# UFP TECHNOLOGIES INC (UFPT) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from UFP TECHNOLOGIES INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/914156/000117184325001192/ufpt20241231_10k.htm
Accession: 0001171843-25-001192
Filing date: 2025-03-03
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/UFPT/
All MD&A years: /company/UFPT/mda/
Previous year: /company/UFPT/mda/fy2023/ (FY 2023)
Next year: /company/UFPT/mda/fy2025/ (FY 2025)

ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company is a designer and custom manufacturer of comprehensive solutions for medical devices, sterile packaging, and other highly engineered custom products. The Company is an important link in the medical device supply chain and a valued outsource partner to many of the top medical device manufacturers in the world. The Company’s single-use and single-patient devices and components are used in a wide range of medical devices and packaging for minimally invasive surgery, infection prevention, surfaces and support, wound care, wearables, orthopedic soft goods, and orthopedic implants.

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

The Company completed four strategic acquisitions during the year ended December 31, 2024. The acquired operations primarily serve the medical market and contributed to an overall 26.1% increase in net sales for the year. Organic net sales grew 8.5%, fueled by strong sales in the robotic surgery and infection prevention markets. Net sales relating to our largest customer, Intuitive Surgical SARL, were 28.8% of our net sales for the year ended December 31, 2024. This increase in net sales as well as strong margins and the leverage of relatively fixed SG&A costs, allowed the Company to generate a 40.3% and 31.3% increase in operating income and net income, respectively, for the year ended December 31, 2024.

21

Results of Operations

The following table sets forth, for the years indicated, the percentage of net sales represented by the items as shown in the Company’s Consolidated Statements of Income:

[[GREPCENT_TABLE]]
[["","","2024","","","2023","","","2022"],["Net sales","","","100.0","%","","","100.0","%","","","100.0","%"],["Cost of sales","","","70.9","%","","","71.9","%","","","74.5","%"],["Gross profit","","","29.1","%","","","28.1","%","","","25.5","%"],["Selling, general, and administrative expenses","","","12.3","%","","","12.7","%","","","12.9","%"],["Acquisition costs","","","0.5","%","","","0.0","%","","","0.3","%"],["Change in fair value of contingent consideration","","","0.2","%","","","0.9","%","","","2.8","%"],["Gain on sale of Molded Fiber business","","","0.0","%","","","0.0","%","","","-4.4","%"],["Loss (gain) on sale of fixed assets","","","0.0","%","","","0.1","%","","","-1.8","%"],["Operating income","","","16.1","%","","","14.4","%","","","15.7","%"],["Interest expense, net","","","1.6","%","","","0.9","%","","","0.8","%"],["Income before taxes","","","14.5","%","","","13.5","%","","","14.9","%"],["Income tax expense","","","2.8","%","","","2.3","%","","","3.1","%"],["Net income from consolidated operations","","","11.7","%","","","11.2","%","","","11.8","%"]]
[[/GREPCENT_TABLE]]

2024 Compared to 2023

Net Sales

Net sales increased 26.1% to $504.4 million for the year ended December 31, 2024, from net sales of $400.1 million for the same period in 2023. We attribute the increase in net sales primarily to increased net sales from newly acquired companies of $70.3 million as well as 8.5% increased organic net sales fueled by increases in the robotic surgery and infection prevention markets. Overall net sales to customers in the medical market increased 30.2% while net sales to customers in other markets were flat. Medical net sales represented 89.4% and 86.6% of overall Company net sales in 2024 and 2023, respectively.

Gross Profit

Gross profit as a percentage of net sales (“Gross Margin”) increased to 29.1% for the year ended December 31, 2024, from 28.1% in 2023.  As a percentage of net sales, material costs decreased 1.8% while overhead and labor costs collectively increased 0.8%. We attribute the increase in gross margin primarily 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 were achieved despite the absorption of approximately $1.1 million in purchase accounting expenses (step-up of inventory to fair value at acquisition date).

Selling, General and Administrative Expenses

Selling, General, and Administrative Expenses (“SG&A”) increased approximately 22.3% to $62.2 million for the year ended December 31, 2024, from $50.9 million 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 net sales, SG&A decreased to 12.3% for the year ended December 31, 2024, from 12.7% for the same period in 2023 reflecting the leverage of the net sales increase over relatively fixed SG&A. The Company plans on investing in back-office resources in response to the significant acquisitions completed during 2024.

Acquisition Costs

The Company incurred approximately $2.5 million in costs associated with acquisition related activities which were charged to expense for the year ended December 31, 2024. These costs were primarily for legal, due diligence and valuation services and are reflected on the face of the consolidated statements of comprehensive income.

22

Change in fair value of contingent consideration

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 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 December 31, 2024 totaled approximately $10.2 million out of the remaining potential payments of $14.5 million. The change in fair value of contingent consideration for the acquisitions for the year ended December 31, 2024, resulted in an expense of approximately $1.0 million, and is included in change in fair value of contingent consideration in the consolidated statements of comprehensive income.

Interest expense, net

The Company had net interest expense of approximately $8.1 million and $3.6 million for the year ended December 31, 2024 and 2023, respectively. The increase in net interest expense for the year ended December 31, 2024 was primarily due to higher debt related to 2024 acquisitions. Interest income was immaterial.

Other (Income) Expense

Other income was approximately $189 thousand and other expense was approximately $117 thousand for the years ended December 31, 2024 and 2023, respectively. The changes in other income/expense are primarily generated by equity method investment income in 2024 and foreign currency transaction gains/losses in both 2024 and 2023.

Income Taxes

The Company recorded income tax expense, as a percentage of income before income tax expense, of 19.2% for the year ended December 31, 2024 compared to 16.7% for the same period in 2023. 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 United States based income in 2024 as a result of the recent acquisitions.

The effective tax rate for the year differs from the federal statutory rate of 21% due to favorable rates in foreign countries, federal deductions available for certain exported goods and federal credits, offset by state income taxes and disallowed compensation under section 162M of the Internal Revenue Code.

The Company notes the potential for volatility in its effective tax rate, as any windfall or shortfall tax benefits related to its share-based compensation plans will be recorded directly into income tax expense.

For more information about the Company’s results of operations of 2023 compared to 2022, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — 2023 Compared to 2022” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 29, 2024.

Liquidity and Capital Resources

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

Cash Flows

Net cash provided by operations for the year ended December 31, 2024 was approximately $66.6 million and was primarily a result of net income generated of approximately $59.0 million, depreciation and amortization of approximately $14.7 million, share-based compensation of approximately $6.8 million, a change in the fair value of contingent consideration of approximately $1.0 million, an increase in net deferred income tax liabilities of approximately $ 1.3 million, a decrease in accounts receivable of approximately $1.2 million due to the collection of an escrow receivable, and a decrease in other assets of approximately $0.6 million.

23

These cash inflows and adjustments to income were partially offset by an increase in inventory of approximately $4.7 million due to inventory build for upcoming demand, an increase in prepaid expenses of approximately $0.5, an increase in refundable income taxes of approximately $3.4 million due to conservative estimated tax payments in in 2024, a decrease in accounts payable of approximately $1.1 million due to the timing of vendor payments in the ordinary course of business, a decrease in deferred revenue of approximately $1.9 million due to the recognition of development revenue and a decrease in other long-term liabilities of approximately $6.5 million due primarily to non-compete payments and payments of contingent consideration.

Net cash used in investing activities for the year ended December 31, 2024 was approximately $210.2 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.

Net cash provided by financing activities was approximately $152.4 million for the year ended December 31, 2024 and was primarily the result of borrowings under the Company’s Third Amended and Restated Credit Agreement of approximately $284.2 million to recent acquisitions. These borrowings were partially offset by payments on the revolving line of credit of approximately $91.7 million, principal payments of long-term debt of approximately $35.1 million, and payments of statutory withholding for stock options exercised and restricted stock units vested of approximately $5.0 million.

Outstanding and Available Debt

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.

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 certain acquisitions (see Note 2 for more information regarding this acquisition), 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.

The Third Amended and Restated Credit Facilities call for interest at Secured Overnight Financing Rate (“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.

At December 31, 2024, the Company had approximately $189.4 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 December 31, 2024, the weighted average interest rate was approximately 5.9% and the Company was in compliance with all covenants under the Third Amended and Restated Credit Agreement.

24

Long-term debt consists of the following (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2024"],["Revolving credit facility","","$","67,500"],["Term loan","","","121,875"],["Total long-term debt","","","189,375"],["Current portion","","","(12,500",")"],["Long-term debt, excluding current portion","","$","176,875"]]
[[/GREPCENT_TABLE]]

Future maturities of long-term debt at December 31, 2024 are as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Term Loan","","","Revolving credit facility","","","Total"],["2025","","","12,500","","","","-","","","","12,500"],["2026","","","12,500","","","","-","","","","12,500"],["2027","","","12,500","","","","-","","","","12,500"],["2028","","","12,500","","","","-","","","","12,500"],["2029","","","71,875","","","","67,500","","","","139,375"],["","","$","121,875","","","$","67,500","","","$","189,375"]]
[[/GREPCENT_TABLE]]

Future Liquidity

The Company requires cash to pay its operating expenses, purchase capital equipment, and to service its contractual obligations. The Company’s principal sources of funds are its operations and its Second Amended and Restated Credit Agreement. The Company generated cash of approximately $66.6 million from operations during the year ended December 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 the 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.

The Company plans to continue to add capacity to enhance operating efficiencies in its manufacturing plants and accommodate anticipated growth in demand. The Company may consider additional acquisitions of companies, technologies, or products that are complementary to its business. The Company believes that its existing resources, including its revolving credit facility, together with cash expected to be generated from operations, will be sufficient to fund its cash flow requirements, including capital asset acquisitions, through the next twelve months.

The Company may also require additional capital in the future to fund capital expenditures, acquisitions, or other investments. These capital requirements could be substantial. The Company anticipates that any future expansion of its business will be financed through existing resources, cash flow from operations, the Company's revolving credit facility, or other new financing. The Company cannot guarantee that it will be able to meet existing financial covenants or obtain other new financing on favorable terms, if at all.

Stock Repurchase Program

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 years ended December 31, 2024, 2023, and 2022. At December 31, 2024, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.

25

Critical Accounting Estimates

The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales, and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates its estimates, including those listed below, on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, including current and anticipated worldwide economic conditions, both in general and specifically in relation to the packaging and component product industries, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Report. The Company believes the following critical accounting policy necessitated that significant judgments and estimates be used in the preparation of its consolidated financial statements.

Valuation of Intangible Assets and Contingent Consideration Liability

We base the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. Further, for those arrangements that involve potential future contingent consideration, we record on the date of acquisition a liability equal to the fair value of the estimated additional consideration we may be obligated to pay in the future. We remeasure this liability each reporting period and record changes in the fair value through a separate line item within our consolidated statements of comprehensive income. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount rates, periods, timing and amount of projected revenue or timing or likelihood of achieving regulatory, revenue or commercialization-based milestones. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows, discount rates, useful life or probability of achieving clinical, regulatory or revenue-based milestones could result in different purchase price allocations and recognized amortization expense and contingent consideration expense or benefit in current and future periods.