UFP Technologies - 10-Q quarterly report FY

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UFP Technologies, Inc.

Index

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UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

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

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UFP Technologies, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

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

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UFP Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

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The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $136,000 and $104,000 for the three-month periods ended June 30, 2010, and 2009, respectively, and approximately $206,000 and $196,000 for the six-month periods ended June 30, 2010, and 2009, respectively.

The following is a summary of stock option activity under all plans for the three-month period ended June 30, 2010:

During the six months ended June 30, 2010, and 2009, 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 $1,747,962 and $2,725, respectively, and the total amount of consideration received from the exercised options was $655,627 and $8,875, 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 six-month period ended June 30, 2010, 62,202 shares were surrendered at a market price of $10.42.  No shares were surrendered during the six-month period ended June 30, 2009.

During the three-month periods ended June 30, 2010, and 2009, the Company recognized compensation expenses related to stock options granted to directors and employees of $163,244 and $114,989, respectively.  During the six-month periods ended June 30, 2010, and 2009, the Company recognized compensation expense of $170,753 and $134,964, respectively.

On February 19, 2010, the Company’s Compensation Committee approved the issuance of 25,000 shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan.  The shares will be issued on or before December 31, 2010.  The Company has recorded compensation expense of $48,125 and $96,250 during the three- and six-month periods ended June 30, 2010, respectively, based on the grant date price of $7.70 at February 19, 2010.

The following table summarizes information about Restricted Stock Units (“RSUs”) activity during the six-month period ended June 30, 2010:

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Forward-looking Statements

This report contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission.  The words “believe,”  “expect,”  “anticipate,” “intend,” “plan,” “estimate,” and other expressions, which are predictions of or indicate future events and trends and that do not relate to historical matters, identify forward-looking statements.  Examples of forward-looking statements included in this report include, without limitation, statements regarding the anticipated performance of the Company and statements regarding prospects for the markets in which the Company competes, and the overall economy.

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

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Overview

UFP Technologies is an innovative designer and custom converter of foams, plastics, and fiber products.  The Company serves a myriad of markets, but specifically targets opportunities in the medical, aerospace and defense, automotive, computers and electronics, industrial, and consumer markets.

On March 9, 2009, the Company acquired selected assets of the Hillsdale, Michigan, operations of Foamade Industries, Inc. (“Foamade”), a business specializing in the fabrication of technical urethane foams for a myriad of industries.  The Company transitioned the acquired assets to its Grand Rapids, Michigan, plant.

On July 7, 2009, the Company acquired substantially all of the assets of E.N. Murray Co. (“ENM”), a Denver, Colorado-based foam fabricator.  ENM specializes in the fabrication of technical urethane foams, primarily for the medical industry.  Like the 2008 acquisition of Stephenson & Lawyer, Inc., this acquisition brings to the Company further access and expertise in fabricating technical urethane foams and a seasoned management team.

On August 24, 2009, the Company acquired selected assets of Advanced Materials, Inc. (“AMI”), a wholly-owned subsidiary of Advanced Materials Group, Inc.  Located in Rancho Dominguez, California, AMI specialized in the fabrication of technical urethane foams, primarily for the medical industry.

On October 29, 2009, the Company’s largest customer, Recticel Interiors North America, filed for bankruptcy protection pursuant to Chapter 11 of the bankruptcy code.  On October 29, 2009, the Company was owed $897,445 from Recticel, all of which was within contractual payment terms.  The Company had not recorded a specific reserve against this receivable in its December 31, 2009, financial statements, as the Company believed that full collection was probable.  The entire $897,445 was paid on March 8, 2010.  Recticel has since emerged from bankruptcy and the Company has experienced no interruption in orders.

In the first half of 2010, the Company experienced revenue growth from its newly acquired businesses (which are primarily focused on the medical market) and increased demand for automobile interior trim parts, overlaid on a streamlined organization.  As a result, the Company significantly increased its net income in the first two quarters of 2010.  Sales and net income for the first half of 2010 are up $16.1 million and $2.9 million, respectively, over the comparable 2009 period.

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

Sales

Sales for the three-month period ended June 30, 2010, increased 43% to $30.0 million from sales of $21.0 million for the same period in 2009.  Sales for the six-month period ended June 30, 2010, were $58.7 million or 38% higher than sales of $42.6 million for the same period in 2009.  The increases in sales for the three- and six-month periods ended June 30, 2010, were primarily due to sales from businesses acquired during 2009 of approximately $4.7 million and $10.5 million, respectively (Component Products segment) and increased sales of interior trim parts to the automotive industry of approximately $1.9 million and $4.1 million, respectively (Component Products segment).

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Gross Profit

Gross profit as a percentage of sales (gross margin) increased to 30.2% and 28.1% for the three- and six-month periods ended June 30, 2010, from 25.6% and 24.2% for the same periods in 2009.  The increase in gross margin is primarily due to the fixed components of cost of sales (overhead) measured against higher sales.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) increased 22% to $5.4 million for the three-month period ended June 30, 2010, from $4.4 million for the same period in 2009.  SG&A increased 18% to $10.4 million for the six-month period ended June 30, 2010, from $8.8 million for the six-month period ended June 30, 2009.  The increase in SG&A for the three- and six-month periods ended June 30, 2010, is primarily due to SG&A from newly acquired companies of approximately $790,000 and $1.6 million, respectively (Component Products segment).

As a percentage of sales, SG&A decreased to 18.0% and 17.7% for the three- and six-month periods ended June 30, 2010, from 21.1% and 20.7%, respectively, for the same three- and six-month periods of 2009.  The decrease in SG&A as a percentage of sales in both the three- and six-month periods ended June 30, 2010, is primarily due to the Company’s ability to leverage relatively fixed SG&A costs against higher sales.

Other Expenses

Net interest expense declined for the three- and six-month periods ended June 30, 2010, to approximately $34,000 and $69,000, respectively, from $54,000 and $136,000, respectively, for the same 2009 periods.  This decline is primarily due to lower average borrowings and interest earned on an increased cash position.

The Company recorded a tax expense of approximately 37% of income before income tax expense for both the three- and six-month periods ended June 30, 2010, compared to an income tax expense of approximately 35% in both the three- and six-month periods ended June 30, 2009.  The current period effective tax rate is higher than the 2009 effective tax rate primarily due to the permanent difference in the nature of the gain recorded on the acquisitions during 2009.

Liquidity and Capital Resources

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

At June 30, 2010, and December 31, 2009, the Company’s working capital was approximately $33.0 million and $27.7 million, respectively.  The increase in working capital for the six-month period ended June 30, 2010, is primarily due to increased cash of approximately $4.2 million and a decrease in accrued expenses of approximately $1.1 million caused by income tax and year-end bonus payments partially offset by an increase in accounts payable of approximately $800,000.

Net cash provided by operations for the six-month periods ended June 30, 2010, and 2009, was approximately $5.0 million and $5.2 million, respectively.  The slight decline in cash generated from operations is primarily due to an increase in net income of approximately $2.9 million, partially offset by an increase in accounts receivable and inventories of approximately $467,000 in the six-month

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period ended June 30, 2010, compared to a decrease in accounts receivable and inventories of approximately $4.4 million in the six-month period ended June 30, 2009.  The large reduction in accounts receivable and inventories in the six-month period ended June 30, 2009, was primarily due to soft sales in the first half of 2009.

Cash used in investing activities during the six-month period ended June 30, 2010, was approximately $875,000, and was entirely the result of normal additions of manufacturing machinery and equipment.

On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA.  The facility comprises: (i) a revolving credit facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-line amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization.  Extensions of credit under the revolving credit facility are based in part upon accounts receivable and inventory levels.  Therefore, the entire $17 million may not be available to the Company.  At June 30, 2010, the Company had availability of approximately $15.8 million, based upon collateral levels as of that date.  The credit facility calls for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the option of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero.  In both cases the applicable margin is dependent upon Company performance.  The loans are collateralized by a first priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan.  Under the credit facility, the Company is subject to a minimum fixed-charge coverage financial covenant with which it was in compliance at June 30, 2010.  The Company’s $17 million revolving credit facility matures November 30, 2013; the term loans are all due on January 29, 2016.  The interest rate on these facilities was approximately 1.25% at June 30, 2010.

UDT has a mortgage note dated May 22, 2007, collateralized by the Florida facility, which is included within long-term debt in the condensed consolidated financial statements.  The note had an original principal balance of $786,000 and calls for 180 monthly payments of $7,147.  The interest rate is fixed at approximately 7.2%.

The Company has no significant capital commitments in 2010, but plans on adding capacity to enhance operating efficiencies in its manufacturing plants.  The Company may consider additional acquisitions of companies, technologies, or products in 2010 that are complementary to its business.  The Company believes that its existing resources, including its revolving credit facility, together with cash generated from operations and funds expected to be available to it through any necessary equipment financing and additional bank borrowings, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through at least the end of 2010.  However, there can be no assurances that such financing will be available at favorable terms, if at all.

Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements

The following table summarizes the Company’s commitments, contractual obligations, and off-balance sheet arrangements at June 30, 2010, and the effect such obligations are expected to have on its liquidity and cash flow in future periods:

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The Company requires cash to pay its operating expenses, purchase capital equipment, and to service the obligations listed above.  The Company’s principal sources of funds are its operations and its revolving credit facility.  Although the Company generated cash from operations during the six-month period ended June 30, 2010, it cannot guarantee that its operations will generate cash in future periods.

The following discussion of the Company’s market risk includes forward-looking statements that involve risk and uncertainties.  Actual results could differ materially from those projected in the forward-looking statements.  Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices.  At June 30, 2010, the Company’s cash and cash equivalents consisted of bank accounts in U.S. dollars, and their valuation would not be affected by market risk.  The Company has several debt instruments where interest is based upon either the prime rate or LIBOR and, therefore, future operations could be affected by interest rate changes.  However, the Company believes that the market risk of the debt is minimal.

As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e) or 15d-15(e)).  Based upon that evaluation, they concluded that the disclosure controls and procedures were effective.

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Information regarding risk factors appears in Part I — Item 2 of this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Forward-Looking Statements” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, in Part I — Item 1A under “Risk Factors” and in Part II — Item 7 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

The Annual Meeting of Stockholders of the Company was held on June 9, 2010, whereby the stockholders voted: (i) to elect two Class-II directors for terms of office until the 2013 Annual Meeting of Stockholders, and (ii) to ratify CCR LLP as Independent Registered Public Accountants.

(i)        Votes for the election of directors were cast as follows:

(ii)       Votes to ratify CCR LLP as Independent Registered Public Accountants:

The following exhibits are included herein:

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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.

EXHIBIT INDEX

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