UFP TECHNOLOGIES INC

Previous wording

Net sales for the Company for the three-month period ended March 31, 2024 increased 7.4% (all organic) to $105.0 million from $97.8 million in the same period last year, which was primarily attributable to 7.4% growth in Medical and non-medical sales. The Medical sales growth was primarily due to the increase in sales of the Company’s robotic surgery and infection prevention products. Net sales relating to our largest customer were 32.2% of our net sales in the three-month period ended March 31, 2024. Gross profit as a percentage of sales (“gross margin”) for the three-month period ended March 31, 2024 decreased to 28.6% from 29.4% in the same period last year but is up sequentially over rates in the second half of 2023.

Current wording

Net sales for the Company for the six-month period ended June 30, 2024 increased 8.8% to $215.2 million from $197.8 million in the same period last year, which was primarily attributable to 9.1% growth in sales to customers in the medical market. The Medical sales growth was primarily due to the increase in sales of the Company’s robotic surgery and infection prevention products. Net sales relating to our largest customer, Intuitive Surgical SARL, were 33.1% of our net sales in the six-month period ended June 30, 2024. Gross profit as a percentage of sales (“gross margin”) for the six-month period ended June 30, 2024 decreased slightly to 29.3% from 29.5% in the same period last year but is up sequentially over rates in the second half of 2023.

Previous wording

Net sales for the three-month period ended March 31, 2024 increased approximately 7.4% (all organic) to $105.0 million from sales of $97.8 million for the same period in 2023. The increase in net sales is primarily due to increased sales to customers in the medical market of 7.4%, primarily led by increased sales of robotic surgery and infection prevention products in response to increased procedures. Net sales to all other markets increased 7.4% largely due to a 46% increase in aerospace and defense sales.

Current wording

Net sales for the three-month period ended June 30, 2024 increased approximately 10.1% to $110.2 million from sales of $100.0 million for the same period in 2023. The increase in net sales is primarily due to increased sales to customers in the medical market of 10.8%, primarily led by increased sales of robotic surgery and infection prevention products in response to increased procedures. Net sales to all other markets increased 6.3% largely due to a 37.5% increase in sales to the aerospace and defense market.

Previous wording

Gross margin decreased to 28.6% for the three-month period ended March 31, 2024, from 29.4% for the same period in 2023. As a percentage of sales, material and labor costs collectively decreased 0.3% while overhead costs increased 1.1%. The decrease in gross margin is primarily due to a decrease in the build of finished goods during the first quarter of 2024 as compared to the first quarter of 2023, as well as sales mix within the medical market.

Current wording

Gross margin decreased slightly to 29.3% for the six-month period ended June 30, 2024, from 29.5% for the same period in 2023. As a percentage of sales, material and labor costs collectively decreased 0.6% while overhead costs increased 0.8%. The decrease in gross margin is primarily due to increased manufacturing efficiencies as well as the containment of fixed overhead costs.

Previous wording

Selling, general, and administrative expenses (“SG&A”) increased approximately 7.0% to $13.9 million for the three-month period ended March 31, 2024, from $13.0 million for the same period in 2023, largely due to increased performance-based compensation, benefits and payroll tax expenses. As a percentage of sales, SG&A decreased to 13.2% for the three-month period ended March 31, 2024, from 13.3% for the same three-month period in 2023.

Current wording

Selling, general, and administrative expenses (“SG&A”) increased approximately 13.0% to $13.9 million for the three-month period ended June 30, 2024, from $12.3 million for the same period in 2023, largely due to increased performance-based compensation and professional fees. As a percentage of sales, SG&A increased to 12.6% for the three-month period ended June 30, 2024, from 12.3% for the same three-month period in 2023.

Previous wording

In connection with the acquisition of DAS Medical in 2021, the Company is required to make contingent payments, subject to the acquired entities achieving certain financial performance thresholds. The contingent consideration payments for the DAS Medical acquisition are four, $5 million payments for a total of up to $20 million. The fair value of the liability 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 the initial calculation were management’s 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 March 31, 2024 totaled approximately $13.3 million for the remaining $15 million of potential earnout. The change in fair value of contingent consideration for the DAS Medical acquisition for the three-month period ended March 31, 2024, resulted in an expense of approximately $0.2 million, and was included in change in fair value of contingent consideration in the consolidated statements of comprehensive income.

Current wording

In connection with the acquisition of DAS Medical in 2021, the Company is required to make contingent payments, subject to the acquired entities achieving certain financial performance thresholds. The contingent consideration payments for the DAS Medical acquisition are four, $5 million payments for a total of up to $20 million. The fair value of the liability 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 the initial calculation were management’s 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 June 30, 2024 totaled approximately $8.6 million for the remaining $10 million of potential earnout. The change in fair value of contingent consideration for the DAS Medical acquisition for the three-and-six-month period ended June 30, 2024, resulted in an expense of approximately $0.2 million and $0.5 Million, respectively, and was included in change in fair value of contingent consideration in the consolidated statements of comprehensive income.

Previous wording

Net interest expense was approximately $631 thousand and $869 thousand for the three-month periods ended March 31, 2024 and 2023, respectively. The decrease in net interest expense for the three-month period ended March 31, 2024 was primarily due to lower debt, partially offset by higher average interest rates in 2024. Interest income was immaterial.

Current wording

Net interest expense was approximately $0.6 million and $1.1 million for the three-month periods ended June 30, 2024 and 2023, respectively. The decrease in net interest expense for the three-month period ended June 30, 2024 was primarily due to lower debt, partially offset by higher average interest rates in 2024. Interest income was immaterial.

Previous wording

The Company recorded tax expense of approximately 17.2% and 18.1% of income before income tax expense, for each of the three-month periods ended March 31, 2024 and 2023, respectively. The decrease in the effective tax rate for the current period as compared to the prior period is largely due to increased discrete tax benefits associated with the issuance of stock compensation and higher earnings in low-tax jurisdictions in 2024.

Current wording

The Company recorded income tax expense of approximately 22.0% and 25.6% of income before income tax expense, for the three-month periods ended June 30, 2024 and 2023, respectively. The decrease in the effective tax rate for the current period as compared to the prior period is largely due to increased discrete tax benefits associated with the issuance of stock compensation and higher earnings in low-tax jurisdictions in 2024.

Previous wording

Net cash provided by operations for the three-month period ended March 31, 2024 was approximately $10.7 million and was primarily a result of net income generated of approximately $12.7 million, depreciation and amortization of approximately $3.0 million, share-based compensation of approximately $1.5 million, a change in the fair value of contingent consideration of approximately $0.3 million, a decrease in accounts receivable of approximately $3.1 million resulting primarily from the collection of an escrow receivable, an increase in income taxes payable of $1.4 million due to the timing of payment of tax estimates, an increase in accounts payable of approximately $1.4 million due to the building of inventory to meet demand and the timing of vendor payments in the ordinary course of business, a decrease in deferred taxes of approximately $0.6 million, and a decrease in other assets of approximately $0.3 million.

Current wording

Net cash provided by operations for the six-month period ended June 30, 2024 was approximately $22.4 million and was primarily a result of net income generated of approximately $26.2 million, depreciation and amortization of approximately $6.0 million, share-based compensation of approximately $3.3 million, a change in the fair value of contingent consideration of approximately $0.5 million, a decreased in deferred taxes of approximately $0.3 million, a decrease in accounts receivable of approximately $4.2 million resulting primarily from the collection of an escrow receivable, a decrease in other assets of approximately $1.0 million, and an increase in accounts payable of approximately $0.7 million due to the timing of vendor payments in the ordinary course of business.

Previous wording

These cash inflows and adjustments to income were partially offset by an increase in inventory of approximately $3.7 million due to inventory build for upcoming demand, an increase in prepaid expenses of approximately $0.8 million primarily due to the payment of current year insurance policies, a decrease in accrued expenses of approximately $5.6 million due primarily to the payment of accrued compensation, a decrease in deferred revenue of approximately $2.1 million due to the recognition of deferred tooling and development revenue, and a decrease in other long-term liabilities of approximately $1.4 million due primarily to non-compete payments.

Current wording

These cash inflows and adjustments to income were partially offset by an increase in inventory of approximately $7.3 million due to inventory build for upcoming demand, an increase in prepaid expenses of approximately $1.0 million primarily due to the payment of current year insurance policies, an increase in refundable income taxes of $0.4 million due to the timing of payment of tax estimates, a decrease in accrued expenses of approximately $2.1 million due primarily to the payment of accrued compensation, a decrease in deferred revenue of approximately $2.1 million due to the recognition of deferred tooling and development revenue, and a decrease in other long-term liabilities of approximately $6.9 million due primarily to non-compete payments and payments of contingent consideration.

Previous wording

Net cash used in investing activities during the three-month period ended March 31, 2024 was approximately $1.7 million and was primarily the result of additions of manufacturing machinery and equipment and various building improvements across the Company.

Current wording

Net cash used in investing activities during the six-month period ended June 30, 2024 was approximately $9.1 million and was primarily the result of the acquisition of Marble Medical, and the additions of manufacturing machinery and equipment and various building improvements across the Company.

Previous wording

Net cash used for financing activities was approximately $2.7 million during the three-month period ended March 31, 2024 and was primarily the result of payments on the revolving line of credit of approximately $3.0 million, principal payments of long-term debt of approximately $2.0 million, and payments of statutory withholding for stock options exercised and restricted stock units vested of approximately $4.7 million. These payments were partially offset by borrowings under our revolving line of credit of approximately $7.0 million.

Current wording

Net cash used for financing activities was approximately $1.7 million during the six-month period ended June 30, 2024 and was primarily the result of payments on the revolving line of credit of approximately $10.0 million, principal payments of long-term debt of approximately $32.0 million, payments of contingent consideration of approximately $0.2 million and payments of statutory withholding for stock options exercised and restricted stock units vested of approximately $4.7 million. These payments were partially offset by borrowings under our revolving line of credit of approximately $45.2 million.

Previous wording

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 Second Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of February 1, 2018.

Current wording

On June 27, 2024, the Company, as the borrower, entered into a secured $275 million Amended and Restated Credit Agreement (the “Third 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 Third Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of December 22, 2021.

Previous wording

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, under which the Company may borrow up to $90 million. The Second Amended and Restated Credit Agreement matures on December 21, 2026. The secured term loan requires quarterly principal payments of $1 million that commenced 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 permitted acquisitions. The Company’s obligations under the Second Amended and Restated Credit Agreement are guaranteed by Subsidiary Guarantors and secured by substantially all assets of the Company.

Current wording

The credit facilities under the Third Amended and Restated Credit Agreement consist of a secured term loan to the Company of up to $125 million and a secured revolving credit facility, under which the Company may borrow up to $150 million. The Third Amended and Restated Credit Facilities mature on June 27, 2029. This maturity date is subject to acceleration and the Company could be subject to additional fees and expenses in certain circumstances should one or more events of default described in the Third Amended and Restated Credit Agreement occur. The secured term loan requires quarterly principal payments of $3,125,000 that commence on December 31, 2024. The proceeds of the Third Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of AJR Enterprises, LLC, as well as certain other permitted acquisitions. The Company’s obligations under the Third Amended and Restated Credit Agreement are guaranteed by Subsidiary Guarantors and secured by substantially all assets of the Company.

Previous wording

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 0.25% 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.

Current wording

The Third Amended and Restated Credit Facilities call for interest of SOFR plus a margin that ranges from 1.25% to 2.25% or, at the discretion of the Company, the bank’s prime rate plus a margin that ranges from .25% to 1.25%. In both cases the applicable margin is dependent upon Company performance. Under the Third 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 Third Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments.

Previous wording

At March 31, 2024, the Company had approximately $30 million in borrowings outstanding under the Second Amended and Restated Credit Agreement, which were used as partial consideration for the DAS Medical and Advant Medical 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 March 31, 2024, the applicable interest rate was approximately 6.6% and the Company was in compliance with all covenants under the Second Amended and Restated Credit Agreement.

Current wording

At June 30, 2024, the Company had approximately $35.2 million in borrowings outstanding under the Third Amended and Restated Credit Agreement, 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 June 30, 2024, the applicable interest rate was approximately 6.9% and the Company was in compliance with all covenants under the Third Amended and Restated Credit Agreement.

Previous wording

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 Second Amended and Restated Credit Agreement. The Company generated cash of approximately $10.7 million from operations during the three-month period ended March 31, 2024. 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 availability of draws on its revolving credit facility. Further, the economic uncertainty resulting from events including inflation, bank failures, and other factors beyond the control of the Company 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.

Current wording

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 Third Amended and Restated Credit Agreement. The Company generated cash of approximately $22.4 million from operations during the six-month period ended June 30, 2024. 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 availability of draws on its revolving credit facility. Further, the economic uncertainty resulting from events including inflation, bank failures, and other factors beyond the control of the Company 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.

Previous wording

The Company accounts for treasury stock under the cost method, using the first-in, first-out cost 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. There were no share repurchases during the three-month periods ended March 31, 2024 and 2023. At March 31, 2024, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.

Current wording

The Company accounts for treasury stock under the cost method, using the first-in, first-out cost 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. There were no share repurchases during the six-month periods ended June 30, 2024 and 2023. At June 30, 2024, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.