UFP TECHNOLOGIES INC

Previous 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.

Current wording

Net sales for the three-month period ended September 30, 2024 increased approximately 44.0% to $145.2 million from sales of $100.8 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 52.2%, primarily led by increased sales from the Company’s recent acquisitions as well as 7.9% increased organic sales fueled by increases in the robotic surgery and infection prevention markets.

Previous wording

Net sales for the six-month period ended June 30, 2024 increased approximately 8.8% to $215.2 million from sales of $197.8 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 9.1%, primarily led by increased sales of robotic surgery and infection prevention products in response to increased procedures. Net sales to all other markets increased 6.9% largely due to a 41.5% increase in sales to the aerospace and defense market.

Current wording

Net sales for the nine-month period ended September 30, 2024 increased approximately 20.7% to $360.4 million from sales of $298.6 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 23.7%, primarily led by increased sales from the Company’s recent acquisitions as well as 7.1% increased organic sales fueled by increases in the robotic surgery and infection prevention markets.

Previous wording

Gross margin increased to 30.0% for the three-month period ended June 30, 2024, from 29.6% for the same period in 2023. As a percentage of sales, material and labor costs collectively decreased 0.8% while overhead costs increased 0.4%. The increase in gross margin is primarily due to increased manufacturing efficiencies as well as the containment of fixed overhead costs.

Current wording

Gross margin increased to 28.6% for the three-month period ended September 30, 2024, from 27.5% for the same period in 2023. As a percentage of sales, material and overhead costs collectively decreased 3.2% while labor costs increased 2.1%. The increase in gross margin is primarily due to the accretive margins from the Company’s recent acquisitions as well as increased manufacturing efficiencies and the containment of fixed overhead costs.

Previous 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.

Current wording

Gross margin increased to 29.0% for the nine-month period ended September 30, 2024, from 28.8% for the same period in 2023. As a percentage of sales, material costs decreased 1.1% while overhead and labor costs collectively increased 0.8%. The increase in gross margin is primarily due to the accretive margins from the Company’s recent acquisitions as well as increased manufacturing efficiencies and the containment of fixed overhead costs. The gross margin increases for both the three- and nine-month periods ended September 30 were achieved despite the absorption of approximately $1 million in purchase accounting one-time costs.

Previous 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.

Current wording

Selling, general, and administrative expenses (“SG&A”) increased approximately 26.6% to $15.8 million for the three-month period ended September 30, 2024, from $12.5 million for the same period in 2023, largely due to SG&A from the Company’s recent acquisitions as well as increased performance-based compensation and professional fees. As a percentage of sales, SG&A decreased to 10.9% for the three-month period ended September 30, 2024, from 12.4% for the same three-month period in 2023 reflecting the leverage of the sales increase over relatively fixed SG&A

Previous wording

SG&A increased approximately 9.9% to $27.8 million for the six-month period ended June 30, 2024, from $25.3 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 slightly to 12.9% for the six-month period ended June 30, 2024, from 12.8% for the same six-month period in 2023.

Current wording

SG&A increased approximately 21.5% to $43.6 million for the nine-month period ended September 30, 2024, from $37.8 million for the same period in 2023, largely due to SG&A from the Company’s recent acquisitions as well as increased performance-based compensation and professional fees. As a percentage of sales, SG&A decreased to 12.1% for the nine-month period ended September 30, 2024, from 12.7% for the same nine-month period in 2023 reflecting the leverage of the sales increase over relatively fixed SG&A.

Previous wording

The Company incurred approximately $943 thousand in costs associated with acquisition related activities which were charged to expense for the three- and six-month periods ended June 30, 2024. These costs were primarily for legal and valuation services and are reflected on the face of the income statement.

Current wording

The Company incurred approximately $0.7 million and $1.7 million in costs associated with acquisition related activities which were charged to expense for the three- and nine-month periods ended September 30, 2024, respectively These costs were primarily for legal, due diligence and valuation services and are reflected on the face of the income statement.

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 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.

Current wording

In connection with the acquisitions of Welch and Marble in 2024, and DAS Medical in 2021, the Company is required to make contingent payments, subject to the entities achieving certain financial performance thresholds. The contingent consideration payments for the Welch, Marble and the DAS Medical acquisitions are up to $6 million, $500 thousand and $20 million, respectively. 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 $800 thousand, $400 thousand and $5.2 million for the Welch, Marble and the DAS Medical acquisitions, respectively, 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. Contingent consideration is considered to be a Level 3 financial liability that is re-measured each reporting period. The fair value of the liability for the contingent consideration payments recognized at September 30, 2024 totaled approximately $10.0 million out of the remaining potential payments of $16.5 million. The change in fair value of contingent consideration for the acquisitions for the three- and nine-month periods ended September 30, 2024, resulted in an expense of approximately $0.2 million and $0.7 million, respectively, and is included in change in fair value of contingent consideration in the condensed consolidated statements of comprehensive income.

Previous 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.

Current wording

Net interest expense was approximately $3.5 million and $0.9 million for the three-month periods ended September 30, 2024 and 2023, respectively. The increase in net interest expense for the three-month period ended September 30, 2024 was primarily due to higher debt related to 2024 acquisitions. Interest income was immaterial.

Previous wording

Net interest expense was approximately $1.2 million and $2.0 million for the six-month periods ended June 30, 2024 and 2023, respectively. The decrease in net interest expense for the six-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.

Current wording

Net interest expense was approximately $4.7 million and $2.9 million for the nine-month periods ended September 30, 2024 and 2023, respectively. The increase in net interest expense for the nine-month period ended September 30, 2024 was primarily due to higher debt related to 2024 acquisitions. Interest income was immaterial.

Previous 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.

Current wording

The Company recorded income tax expense of approximately 22.9% and 17.3% of income before income tax expense, for the three-month periods ended September 30, 2024 and 2023, respectively. The increase in the effective tax rate for the current period as compared to the prior period is largely due to the difference in discrete items during the two periods.

Previous wording

The Company recorded income tax expense of approximately 19.8% and 22.4% of income before income tax expense, for the six-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.

Current wording

The Company recorded income tax expense of approximately 21.0% and 20.7% of income before income tax expense, for the nine-month periods ended September 30, 2024 and 2023, respectively. The increase in the effective tax rate for the current period as compared to the prior period is largely due to the difference in discrete items during the two periods as well as more anticipated US based income in 2024 as a result of the recent acquisitions.

Previous 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.

Current wording

Net cash provided by operations for the nine-month period ended September 30, 2024 was approximately $42.2 million and was primarily a result of net income generated of approximately $42.6 million, depreciation and amortization of approximately $10.1 million, share-based compensation of approximately $4.8 million, a change in the fair value of contingent consideration of approximately $0.7 million, a decrease in deferred taxes of approximately $0.8 million, and a decrease 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 $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.

Current wording

These cash inflows and adjustments to income were partially offset by an increase in accounts receivable of approximately $2.9 million resulting primarily from an increase in sales from the last 60 days of Q3 2024 as compared to Q4 2023, partially offset by the collection of an escrow receivable, an increase in inventory of approximately $5.6 million due to inventory build for upcoming demand, an increase in prepaid expenses of approximately $0.9 million primarily due to the payment of current year insurance policies, an increase in refundable income taxes of $0.8 million due to the timing of payment of tax estimates, an increase in other assets of approximately $0.5 million, a decrease in accrued expenses of approximately $0.6 million due primarily to the net payment of accrued compensation, a decrease in deferred revenue of approximately $0.8 million due to the recognition of deferred tooling and development revenue, and a decrease in other long-term liabilities of approximately $5.4 million due primarily to non-compete payments and payments of contingent consideration.

Previous 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.

Current wording

Net cash used in investing activities during the nine-month period ended September 30, 2024 was approximately $206.3 million and was primarily the result of the acquisition of Marble Medical, AJR Enterprises, Welch Fluorocarbon, and AQF 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 $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.

Current wording

Net cash provided by financing activities was approximately $175.1 million during the nine-month period ended September 30, 2024 and was primarily the result of borrowings under the Company’s Third Amended and Restated Credit Agreement of approximately $240.2 million to recent acquisitions. These borrowings were partially offset by payments on the revolving line of credit of approximately $28.2 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.

Previous 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.

Current wording

The credit facilities under the Third Amended and Restated Credit Agreement consist of a secured term loan to the Company of$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

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.

Current wording

At September 30, 2024, the Company had approximately $212 million in outstanding borrowings 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 September 30, 2024, the applicable interest rate was approximately 6.5% 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 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.

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 $42.2 million from operations during the nine-month period ended September 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 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.

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 nine-month periods ended September 30, 2024 and 2023. At September 30, 2024, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.

Previous wording

There have been no material changes to the Company’s Critical Accounting Estimates, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

There have been no material changes to the Company’s Critical Accounting Estimates, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, with the exception of the item noted below: