<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
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: 0-12648
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UFP Technologies, Inc.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2314970
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
172 East Main Street, Georgetown, Massachusetts 01833, USA
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(978) 352-2200
--------------
(Registrant's telephone number, including area code)
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 filings
requirements for the past 90 days.
Yes X No
----- ----
As of November 12, 1998, there were 4,707,354 shares of registrant's Common
Stock, $.01 par value, outstanding.
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UFP TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Income Statements
Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION 11
SIGNATURES 12
</TABLE>
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UFP Technologies, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
30-Sep-98 31-Dec-97
ASSETS Unaudited Audited
-------------------- -------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 559,813 233,452
Receivables, net 7,356,009 6,413,251
Inventories (note 2) 3,231,666 3,053,299
Prepaid expenses and other current
assets 79,307 146,800
--------------- --------------
Total current assets 11,226,795 9,846,802
Property, plant and equipment 21,060,887 20,110,727
Less accumulated depreciation and
amortization (10,156,502) (8,920,621)
--------------- --------------
Net property, plant and equipment 10,904,385 11,190,106
Goodwill, net 2,413,367 2,539,367
Other assets 1,527,264 1,618,492
--------------- --------------
Total assets $ 26,071,811 25,194,767
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,600,000 2,500,000
Current installments of long-term
debt 54,831 111,888
Current installments of capital lease
obligations 954,386 913,170
Accounts payable 1,906,989 1,540,377
Accrued expenses and payroll 3,000,391 2,202,817
--------------- --------------
Total current liabilities 7,516,597 7,268,252
Long-term debt, excluding current
installments 586,305 624,641
Capital lease obligations, excluding
current installments 1,913,977 2,608,768
Retirement and other liabilities 704,896 559,896
--------------- --------------
Total liabilities 10,721,775 11,061,557
--------------- --------------
Stockholders' equity
Preferred stock 0 0
Common stock 47,073 46,664
Additional paid-in capital 9,613,859 9,499,019
Retained earnings 5,689,104 4,587,527
--------------- --------------
Total stockholders' equity 15,350,036 14,133,210
--------------- --------------
Total liabilities and stockholders'
equity $ 26,071,811 25,194,767
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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UFP Technologies, Inc.
Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ---------------------------------------
30-Sep-98 30-Sep-97 30-Sep-98 30-Sep-97
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 12,661,734 11,440,309 34,729,759 33,600,624
Cost of sales 9,143,693 8,266,699 25,218,157 24,662,526
------------------- ------------------- ------------------ ------------------
Gross profit 3,518,041 3,173,610 9,511,602 8,938,098
Selling, general and
administrative expenses 2,572,460 2,353,399 7,283,700 6,973,435
------------------- ------------------- ------------------ ------------------
Operating income 945,581 820,211 2,227,902 1,964,663
Interest expense 125,106 171,064 403,990 481,752
Other income (6,751) - (42,665) -
------------------- ------------------- ------------------ ------------------
Income before income taxes 827,226 649,147 1,866,577 1,482,911
Income taxes 335,000 268,000 765,000 618,000
------------------- ------------------- ------------------ ------------------
Net income $ 492,226 381,147 1,101,577 864,911
------------------- ------------------- ------------------ ------------------
------------------- ------------------- ------------------ ------------------
Basic net income per share $ 0.10 0.08 0.24 0.19
Diluted net invome per share $ 0.10 0.08 0.23 0.18
Weighted average number of
shares used in computation of per
share data:
Basic 4,688,441 4,662,054 4,675,590 4,651,114
Diluted 4,786,905 4,838,372 4,832,057 4,871,519
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
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UFP Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------
30-Sep-98 30-Sep-97
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,101,577 864,911
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,361,881 1,281,235
Equity in net (income)/loss of unconsolidated affiliate
and partnership (17,984) 8,590
Deferred income taxes 523 0
Stock issued in lieu of compensation 44,000 33,750
Changes in operating assets and liabilities:
Receivables, net (942,758) (209,531)
Inventories (178,367) (777,259)
Prepaid expenses and other current assets 67,493 242,760
Accounts payable 366,612 (299,305)
Accrued expenses and payroll withholdings 797,574 473,360
Retirement and other liabilities 145,000 45,000
--------------- ---------------
Net cash provided by operating activities 2,745,551 1,663,511
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (950,160) (1,186,311)
Acquisition of Foam Cutting Engineers, net of cash acquired 0 (1,512,879)
Decrease in other assets 108,689 33,646
--------------- ---------------
Net cash used in investing activities (841,471) (2,665,544)
--------------- ---------------
Cash flows from financing activities:
Net (repayment)/borrowings under notes payable (900,000) 1,900,000
Principal repayments of long-term debt (95,393) (140,898)
Principal repayments of capital lease obligations (653,575) (529,085)
Net proceeds from sale of common stock 71,249 60,662
--------------- ---------------
Net cash (used in)/provided by financing activities (1,577,719) 1,290,679
--------------- ---------------
Net change in cash and cash equivalents 326,361 288,646
Cash and cash equivalents, at beginning of period 233,452 143,531
--------------- ---------------
Cash and cash equivalents, at end of period $ 559,813 432,177
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
UFP TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The interim consolidated financial statements of UFP Technologies,
Inc. (the Company) presented herein, without audit, 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
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1997,
included in the Company's 1997 Annual Report on Form 10-K as provided to
the Securities and Exchange Commission.
The condensed consolidated balance sheet as of September 30, 1998,
the consolidated income statements for the three and nine months ended
September 30, 1998 and 1997, and the consolidated statements of cash
flows for the nine months ended September 30, 1998 and 1997, are
unaudited but, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments) necessary for fair
presentation of results for these interim periods.
The results of operations for the nine months ended September 30,
1998, are not necessarily indicative of the results to be expected for
the entire fiscal year ending December 31, 1998.
(2) Inventory
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
<TABLE>
<CAPTION>
30-Sep-98 31-Dec-97
--------- ---------
<S> <C> <C>
Raw materials $ 1,989,540 $ 1,933,740
Work-in-process 521,609 395,592
Finished goods 720,517 723,967
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Total Inventory 3,231,666 3,053,299
---------- ----------
---------- ----------
</TABLE>
Work-in-process and finished goods inventories consist of materials,
labor and manufacturing overhead.
(3) Common Stock
At December 31, 1997, 697,500 options were outstanding under the
Company's 1993 Employee Stock Option Plan ("1993 Plan"). The purpose of
these options is to provide long-term rewards and incentives to the
Company's key employees, officers, employee directors, consultants and
advisors. There were 102,500 options issued and 30,000 options exercised
in the first nine months of 1998 under the 1993 Plan, and 25,000 options
were canceled. At September 30, 1998, 745,000 options were outstanding
under the 1993 Plan.
At December 31, 1997, 40,000 options were outstanding under the
Company's 1993 Non-Employee Director Plan ("1993 Director's Plan"). There
were 10,000 options issued and no
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options were exercised or expired in the first nine months of 1998. At
September 30, 1998, 50,000 options were outstanding under the 1993
Director's Plan.
Effective July 15, 1998, subject to shareholder approval, the Company
adopted the 1998 Director Stock Option Incentive Plan ("1998 Director's
Plan") for the benefit of non-employee directors of the Company. In
connection with the adoption of the 1998 Director's Plan, the 1993
Director's Plan was discontinued; however, the options outstanding under
the 1993 Director's Plan were not affected by the adoption of the new
plan. During the period July 15, 1998 through September 30, 1998, 14,800
options were granted under the 1998 Director's Plan. No options were
exercised or expired under the 1998 Director's Plan during such period.
At September 30, 1998, options to acquire an aggregate of 14,800 shares
were outstanding under the 1998 Director's Plan.
(4) Earnings per share
The Company has adopted the provisions of the Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share
with a calculation of basic and diluted earnings per share. Basic
earnings per share is computed based on the weighted average number of
shares of common stock outstanding. Diluted earnings per share is based
upon the weighted average of common shares and dilutive common stock
equivalent shares outstanding during each period. All earnings per share
amounts for all periods have been restated to conform to SFAS No. 128
requirements. The weighted average number of shares used to compute
diluted income per share consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
30-Sep-98 30-Sep-97 30-Sep-98 30-Sep-97
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Weighted average common 4,688,441 4,662,054 4,675,590 4,651,114
shares outstanding
Weighted average common
equivalent shares due to
stock options 98,464 176,318 156,467 220,405
----------------- ----------------- ----------------- -----------------
4,786,905 4,838,372 4,832,057 4,871,519
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sales
Net sales for the three-month period ended September 30, 1998, were $12.7
million or 10.7% above sales of $11.4 million in the same period last year.
Sales for the nine-month period ended September 30, 1998, increased 3.4% to
$34.7 million from $33.6 million last year. The increase in sales is
attributable to volume growth in both the plastics and moulded fibre components
of our packaging business.
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Gross Profit
Gross profit as a percentage of sales (gross margin) increased in both the
three- and nine-month periods ended September 30, 1998, over the respective
periods last year. Gross margin for the three-month period ended September 30,
1998 and 1997, was 27.8% and 27.7% respectively. Gross margins were 27.4% and
26.6% for the respective nine-month periods. The increases in gross margin are
attributable to a favorable product mix and continued favorable overhead
absorption at certain plants.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses ("SG&A") were $2,572,000 for the
three-month period ended September 30, 1998, or 9.3% higher than $2,353,000
in the same period a year ago. For the nine-month period ended September 30,
1998, SG&A expenses increased by 4.4% to $7,284,000 from $6,973,000 in the
same period a year ago. The increase primarily results from additions to the
management team, implementation of new computer hardware and software, and
increases in certain volume related expenses, such as sales commissions.
Other
Interest expense for the three-month period ended September 30, 1998, decreased
to $125,000 from $171,000 in the comparable last year period. For the nine-month
period ended September 30, 1998, interest expense decreased to $404,000 from
$482,000 for the last year period. The decline in both periods is primarily due
to lower average borrowings.
The Company's effective tax rate for the three- and nine-month periods ended
September 30, 1998, were 40.5% and 41% compared to 41.3% and 41.7% for the same
periods last year.
Liquidity and Capital Resources
The Company funds its operating expenses, capital requirements, and growth plan
through internally generated cash, bank credit facilities, and long-term capital
leases.
At September 30, 1998 and December 31, 1997, the Company's working capital was
approximately $3,710,000 and $2,579,000 respectively. The increase in working
capital is primarily due to increases in cash and accounts receivable due to
higher sales volume. During the nine-month period ended September 30, 1998,
operations provided cash of $2,746,000, an increase of $1,082,000 over the same
period last year. The increase in cash is primarily a result of higher earnings,
offset by increases in accounts receivable and inventories. Accounts payable and
accrued liabilities also increased due to higher sales volume. Cash used for
investing activities of $841,000 decreased from last year by approximately
$1,824,000 due to the acquisition of Foam Cutting Engineers, Inc. of $1,513,000.
Also, capital expenditures, primarily for machinery and equipment, decreased
from $1,186,000 to $950,000.
Net cash used in financing activities for the nine-month period ended September
30, 1998, was approximately $1,578,000 compared to cash provided from financing
of approximately $1,291,000 in the same period last year. The large difference
is due to the prior year borrowings related to the acquisition of Foam Cutting
Engineers, Inc. and the utilization in the current year of cash provided from
operations to reduce debt.
While the Company does not have any significant capital commitments, it intends
to continue to invest in capital equipment to support its operations. The
Company is also engaged in discussions with
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certain parties regarding potential strategic acquisitions, but presently does
not have any agreements to enter into any such acquisitions. The Company intends
to fund any such acquisitions with working capital and bank financing. There can
be no assurances that such financing would be available on favorable terms, if
at all.
The Company has a $7,500,000 revolving bank loan facility, of which $1,600,000
was outstanding on September 30, 1998. Borrowings through this credit facility
are unsecured, and bear interest at LIBOR plus 1.75% or prime. In addition, at
September 30, 1998, the Company had capital lease obligations and other notes
payable of approximately $2,868,000 and $641,000 respectively. At September 30,
1998, the current portion of all debt, including the revolving bank loan, was
approximately $2,609,000.
The Company believes that its existing resources, including its revolving loan
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 through at
least the next twelve months. However, there can be no assurances that such
financing will be available at favorable terms, if at all.
Year 2000 Compliance
The Year 2000 issue is the potential for system and processing failure of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has established a Year 2000 Compliance Committee (the "Committee)
which is comprised of members of senior management, finance, MIS, operations and
engineering. The committee's mandate is to design and implement a Compliance
Plan that minimizes the risk of material adverse impact to the Company resulting
from events triggered by the turn of the century.
The Committee has defined three categories of internal elements that are subject
to risk; computer hardware and software, manufacturing equipment and building
equipment. Computer hardware and software includes networking, operating and
application software currently being used by the Company as well as those that
are planned to be installed prior to the year 2000, and the hardware platforms
upon which they operate. Manufacturing equipment includes machinery and
equipment, owned or leased, that is used by the Company in the process of
manufacturing inventory for resale. Building equipment includes all other
devices that potentially have microprocessing chips that were not included in
computer hardware and software and manufacturing equipment, including, but not
limited to, fax machines, security systems, heating/air conditioning, telephone
and other communication systems, copiers, sprinklers and elevators.
The approach for minimizing risk of noncompliance within each of these elements
includes four distinct phases: Inventory, Assessment, Conversion and
Implementation. In the Inventory phase the Company identifies the items within
each of the three previously defined elements. The Company has substantially
completed this phase. The Assessment phase includes identifying which of the
items in the inventory are noncompliant. The items in Inventory are assessed in
an order of priority based upon the Committee's opinion of their relative
importance to the Company's operations. The Company has started the assessment
phase for many of the items in the computer hardware and software
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and the manufacturing equipment elements. The Company is in the early stages of
assessment on building equipment.
In the Conversion phase the Company repairs or replaces those items that are
noncompliant. The Company is in the process of implementing new financial and
manufacturing software ("New Software") throughout all of its plants that is
Year 2000 compliant which should result in substantial compliance within the
computer hardware and software element. While the Assessment phase is not yet
complete, the Company has not yet identified a manufacturing machine that is
not Year 2000 compliant. In the Implementation phase, the Company plans to
put into operation repaired or new devices that are Year 2000 compliant. At
this time, the Company expects the implementation of the new software systems
and their related hardware platforms to extend into the third quarter of 1999.
Independent of its own internal elements, the Company is dependent upon the
customers who order its products and upon numerous third parties who supply
various items including materials, supplies, services, utilities and other items
the Company uses in the ordinary course of business. Included within these third
parties is a group of several key foam raw material suppliers that collectively
supply a significant portion of the Company's foam used in production. The
Company is in the early stages of evaluating the compliance status of its
customers and third party suppliers. However, the Company may not ever be able
to estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties, such as its suppliers, service providers and
customers, to achieve Year 2000 compliance. Moreover, such third parties, even
if Year 2000 compliant, could experience difficulties resulting from Year 2000
issues relating to their suppliers, service providers and customers. As a
result, although the Company does not currently anticipate that it will
experience any significant shipment delays from its major suppliers or any major
sales delays from its major customers due to Year 2000 issues, the Company
cannot provide any assurance that these third parties will not experience Year
2000 problems or that any may have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company has included the cost of the New Software in its financial plan for
1998 and 1999. The software and hardware costs will be capitalized and
depreciated in compliance with the Company's capitalization policy. Although the
decision to implement the New Software potentially resolves the Year 2000
problem for the majority of the Company's computer applications, it was made for
operating reasons and is considered normal capital expenditures. As a result,
the Company does not expect to incur material costs above and beyond the cost of
implementing the New Software.
The Company expects to be substantially compliant by the Year 2000, but can give
no assurance as to the readiness of its key material and service providers. As a
result, the Company expects to complete, by mid 1999, a Contingency Plan (the
"Plan") that will address the operating issues in the event that any of its
material or service providers fail to perform as a result of a Year 2000
problem. In addition, the Plan will address operating considerations in the
event that any of the Company's internal elements fail to perform as expected.
The Company can give no assurance that the Plan will be effective.
To the extent that the Company does not identify or properly address any
material noncompliant systems or equipment operated by the Company or by third
parties, such as the Company's suppliers, service providers and customers, the
most reasonably likely worst case Year 2000 scenario is a systemic failure
beyond the control of the Company, such as a prolonged telecommunications or
electrical failure, or a general disruption in the United States or global
business activities that could result in a significant economic downturn. The
Company believes that the primary business risks, in the event of such failure
or other disruption, would include but not be limited to, loss of customers or
orders, increased operating costs, inability to obtain inventory on a timely
basis, disruptions in product ship-
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ments, or other business interruptions of a material nature, as well as claims
of mismanagement, misrepresentation, or breach of contract, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
* * *
PART II - OTHER INFORMATION
UFP TECHNOLOGIES, INC.
Item 1 Legal Proceedings.
No material litigation.
Item 2 Changes in Securities.
None
Item 3 Defaults Upon Senior Securities.
None
Item 4 Submission of Matters to a Vote of Security Holders.
None
Item 5 Other Information.
None
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits furnished:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file a report on Form 8-K for the
reporting period.
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UFP TECHNOLOGIES, INC.
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.
(Registrant)
November 13, 1998 /s/ R. Jeffrey Bailly
- ----------------- -----------------------
Date R. Jeffrey Bailly
President, Chief Executive
Officer and Director
November 13, 1998 /s/ Ron Lataille
- ----------------- -----------------------
Date Ron Lataille
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000914156
<NAME> UFP TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 560
<SECURITIES> 0
<RECEIVABLES> 7,594
<ALLOWANCES> 238
<INVENTORY> 3,232
<CURRENT-ASSETS> 11,227
<PP&E> 21,061
<DEPRECIATION> 10,157
<TOTAL-ASSETS> 26,072
<CURRENT-LIABILITIES> 7,517
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 15,303
<TOTAL-LIABILITY-AND-EQUITY> 26,072
<SALES> 34,730
<TOTAL-REVENUES> 34,730
<CGS> 25,218
<TOTAL-COSTS> 32,502
<OTHER-EXPENSES> (43)
<LOSS-PROVISION> 48
<INTEREST-EXPENSE> 404
<INCOME-PRETAX> 1,867
<INCOME-TAX> 765
<INCOME-CONTINUING> 1,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,102
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
