s principal sources of funds are its operations and its revolvingamended and restated credit facility. The Company generatedused cash of approximately $13.0 million from$144 thousand for operations during the nine-month periodnine months ended September 30, 2017; however,2022; and, the Company cannot guarantee that its operations will generate cash in future periods. The Company’s longer-term liquidity is contingent upon future operating performance.performance and draws on the revolving credit facility are possible.
Throughout fiscal 2017,2022, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants. The Company is in the process of further expanding its Newburyport, Massachusetts, manufacturing plant. The Company may consider additional acquisitions of companies, technologies, or products that are complementary to its business. The Company believes that its existing resources, including its revolving credit facility, together with cash expected to be generated from operations, and funds expected to be available to it through any necessary equipment financings and additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.
The Company may also require additional capital in the future to fund capital expenditures, acquisitions, or other investments. These capital requirements could be substantial. The Company anticipates that any future expansion of its business will be financed through existing resources, cash flow from operations, the Company's revolving credit facility, or other new financing. The Company cannot guarantee that it will be able to meet existing financial covenants or obtain other new financing on favorable terms, if at all. The Company's liquidity will be impacted to the extent additional stock repurchases are made under the Company's stock repurchase program.
Stock Repurchase Program
The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and includes treasury stock as a component of stockholders’ equity. On June 16, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. Under the program, the Company is authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. The stock repurchase program will end upon the earlier of the date on which the plan is terminated by the Board or when all authorized repurchases are completed. The timing and amount of stock repurchases, if any, will be determined based upon our evaluation of market conditions and other factors. The stock repurchase program may be suspended, modified, or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the program.
The Company did not repurchase any shares of its common stock under this program in the first nine months of 2017. Through September 30, 2017, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000.2022. At September 30, 2017,2022 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, 2016.2021.
ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Off-Balance-Sheet Arrangements
In addition to operating leases, the Company’s off-balance-sheet arrangements include standby letters of credit which are included in the Company’s revolving credit facility. As of September 30, 2017, there was approximately $300,000 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, 2016.2021.
ITEM 4:CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the “Evaluation Date”), the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in 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.
There
The Company closed the acquisitions of Contech, DAS Medical, and Advant Medical on October 12, 2021, December 22, 2021, and March 17, 2022, respectively. The new acquisitions’ total assets and revenues constituted approximately 45.1% and 35.4%, respectively, of the Company’s consolidated total assets and revenues as shown on our consolidated financial statements as of and for the period ended September 30, 2022. As the acquisitions occurred in the fourth quarter of fiscal 2021 and the first quarter of fiscal 2022, the Company excluded all of the acquired businesses internal control over financial reporting from the scope of the assessment of the effectiveness of the Company’s disclosure controls and procedures. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from the scope within the first year of acquisition if specified conditions are satisfied.
An evaluation was also performed under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has been nomaterially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Except as described above, that evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the most recentour latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
There have been noThe Company is not a party to any material changes fromlitigation or other material legal proceedings. From time to time, the risk factors previously disclosedCompany may be a party to various suits, claims and complaints arising in Part 1 - Item 1Athe ordinary course of business. In the opinion of management of the Company, these suits, claims and complaints should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations.
The Company faces a number of uncertainties and risks that are difficult to predict and many of which are outside of the Company's control. For a detailed discussion of the risks that affect our business, please refer to Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021 and Part II, Item 1A, “Risk Factors” in our subsequent Quarterly Reports on Form 10-Q. There have been no material changes from the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and our subsequent Quarterly Reports, with the exception of the additional Risk Factors noted below.
Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future. In December 2021, we entered into a secured $130 million Second Amended and Restated Credit Agreement with Bank of America, N.A., which provided for a $90 million revolving credit facility and a $40 million term loan facility. This Credit Agreement contains covenants imposing various restrictions on our business and financial activities. These restrictions may affect our ability to operate our business and undertake certain financial activities and may limit our ability to take advantage of potential business or financial opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to incur liens, incur indebtedness, make investments, dissolve or merge or consolidate with or into another entity, dispose of certain property, and make restricted payments. The Credit Agreement also requires us to meet certain financial ratios, including a minimum fixed-charge coverage ratio and a maximum total funded debt to EBITDA ratio. The breach of any of these covenants or restrictions could result in a default under the Credit Agreement, which could have a material adverse impact to our business, financial condition and results of operation. We are also exposed to the risk of increasing interest rates as our revolving credit and term loan facilities are both at a variable interest rate. Material changes in interest rates could result in higher interest expense and related payments for us. For example, at December 31, 2021, the applicable interest rate under the Second Amended and Restated Credit Agreement was approximately 1.58% and at September 30, 2022, the interest rate thereunder was approximately 4.6%. Adverse economic or market conditions may harm our business. Worsening economic conditions, including inflation, increasing interest rates, decreasing economic activity, volatility in equity and credit markets or other changes in the economic environment, may adversely affect our business, financial condition, or results of operations. For example, we depend on suppliers for the raw materials used in our products, and the suppliers of these raw materials may seek to raise prices in the current inflationary economic environment. If our costs increase and we are unable to successfully pass along those increased costs to our customers, our revenue and/or operating profitability may be adversely affected. To the extent we are able to pass along such increased costs to our customers, such pass-through costs could negatively impair our relationships with our customers. 30 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer’s Purchases of Equity Securities
On June 16, 2015, the Company issued a press release announcing that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. The Company did not repurchase any shares of its common stock under this program in the first nine months of 2017. Through September 30, 2017, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587,000. At September 30, 2017, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: MINE SAFETY DISCLOSURES
Not Applicable
None
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Exhibit No. | Description |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.* | |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.* | |
101.INS | Inline XBRL Instance Document.* |
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document.* |
101.LAB | Inline XBRL Taxonomy Label Linkbase Document.* |
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document.* |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
__________________
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UFP TECHNOLOGIES, INC.
Date: November 9, | By: /s/ R. Jeffrey Bailly | |||
R. Jeffrey Bailly | ||||
Chairman, Chief Executive Officer, President, and Director (Principal Executive Officer) | ||||
Date: November 9, 2022 | By: /s/ Ronald J. Lataille | |||
Ronald J. Lataille | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
__________________
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