Docoh
Loading...

UFPT UFP

Filed: 7 May 21, 9:15am
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)         

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

For the quarterly period ended     MARCH 31, 2021

 

OR

 

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

For the transition period from ____ to ____

 

Commission File Number: 001-12648

UFP Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware

04-2314970

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

100 Hale Street, Newburyport, MA 01950, USA

(Address of principal executive offices) (Zip Code)

 

(978) 352-2200

(Registrant's telephone number, including area code)

_________________________________________

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

UFPT

The NASDAQ Stock Market L.L.C.

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No ☒

 

7,526,537 shares of registrant’s Common Stock, $0.01 par value, were outstanding as of May 3, 2021.

 

 

 

 

UFP Technologies, Inc.

 

Index

 

 

 Page 
   
PART I - FINANCIAL INFORMATION 3 
Item 1.Financial Statements3 
Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited)3 
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2021 and March 31, 2020 (unaudited)4 
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and March 31, 2020 (unaudited)5 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and March 31, 2020 (unaudited)6 
Notes to Interim Condensed Consolidated Financial Statements7 
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations16 
Item 3.Quantitative and Qualitative Disclosures About Market Risk22 
Item 4.Controls and Procedures22 
PART II - OTHER INFORMATION22 
Item 1.Legal Proceedings22 
Item 1A.Risk Factors22 
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds22 
Item 6.Exhibits23 
Signatures 24 

 

 

 

 

 

 

PART I:          FINANCIAL INFORMATION

ITEM 1:         FINANCIAL STATEMENTS

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

 
  

March 31,
2021

  

December 31, 2020

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $25,377  $24,234 

Receivables, net

  30,018   26,428 

Inventories

  20,016   18,642 

Prepaid expenses and other current assets

  2,630   2,560 

Total current assets

  78,041   71,864 

Property, plant and equipment

  120,037   118,388 

Less accumulated depreciation and amortization

  (66,388)  (64,633)

Net property, plant and equipment

  53,649   53,755 

Goodwill

  51,838   51,838 

Intangible assets, net

  19,404   19,718 

Non-qualified deferred compensation plan

  3,881   3,724 

Finance lease right of use assets

  96   100 

Operating lease right of use assets

  2,118   2,052 

Other assets

  153   153 

Total assets

 $209,180  $203,204 
         

Liabilities and Stockholders Equity

        

Current liabilities:

        

Accounts payable

 $5,977  $4,121 

Accrued expenses

  6,861   7,944 

Deferred revenue

  1,763   1,887 

Finance lease liabilities

  15   15 

Operating lease liabilities

  1,189   1,154 

Income taxes payable

  863   16 

Total current liabilities

  16,668   15,137 

Deferred income taxes

  5,336   5,057 

Non-qualified deferred compensation plan

  4,105   3,810 

Finance lease liabilities

  82   86 

Operating lease liabilities

  975   950 

Other liabilities

  1,195   1,271 

Total liabilities

  28,361   26,311 

Commitments and contingencies

          

Stockholders’ equity:

        

Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued

  0   0 

Common stock, $.01 par value, 20,000,000 shares authorized; 7,549,538 and 7,519,979 shares issued and outstanding, respectively, at March 31, 2021; 7,529,625 and 7,500,066 shares issued and outstanding, respectively, at December 31, 2020

  75   75 

Additional paid-in capital

  32,247   32,484 

Retained earnings

  149,084   144,921 

Treasury stock at cost, 29,559 shares at March 31, 2021 and 29,559 shares at December 31, 2020

  (587)  (587)

Total stockholders’ equity

  180,819   176,893 

Total liabilities and stockholders' equity

 $209,180  $203,204 

 

 

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

3

 

 

 

UFP Technologies, Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Net sales

 $48,599  $48,277 

Cost of sales

  35,990   35,454 

Gross profit

  12,609   12,823 

Selling, general & administrative expenses

  7,309   7,752 

Gain on disposal of property, plant & equipment

  0   (4)

Operating income

  5,300   5,075 

Interest expense

  16   16 

Other (income) expense

  (10)  327 

Income before income tax expense

  5,294   4,732 

Income tax expense

  1,131   841 

Net income

 $4,163  $3,891 
         

Net income per share:

        

Basic

 $0.55  $0.52 

Diluted

 $0.55  $0.52 

Weighted average common shares outstanding:

        

Basic

  7,507   7,457 

Diluted

  7,570   7,538 

 

 

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

 

4

 

 

 

 

UFP TECHNOLOGIES, INC.

Condensed Consolidated Statements of Stockholders Equity

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31, 2021

 
          

Additional

              

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Treasury Stock

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Equity

 

Balance at December 31, 2020

  7,500  $75  $32,484  $144,921   30  $(587) $176,893 

Share-based compensation

  34   0   501   0   0   0   501 

Exercise of stock options

  0   0   0   0   0   0   0 

Net share settlement of restricted stock units

  (14)  0   (738)  0   0   0   (738)

Net income

  -   0   0   4,163   -   0   4,163 

Balance at March 31, 2021

  7,520  $75  $32,247  $149,084   30  $(587) $180,819 

 

Three Months Ended March 31, 2020

 
          

Additional

              

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Treasury Stock

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Equity

 

Balance at December 31, 2019

  7,446  $74  $30,952  $131,552   30  $(587) $161,991 

Share-based compensation

  28   0   537   0   0   0   537 

Exercise of stock options

  20   1   415   0   0   0   416 

Net share settlement of restricted stock units

  (11)  0   (560)  0   0   0   (560)

Net income

  -   0   0   3,891   -   0   3,891 

Balance at March 31, 2020

  7,483  $75  $31,344  $135,443   30  $(587) $166,275 

 

 

 

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

5

 

 

 

UFP Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income

 $4,163  $3,891 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  2,069   2,066 

Gain on disposal of property, plant & equipment

  0   (4)

Share-based compensation

  501   537 

Deferred income taxes

  279   421 

Changes in operating assets and liabilities:

        

Receivables, net

  (3,590)  (801)

Inventories

  (1,374)  (1,966)

Prepaid expenses and other current assets

  (70)  (446)

Other assets

  (219)  247 

Accounts payable

  1,656   2,726 

Accrued expenses

  (1,083)  (2,133)

Deferred revenue

  (124)  (142)

Income taxes payable

  847   284 

Non-qualified deferred compensation plan and other liabilities

  279   62 

Net cash provided by operating activities

  3,334   4,742 

Cash flows from investing activities:

        

Additions to property, plant, and equipment

  (1,449)  (1,020)

Proceeds from sale of fixed assets

  0   13 

Net cash used in investing activities

  (1,449)  (1,007)

Cash flows from financing activities:

        

Principal payments on finance lease obligation

  (4)  0 

Proceeds from exercise of stock options

  0   416 

Payment of statutory withholdings for restricted stock units vested

  (738)  (560)

Net cash used in financing activities

  (742)  (144)

Net increase in cash and cash equivalents

  1,143   3,591 

Cash and cash equivalents at beginning of period

  24,234   3,743 

Cash and cash equivalents at end of period

 $25,377  $7,334 

 

 

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

6

 

 

 

Notes to Interim Condensed Consolidated Financial Statements

 

 

(1)      Basis of Presentation

 

The interim condensed consolidated financial statements of UFP Technologies, Inc. (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020, included in the Company's 2020 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

 

The condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, the condensed consolidated statements of income for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 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, 2020 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

The results of operations for the three-month period ended March 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2021.

 

Recent Accounting Pronouncements

 

There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial statements.

 

 

(2)      Revenue Recognition

 

The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, resulting in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.

 

7

 

Disaggregated Revenue

 

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

 

 

  

Three Months Ended

 
  

March 31,

 

Net sales of:

 

2021

  

2020

 

Products

 $47,323  $47,029 

Tooling and Machinery

  412   677 

Engineering services

  864   571 

Total net sales

 $48,599  $48,277 

 

Contract balances

 

Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has contract liabilities included within “deferred revenue” on the condensed consolidated balance sheet.

 

The following table presents opening and closing balances of contract liabilities for the three-month periods ended March 31, 2021 and 2020 (in thousands):

 

  

Contract Liabilities

 
  

Three Months Ended
March 31,

 
  

2021

  

2020

 

Deferred revenue - beginning of period

 $1,887  $2,574 

Increases due to consideration received from customers

  217   525 

Revenue recognized

  (341)  (667)

Deferred revenue - end of period

 $1,763  $2,432 

 

Revenue recognized during the three-month periods ended March 31, 2021 and 2020 from amounts included in deferred revenue at the beginning of the period were approximately $302 thousand and $517 thousand, respectively.

 

When invoicing occurs after revenue recognition, the Company has contract assets, included within “receivables” on the condensed consolidated balance sheet.

 

The following table presents opening and closing balances of contract assets for the three-month periods ended March 31, 2021 and 2020 (in thousands):

 

  

Contract Assets

 
  

Three Months Ended
March 31,

 
  

2021

  

2020

 

Unbilled Receivables - beginning of period

 $271  $72 

Increases due to revenue recognized, not invoiced to customers

  531   522 

Decreases due to customer invoicing

  (578)  (404)

Unbilled Receivables - end of period

 $224  $190 

 

8

 
 

(3)       Supplemental Cash Flow Information

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
  

(in thousands)

 

Cash paid for:

        

Interest

 $13  $12 

Income taxes, net of refunds

  6   0 
         

Non-cash investing and financing activities:

        

Capital additions accrued but not yet paid

 $200  $232 

 

 

(4)      Receivables and Allowance for Credit Losses

 

Receivables consist of the following (in thousands):

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Accounts receivable–trade

 $30,542  $26,912 

Less allowance for credit losses

  (524)  (484)

Receivables, net

 $30,018  $26,428 

 

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. 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 for the three months ended March 31, 2021 and 2020 (in thousands):

 

  

Allowance for Credit
Losses

 
  

Three Months Ended
March 31,

 
  

2021

  

2020

 

Allowance - beginning of period

 $484  $486 

Provision for expected credit losses

  48   60 

Amounts written off against the allowance

  (8)  (5)

Allowance - end of period

 $524  $541 

 

 

(5)      Fair Value of Financial Instruments

 

Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820, Fair Value Measurements and Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:

 

9

 

Level 1

Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2

Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3

Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

The following table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):

 

Level 2

 

March 31, 2021

  

December 31, 2020

 

Liabilities:

        

Derivative financial instruments

 $(385) $(624)

 

Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full term of the swap agreement.

 

The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, that are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.

 

 

(6)      Share-Based Compensation

 

Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).

 

The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2020. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):

 

  

Three Months Ended

 
  

March 31,

 

Share-based compensation related to:

 

2021

  

2020

 

Common stock grants

 $100  $100 

Stock option grants

  53   60 

Restricted Stock Unit Awards ("RSUs")

  348   377 

Total share-based compensation

 $501  $537 

 

The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensa‐tion arrangements was approximately $242 thousand and $348 thousand for the three-month periods ended March 31, 2021 and 2020, respectively.

 

10

 

Common stock grants

 

The compensation expense for common stock granted during the three-month period ended March 31, 2021, was determined based on the market price of the shares on the date of grant.

 

Stock Option grants

 

The following is a summary of stock option activity under all plans for the three-month period ended March 31, 2021:

 

  

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, 2020

  94,513  $30.22         

Granted

  0   0         

Exercised

  0   0         

Outstanding at March 31, 2021

  94,513  $30.22   5.78  $1,852 

Exercisable at March 31, 2021

  79,621  $27.66   5.14  $1,765 

Vested and expected to vest at March 31, 2021

  94,513  $30.22  $5.78  $1,852 

 

During the three-month period ended March 31, 2020, the total intrinsic value of all options exercised was approximately $530 thousand, and the total amount of consideration received by the Company from the exercised options was approximately $415 thousand. At its discretion, the Company allows option holders to surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During both the three-month periods ended March 31, 2021 and 2020, 0 shares were surrendered for this purpose.

 

Restricted Stock Unit awards

 

The following table summarizes information about RSU activity during the three-month period ended March 31, 2021:

 

  

Restricted Stock Units

  

Weighted Average
Grant Date
Fair Value

 

Outstanding at December 31, 2020

  93,187  $35.03 

Awarded

  45,292   49.14 

Shares vested

  (33,987)  31.29 

Outstanding at March 31, 2021

  104,492  $42.72 

 

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 and issued to the RSU holder. During the three-month periods ended March 31, 2021 and 2020, 14,074 and 11,195 shares were surrendered at an average market price of $52.46 and $49.99, respectively.

 

As of March 31, 2021, the Company had approximately $3.8 million of unrecognized compensation expense that is expected to be recognized over a period of 4 years.

 

 

(7)      Inventories

 

Inventories are stated at the lower of cost (determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Raw materials

 $12,066  $12,229 

Work in process

  3,080   1,991 

Finished goods

  4,870   4,422 

Total inventory

 $20,016  $18,642 

 

 

11

 
 

(8)      Leases

 

The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet. 

 

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 uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

 

 

  

Three Months Ended

 
  

March 31,

 
  

($ in thousands)

 
  

2021

  

2020

 

Lease Cost:

        

Finance lease cost:

        

Amortization of right of use assets

 $4  $0 

Interest on lease liabilities

  1   0 

Operating lease cost

  300   305 

Variable lease cost

  60   57 

Short-term lease cost

  7   7 

Total lease cost

 $372  $369 
         

Cash paid for amounts included in measurement of lease liabilities:

        

Operating cash flows from operating leases

 $305  $305 

Financing cash flows from finance leases

  4   0 
         

Weighted-average remaining lease term (years):

        

Finance

  6.08   - 

Operating

  1.87   2.45 

Weighted-average discount rate:

        

Finance

  2.26%  0 

Operating

  4.36%  4.45%

 

 

12

 

The aggregate future lease payments for leases as of March 31, 2021 are as follows (in thousands):

 

  

Finance

  

Operating

 

Remainder of 2021

 $13  $907 

2022

  17   1,054 

2023

  17   116 

2024

  17   74 

2025

  17   64 

Thereafter

  23   33 

Total lease payments

  104   2,248 

Less: Interest

  (7)  (84)

Present value of lease liabilities

 $97  $2,164 

 

 

(9)      Income Per Share

 

Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during each period.

 

The weighted average number of shares used to compute basic and diluted net income per share consisted of the following (in thousands):

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Basic weighted average common shares outstanding

  7,507   7,457 

Weighted average common equivalent shares due to restricted stock, stock options and RSUs

  63   81 

Diluted weighted average common shares outstanding

  7,570   7,538 

 

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included in the computation of diluted income per share because the effect would be antidilutive. For both the three-month periods ended March 31, 2021 and 2020, there were 0 stock awards excluded from the computation of diluted earnings per share for this reason.

 

13

 
 

(10)    Segment Reporting

 

The Company consists of a single operating and reportable segment.

 

Revenues from customers outside of the United States are not material. NaN customer comprised more than 10% of the Company’s consolidated revenues for the three-month periods ended March 31, 2021 and 2020. At March 31, 2021 and December 31, 2020, one customer represented approximately 12.4% and 13.3% of gross accounts receivable, respectively. All of the Company’s assets are located in the United States.

 

The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Aerospace & Defense, Industrial, and Electronics markets. Net sales by market for the three-month periods ended March 31, 2021 and 2020 are as follows (in thousands):

 

 

  

Three Months Ended March 31,

  

2021

   2020 (1)

Market

 

Net Sales

  

%

  

Net Sales

   %
                

Medical

 $29,863   61.4% $33,732   69.9%

Consumer

  5,596   11.5%  3,453   7.2%

Automotive

  4,646   9.6%  4,602   9.5%

Aerospace & Defense

  4,631   9.5%  2,752   5.7%

Industrial

  2,098   4.3%  1,910   4.0%

Electronics

  1,765   3.6%  1,828   3.8%

Net Sales

 $48,599   100.0% $48,277   100.0%

 

 

(1)

Certain amounts for the three months ended March 31, 2020 were reclassified between markets to conform to the current period presentation.

 

 

(11)    Other Intangible Assets

 

The carrying values of the Company’s definite lived intangible assets as of March 31, 2021 are as follows (in thousands):

 

  

Tradename & Brand

  

Non-
Compete

  

Customer
List

  

Total

 

Estimated useful life

 

10 years

  

5 years

  

20 years

     

Gross amount

 $367  $462  $22,555  $23,384 

Accumulated amortization

  (116)  (293)  (3,571)  (3,980)

Net balance

 $251  $169  $18,984  $19,404 

 

 

 

14

 

Amortization expense related to intangible assets was approximately $314 thousand for both the three-month periods ended March 31, 2021 and 2020. The estimated remaining amortization expense as of March 31, 2021 is as follows (in thousands):

 

Remainder of 2021

 $943 

2022

  1,257 

2023

  1,257 

2024

  1,164 

2025

  1,164 

Thereafter

  13,619 

Total

 $19,404 

 

 

 

(12)    Income Taxes

 

The determination of income tax expense in the accompanying unaudited condensed consolidated statements of income 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 21.4% and 17.8% of income before income tax expense for the three-month periods ended March 31, 2021 and 2020, respectively. The increase in the effective tax rate for the current period as compared to the prior period was largely due to a lower anticipated effective tax rate in 2020 due to credits available for increased research activities.

 

 

(13)    Indebtedness

 

On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time to time party thereto. The Amended and Restated Credit Agreement amended and restated the Company’s prior credit agreement.

 

On December 31, 2020, the Company, as the borrower, and Bank of America, N.A., as administrative agent and sole lender, entered into a First Amendment (the “First Amendment”) to the Company’s Amended and Restated Credit Agreement, dated February 1, 2018 (as amended, the “Restated Credit Agreement”).

 

The First Amendment amended the Restated Credit Agreement by extending the scheduled maturity date from February 1, 2023 to December 31, 2025 and creating procedures and guidelines for establishing a successor benchmark rate if LIBOR ceases to be available during the term of the revolving credit facility. The Restated Credit Agreement called for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. The First Amendment calls for interest of LIBOR plus a margin that ranges from 1.25% to 1.75% or, at the discretion of the Company, the bank’s prime rate plus a margin that ranges from zero to 0.25%. In both cases the applicable margin remains dependent upon Company performance. The First Amendment also added certain representations and covenants concerning compliance by the Company with legal requirements.

 

The credit facilities under the Restated Credit Agreement consist of a $20 million unsecured term loan to the Company and an unsecured revolving credit facility, under which the Company may borrow up to $50 million. The proceeds of the Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. The Company’s obligations under the Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.

 

Under the 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 Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of March 31, 2021 and December 31, 2020 there were no amounts outstanding; the applicable interest rate was approximately 1.11% and the Company was in compliance with all financial covenants under the Restated Credit Agreement. As of March 31, 2021 and December 31, 2020, there were $0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies.

 

15

 

Derivative Financial Instruments

 

The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The Company assesses interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the term loan under the Amended and Restated Credit Agreement, the Company entered into a $20 million, 5‑year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap agreement was established to modify the Company’s interest rate exposure by converting the interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. As the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $10.7 million at March 31, 2021. The fair value of the swap as of March 31, 2021 and 2020 was approximately $(385) thousand and $(624) thousand, respectively, and is included in other liabilities on the condensed consolidated balance sheets. Changes in the fair value and net cash settlement amounts related to the swap are recorded in other expense on the condensed consolidated statements of income and resulted in income of $10 thousand and expense of $327 thousand during the three-month periods ended March 31, 2021 and 2020, respectively.

 

 

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

 

Forward-looking Statements

 

Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Management and representatives of UFP Technologies, Inc. (the “Company”) also may from time to time make forward-looking statements. These statements are subject to known and unknown risks, uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about the Company’s prospects; statements about the potential further impact the novel coronavirus ("COVID-19") pandemic may have on the Company’s business, financial condition and results of operations, including with respect to the different markets in which the Company participates, the demand for its products, the well-being and availability of the Company’s employees, the continuing operation of the Company’s locations, delayed payments by the Company’s customers and the potential for reduced or canceled orders, the Company’s efforts to address the pandemic, including regarding the safety of its employees, the maintenance of its facilities and the sufficiency of the Company’s supply chain, inventory, liquidity and capital resources, including increased costs in connection with such efforts, the impact of the pandemic on the businesses of the Company’s suppliers and customers, and the overall impact the pandemic may have on the Company’s financial results in 2021; statements about the Company’s acquisition strategies and opportunities and the Company’s growth potential and strategies for growth; expectations regarding customer demand; expectations regarding the Company’s liquidity and capital resources, including the sufficiency of its cash reserves and the availability of borrowing capacity to fund operations and/or potential future acquisitions; anticipated revenues and the timing of such revenues; expectations regarding the potential impact of the proposed phase out of LIBOR by the end of 2021; expectations about shifting the Company’s book of business to higher-margin, longer-run opportunities; anticipated trends and potential advantages in the different markets in which the Company competes, including the medical, aerospace and defense, automotive, consumer, electronics, and industrial markets, and the Company’s plans to expand in certain of its markets; statements regarding anticipated advantages the Company expects to realize from its investments and capital expenditures; statements regarding anticipated advantages to improvements and alterations at the Company’s existing plants; expectations regarding the Company’s manufacturing capacity, operating efficiencies, and new production equipment; statements about new product offerings and program launches; statements about the Company’s participation and growth in multiple markets; statements about the Company’s business opportunities; and any indication that the Company may be able to sustain or increase its sales, earnings or earnings per share, or its sales, earnings or earnings per share growth rates.

 

16

 

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 limitation: the severity and duration of the COVID-19 pandemic and its impact on the markets in which the Company participates, including its impact on the Company’s customers, suppliers and employees, as well as the U.S. and worldwide economies; the timing, scope and effect of further governmental, regulatory, fiscal, monetary and public health responses to the COVID-19 pandemic; risks and uncertainties associated with the COVID-19 pandemic and its impact on the Company’s business, financial condition and results of operations, including risks relating to decreased, including substantially decreased, demand for the Company’s products; risks relating to the potential closure of any of the Company’s facilities or the unavailability of key personnel or other employees; risks that the Company’s inventory, cash reserves, liquidity or capital resources may be insufficient; risks relating to delayed payments by our customers and the potential for reduced or canceled orders; risks relating to the increased costs associated with the Company’s efforts to respond to the pandemic; risks associated with the identification of suitable acquisition candidates and the successful, efficient execution of acquisition transactions, the integration of any such acquisition candidates, the value of those acquisitions to our customers and shareholders, and the financing of such acquisitions; risks related to our indebtedness and compliance with covenants contained in our financing arrangements, and whether any available financing may be sufficient to address our needs; risks related to the proposed phase out of LIBOR by the end of 2021; risks associated with efforts to shift the Company’s book of business to higher-margin, longer-run opportunities; risks associated with the Company’s entry into and growth in certain markets; risks and uncertainties associated with seeking and implementing manufacturing efficiencies and implementing new production equipment; risks and uncertainties associated with growth of the Company’s business and increases to sales, earnings and earnings per share; and risks associated with new product and program launches. Accordingly, actual results may differ materially.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts, and projections, and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our current beliefs, estimates and assumptions and are only as of the date of this Report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, 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 manufacturer 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 fabricating techniques. The Company is diversified by also providing highly engineered solutions to customers in the aerospace & defense, automotive, consumer, electronics and industrial markets. The Company consists of a single operating and reportable segment.

 

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

 

As further summarized below, the COVID-19 pandemic has had, and we believe it will continue to have, negative effects on our business and financial results. Despite the impact of the COVID-19 pandemic, sales for the Company for the three-month period ended March 31, 2021 increased 0.7% to $48.6 million from $48.3 million in the same period last year. Gross margins for the three-month period ended March 31, 2021 decreased to 25.9% from 26.6% in the same period last year. Operating income and net income increased 4.4% and 7.0%, respectively.

 

17

 

Recent Developments

 

IMPACT OF COVID-19 ON OUR BUSINESS

 

Through much of 2020, COVID-19 spread across the country to areas in which our products are designed, manufactured, distributed or sold. The spread of COVID-19 and the response to it negatively impacted operating conditions for our business in 2020. Although we expect COVID-19 will continue to have negative impacts on our operating results in future periods, the magnitude and duration of the continuing impact is uncertain.

 

To stall the spread of COVID-19, authorities in states in which we do business implemented numerous measures, including social distancing guidelines, travel bans and restrictions, quarantines, curfews, stay-at-home orders, and business shutdowns. These measures have impacted and will likely further impact us, our customers, consumers, employees, suppliers and other third parties with whom we do business. It is uncertain how these and any future measures in response to the pandemic will impact our business, including whether and to what extent they will result in further changes in demand for our products or further increases in operating costs. The timing of distribution and the effectiveness of recently introduced vaccines is also uncertain. Our top priorities continue to be ensuring the health and safety of our workforce and serving our various constituencies with as little disruption as possible.

 

Our operations expose us to risks associated with the COVID-19 pandemic. The COVID-19 pandemic has impacted the cost of manufacturing our goods, including higher labor costs, maintenance costs and manufacturing inefficiencies due to employee absenteeism and significantly enhanced cleaning and sterilization. Elective medical procedures and exams have been delayed or canceled, there has been a significant reduction in physician office visits, and hospitals have postponed or canceled capital purchases. We believe that these responses negatively impacted demand for the Company’s components for medical devices. Additionally, many of our customers in the automotive markets experienced closures of their businesses in connection with the pandemic. Such closures negatively impacted the demand for our automobile component products particularly in the second quarter. Any continued reduced demand for our products, including reduced need for components for medical devices as well as continued economic uncertainty, could adversely and materially affect our business, financial condition and results of operations, as well as those of our customers.

 

To ensure the health and safety of our employees and to comply with governmental orders, since March 2020 we have required or enabled certain employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shifted schedules to facilitate social distancing and sterilization for those who continue to work in our facilities; enhanced cleaning and disinfecting procedures at our facilities; required face coverings and worked to procure and distributed personal protective equipment; implemented health checks and visitor protocols and restricted travel.

 

In response to the economic uncertainties resulting from the COVID-19 pandemic, we initiated and at present are continuing certain cost-cutting measures, including restrictions on travel and labor cost reduction measures (including employee terminations).

 

Although the impact of the pandemic on our business and financial results will depend on future developments that are highly uncertain and cannot be predicted, and which may vary by market, we have a strong liquidity position, solid balance sheet, and access to capital which we expect will enable us to effectively manage through the COVID-19 pandemic.

 

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

 

The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments and estimated income tax payments that we expect to defer to future periods. Accordingly, the Company deferred social security payments of approximately $1.6 million through December 31, 2020. Fifty percent of this amount is required to be paid by December 31, 2021 and the remaining balance is required to be paid by December 31, 2022. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the CARES Act may have on our business and financial results.

 

18

 

Results of Operations

 

Sales

 

Sales for the three-month period ended March 31, 2021 increased approximately 0.7% to $48.6 million from sales of $48.3 million for the same period in 2020. The increase in sales is primarily due to increases in sales to customers in the Aerospace & defense and Consumer markets of 68.2% and 62.1%, respectively, partially offset by a decrease in sales to customers in the Medical market of 11.5%.

 

Gross Profit

 

Gross profit as a percentage of sales (“gross margin”) decreased to 25.9% for the three-month period ended March 31, 2021, from 26.6% for the same period in 2020. As a percentage of sales, material and labor costs collectively decreased 0.5%, while overhead increased 1.1%. The decrease in collective material and labor costs as a percentage of sales was primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives, and a reduction in direct labor partially offset by an unfavorable change in mix. The increase in overhead as a percentage of sales was primarily due to increases in the cost of shipping supplies and outbound freight.

 

Selling, General and Administrative Expenses

 

Selling, general, and administrative expenses (“SG&A”) decreased approximately 5.7% to $7.3 million for the three-month period ended March 31, 2021, from $7.8 million for the same period in 2020 primarily due to labor reductions as well as decreases in company-wide travel and entertainment. As a percentage of sales, SG&A decreased to 15.0% for the three-month period ended March 31, 2021, from 16.1% for the same three-month period in 2020. The decrease in SG&A for the three-month period ended March 31, 2021 primarily due to labor reductions as well as decreases in company-wide travel and entertainment.

 

Interest Income and Expense

 

Net interest expense was approximately $16 thousand for both the three-month periods ended March 31, 2021 and 2020.

 

Other (Income) Expense

 

Other income was approximately $10 thousand and other expense was approximately $327 thousand for the three-month periods ended March 31, 2021 and 2020, respectively. Other expense was primarily generated by changes in the fair value of the swap liability, which is driven by anticipated future interest rate changes, offset by net cash settlement amounts related to the swap.

 

Income Taxes

 

The Company recorded tax expense of approximately 21.4% and 17.8% of income before income tax expense, respectively, for each of the three-month periods ended March 31, 2021 and 2020. The increase in the effective tax rate for the current period as compared to the prior period was largely due to a lower anticipated effective tax rate in 2020 due to credits available for increased research activities.

 

Liquidity and Capital Resources

 

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

 

Cash Flows

 

Net cash provided by operations for the three-month period ended March 31, 2021 was approximately $3.3 million and was primarily a result of net income generated of approximately $4.2 million, depreciation and amortization of approximately $2.1 million, share-based compensation of approximately $0.5 million, an increase in deferred taxes of approximately $0.3 million, an increase in income taxes payable of approximately $0.8 million, an increase in accounts payable of approximately $1.6 million, due to the timing of vendor payments in the ordinary course of business, and an increase of other long-term liabilities of approximately $0.3 million. These cash inflows and adjustments to income were partially offset by an increase in accounts receivable of approximately $3.6 million due to higher sales in the last two months of the first quarter of 2021 as compared to the same period in the fourth quarter of 2020 , an increase in inventory of approximately $1.4 million due to restocking to historical levels, an increase in prepaid expenses of approximately $0.1 million, an increase in other assets of approximately $0.2 million, a decrease in accrued expenses of approximately $1.1 million due to the payment of accrued compensation, and a decrease in deferred revenue of approximately $0.1 million.

 

19

 

Net cash used in investing activities during the three-month period ended March 31, 2021 was approximately $1.4 million and was primarily the result of additions of manufacturing machinery and equipment across the Company.

 

Net cash used in financing activities was approximately $0.7 million during the three-month period ended March 31, 2021, resulting primarily from payments of statutory withholding for stock options exercised and restricted stock units vested.

 

Outstanding and Available Debt

 

On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time to time party thereto. The Amended and Restated Credit Agreement amended and restated the Company’s prior credit agreement.

 

On December 31, 2020, the Company, as the borrower, and Bank of America, N.A., as administrative agent and sole lender, entered into a First Amendment (the “First Amendment”) to the Company’s Amended and Restated Credit Agreement, dated February 1, 2018 (as amended, the “Restated Credit Agreement”).

 

The First Amendment amended the Restated Credit Agreement by (i) extending the scheduled maturity date from February 1, 2023 to December 31, 2025, and (ii) creating procedures and guidelines for establishing a successor benchmark rate if LIBOR ceases to be available during the term of the revolving credit facility. The Restated Credit Agreement called for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. The First Amendment calls for interest of LIBOR plus a margin that ranges from 1.25% to 1.75% or, at the discretion of the Company, the bank’s prime rate plus a margin that ranges from zero to 0.25%. In both cases the applicable margin remains dependent upon Company performance. The First Amendment also added certain representations and covenants concerning compliance by the Company with legal requirements.

 

The credit facilities under the Restated Credit Agreement consist of a $20 million unsecured term loan to the Company and an unsecured revolving credit facility, under which the Company may borrow up to $50 million. The proceeds of the Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. The Company’s obligations under the Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.

 

Under the 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 Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of March 31, 2021 and December 31, 2020 there were no amounts outstanding; the applicable interest rate was approximately 1.11% and the Company was in compliance with all financial covenants under the Restated Credit Agreement. As of March 31, 2021 and December 31, 2020, there were $0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies.

 

Derivative Financial Instruments

 

The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The Company assesses interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the term loan under the Amended and Restated Credit Agreement, the Company entered into a $20 million, 5‑year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap agreement was established to modify the Company’s interest rate exposure by converting the interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. As the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $10.7 million at March 31, 2021. The fair value of the swap as of March 31, 2021 and 2020 was approximately $(385) thousand and $(624) thousand, respectively, and is included in other liabilities on the condensed consolidated balance sheets. Changes in the fair value and net cash settlement amounts related to the swap are recorded in other expense on the condensed consolidated statements of income and resulted in income of $10 thousand and expense of $327 thousand during the three-month periods ended March 31, 2021 and 2020, respectively.

 

20

 

Future Liquidity

 

The Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations. The Company’s principal sources of funds are its operations and its amended and restated credit facility. The Company generated cash of approximately $3.3 million in operations during the three months ended March 31, 2021; however, the Company cannot guarantee that its operations will generate cash in future periods. The Company’s longer-term liquidity is contingent upon future operating performance and draws on the revolving credit facility are possible. Further, the continued economic uncertainty resulting from the COVID-19 pandemic could affect the Company’s long-term ability to access the public markets and obtain necessary capital in order to properly capitalize and continue operations.

 

Throughout fiscal 2021, the Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants. The Company may consider additional acquisitions of companies, technologies, or products that are complementary to its business. The Company believes that its existing resources, including its revolving credit facility, together with cash expected to be generated from operations, 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 three months of 2021. At March 31, 2021 approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.

 

21

 

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, 2020.

 

ITEM 3:         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our market risks as previously disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.

 

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 Exchange 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 Exchange Act, is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

An evaluation was also performed under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. That evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II:         OTHER INFORMATION

 

ITEM 1:          LEGAL PROCEEDINGS

 

From time to time, the Company may be a party to various suits, claims and complaints arising in the ordinary course of business. In the opinion of management of the Company, these suits, claims and complaints should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations.

 

ITEM 1A:       RISK FACTORS

 

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, 2020. 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, 2020.

 

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

 

Issuers Purchases of Equity Securities

 

On June 16, 2015, the Company issued a press release announcing that its Board of Directors authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock. The Company did not repurchase any shares of its common stock under this program in the first three months of 2021. Through March 31, 2021, the Company had repurchased a total of 29,559 shares of its common stock under this program at a cost of approxi‐mately $587 thousand. At March 31, 2021, approximately $9.4 million was available for future repurchases of the Company's common stock under this authorization.

 

22

 

 

ITEM 6:          EXHIBITS

 

Exhibit No.

Description

  

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*

32.1

Certifications pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS

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

104

Inline XBRL Taxonomy Extension Definition Linkbase Document.*

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

__________________

 

*         Filed herewith.

**       Furnished herewith.

#         Indicates management contract or compensatory plan or arrangement.

 

23

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UFP TECHNOLOGIES, INC.

 

Date: May 7, 2021

 

By: /s/ R. Jeffrey Bailly

 
  

R. Jeffrey Bailly

Chairman, Chief Executive Officer, President, and Director

(Principal Executive Officer)

 
    

Date: May 7, 2021

 

By: /s/ Ronald J. Lataille 

 
  

Ronald J. Lataille

Chief Financial Officer

(Principal Financial Officer)

 

 

24