The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Interim Condensed Consolidated Financial Statements
(1) Basis of Presentation
The interim condensed consolidated financial statements of UFP Technologies, Inc. (the “Company”) presented herein, 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 note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019, included in the Company's 2019 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, the condensed consolidated statements of income for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The results of operations for the three- and nine-month periods ended September 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2020.
Recent Accounting Pronouncements
There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial statements.
Revisions
Certain revisions have been made to the December 31, 2019 Condensed Consolidated Balance Sheet to conform to the current year presentation relating to a reclassification of long-term operating lease liabilities to current operating lease liabilities. The reclassification resulted in an increase of current operating lease liabilities of $476 thousand and a decrease of long-term operating lease liabilities of $476 thousand. These revisions had no impact on previously reported earnings, net income or cash flows and are deemed immaterial to the previously issued financial statements.
(2) Revenue Recognition
The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance, with the exception of certain tooling where control does not transfer to the customer, resulting in revenue being recognized over the estimated time for which parts are produced with the use of each respective tool. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill and hold transactions at the time the specified goods are complete and available to the customer. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the good and are expensed when revenue is recognized.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to the Company’s customers (in thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Net sales of:
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Products
|
|
$
|
41,072
|
|
|
$
|
47,400
|
|
|
$
|
128,853
|
|
|
$
|
144,386
|
|
|
Tooling and Machinery
|
|
|
887
|
|
|
|
952
|
|
|
|
2,210
|
|
|
|
1,920
|
|
|
Engineering services
|
|
|
1,340
|
|
|
|
1,042
|
|
|
|
3,157
|
|
|
|
1,814
|
|
|
Total net sales
|
|
$
|
43,299
|
|
|
$
|
49,394
|
|
|
$
|
134,220
|
|
|
$
|
148,120
|
|
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has deferred revenue or contract liabilities included within “deferred revenue” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract liabilities for the nine-month periods ended September 30, 2020 and 2019 (in thousands):
|
|
|
Contract Liabilities
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred revenue - beginning of period
|
|
$
|
2,574
|
|
|
$
|
2,507
|
|
|
Increases due to consideration received from customers
|
|
|
2,255
|
|
|
|
2,256
|
|
|
Revenue recognized
|
|
|
(2,883
|
)
|
|
|
(2,231
|
)
|
|
Deferred revenue - end of period
|
|
$
|
1,946
|
|
|
$
|
2,532
|
|
Revenue recognized during the nine-month periods ended September 30, 2020 and 2019 from amounts included in deferred revenue at the beginning of the period were approximately $1.5 million and $1.3 million, respectively.
When invoicing occurs after revenue recognition, the Company has unbilled receivables, or contract assets, included within “receivables” on the condensed consolidated balance sheet.
The following table presents opening and closing balances of contract assets for the nine-month periods ended September 30, 2020 and 2019 (in thousands):
|
|
|
Contract Assets
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Unbilled Receivables - beginning of period
|
|
$
|
72
|
|
|
$
|
65
|
|
|
Increases due to revenue recognized, not invoiced to customers
|
|
|
2,223
|
|
|
|
660
|
|
|
Decreases due to customer invoicing
|
|
|
(2,004
|
)
|
|
|
(712
|
)
|
|
Unbilled Receivables - end of period
|
|
$
|
291
|
|
|
$
|
13
|
|
(3) Supplemental Cash Flow Information
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
55
|
|
|
$
|
579
|
|
|
Income taxes, net of refunds
|
|
|
1,454
|
|
|
|
1,593
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Capital additions accrued but not yet paid
|
|
$
|
225
|
|
|
$
|
209
|
|
(4) Allowance for Credit Losses
Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (ASC 326) which is required to be applied by means of a cumulative-effect adjustment to the opening retained earnings balance as of the adoption date. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables and contract assets. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. There was no impact to the Company’s opening retained earnings or its consolidated balance sheet upon adoption.
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and included specific allowance amounts for any customer determined to have been significantly impacted. Estimates based on an assessment of anticipated payment and all other historical, current and future information that is reasonably available are used to determine the allowance.
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected for the nine months ended September 30, 2020 (in thousands):
|
|
|
Allowance for
Credit Losses
|
|
|
|
|
Nine Months Ended
September 30, 2020
|
|
|
Allowance - beginning of period
|
|
$
|
486
|
|
|
Provision for expected credit losses
|
|
|
182
|
|
|
Amounts written off against the allowance
|
|
|
(19
|
)
|
|
Allowance - end of period
|
|
$
|
649
|
|
(5) Fair Value of Financial Instruments
Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820, Fair Value Measurements and Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:
Level 1
Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3
Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The following table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):
|
Level 2
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
(538
|
)
|
|
$
|
(325
|
)
|
Derivative financial instruments consist of an interest rate swap for which fair value is determined through the use of a pricing model that utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals for the full term of the swap agreement.
The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, that are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.
(6) Share-Based Compensation
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2019. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
September 30,
|
|
|
Share-based compensation related to:
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Common stock grants
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
Stock option grants
|
|
|
59
|
|
|
|
60
|
|
|
|
173
|
|
|
|
91
|
|
|
Restricted Stock Unit Awards ("RSUs")
|
|
|
80
|
|
|
|
313
|
|
|
|
865
|
|
|
|
778
|
|
|
Total share-based compensation
|
|
$
|
239
|
|
|
$
|
473
|
|
|
$
|
1,338
|
|
|
$
|
1,169
|
|
The total income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements was approximately $60 thousand and $176 thousand for the three-month periods ended September 30, 2020 and 2019, respectively, and approximately $612 and $524 thousand for the nine-month periods ended September 30, 2020 and 2019, respectively.
The following is a summary of stock option activity under all plans for the nine-month period ended September 30, 2020:
|
|
|
Shares Under
Options
|
|
|
Weighted
Average
Exercise Price
(per share)
|
|
|
Weighted
Average Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Outstanding at December 31, 2019
|
|
|
105,614
|
|
|
$
|
25.34
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
14,892
|
|
|
|
43.95
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(25,993
|
)
|
|
|
18.24
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
94,513
|
|
|
$
|
30.22
|
|
|
|
6.28
|
|
|
$
|
1,096
|
|
|
Exercisable at September 30, 2020
|
|
|
75,871
|
|
|
$
|
27.60
|
|
|
|
5.81
|
|
|
$
|
1,048
|
|
|
Vested and expected to vest at September 30, 2020
|
|
|
94,513
|
|
|
$
|
30.22
|
|
|
|
6.28
|
|
|
$
|
1,096
|
|
On June 10, 2020, the Company granted options to its directors for the purchase of 14,892 shares of common stock at that day’s closing price of $43.95. The compensation expense related to these grants was determined as the fair value of the options using the Black-Scholes option pricing model based on the following assumptions:
|
Expected volatility
|
|
|
32.8
|
%
|
|
Expected dividends
|
|
|
None
|
|
|
Risk-free interest rate
|
|
|
0.3
|
%
|
|
Exercise price
|
|
$
|
43.95
|
|
|
Expected term (in years)
|
|
|
6.1
|
|
|
Weighted-average grant date fair value
|
|
|
14.10
|
|
The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option. The expected term is estimated based on historical option exercise activity.
During the nine-month periods ended September 30, 2020 and 2019, the total intrinsic value of all options exercised (i.e., the difference between the market price on the exercise date and the price paid by the employees to exercise the options) was approximately $757 thousand and $867 thousand, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $474 thousand and $562 thousand, respectively. At its discretion, the Company allows option holders to surrender previously-owned common stock in lieu of paying the exercise price and withholding taxes. During both the nine-month periods ended September 30, 2020 and 2019, zero shares were surrendered for this purpose.
On February 24, 2020, the Company’s Compensation Committee approved the award of $400 thousand, payable in shares of common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Incentive Plan. Subject to his continued employment and the terms of his employment agreement, the shares will be issued in December 2020.
The following table summarizes information about RSU activity during the nine-month period ended September 30, 2020:
|
|
|
Restricted
Stock Units
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
Outstanding at December 31, 2019
|
|
|
113,866
|
|
|
$
|
28.36
|
|
|
Awarded
|
|
|
25,312
|
|
|
|
48.83
|
|
|
Shares vested
|
|
|
(33,815
|
)
|
|
|
28.93
|
|
|
Shares forfeited
|
|
|
(11,506
|
)
|
|
|
35.49
|
|
|
Outstanding at September 30, 2020
|
|
|
93,857
|
|
|
|
|
|
At the Company’s discretion, upon vesting, RSU holders are given the option to net-share settle to cover the required minimum withholding tax and the remaining amount is converted into the equivalent number of common shares and issued to the RSU holder. During the nine-month periods ended September 30, 2020 and 2019, 11,233 and 8,132 shares were surrendered at an average market price of $49.98 and $33.35, respectively.
As of September 30, 2020, the Company had approximately $2.3 million of unrecognized compensation expense that is expected to be recognized over a period of 3.5 years.
(7) Inventories
Inventories are stated at the lower of cost (determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Raw materials
|
|
$
|
11,802
|
|
|
$
|
10,540
|
|
|
Work in process
|
|
|
2,510
|
|
|
|
2,279
|
|
|
Finished goods
|
|
|
5,176
|
|
|
|
5,457
|
|
|
Total inventory
|
|
$
|
19,488
|
|
|
$
|
18,276
|
|
(8) Leases
The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet.
ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets are also adjusted for any deferred or accrued rent. As the Company's leases do not typically provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
($ in thousands)
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Lease Cost:
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
Amortization of right of use assets
|
|
$
|
7
|
|
|
$
|
-
|
|
|
Interest on lease liabilities
|
|
|
1
|
|
|
|
-
|
|
|
Operating lease cost
|
|
|
907
|
|
|
|
918
|
|
|
Variable lease cost
|
|
|
164
|
|
|
|
167
|
|
|
Short-term lease cost
|
|
|
21
|
|
|
|
20
|
|
|
Total lease cost
|
|
$
|
1,100
|
|
|
$
|
1,105
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
908
|
|
|
$
|
905
|
|
|
Financing cash flows from finance leases
|
|
|
7
|
|
|
|
-
|
|
|
ROU assets obtained in exchange for finance lease obligations
|
|
|
110
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (years):
|
|
|
|
|
|
|
|
|
|
Finance
|
|
|
6.58
|
|
|
|
-
|
|
|
Operating
|
|
|
2.02
|
|
|
|
2.92
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
|
|
|
Finance
|
|
|
2.26
|
%
|
|
|
-
|
|
|
Operating
|
|
|
4.42
|
%
|
|
|
4.45
|
%
|
The aggregate future lease payments for leases as of September 30, 2020 are as follows
(in thousands):
|
|
|
Finance
|
|
|
Operating
|
|
|
Remainder of 2020
|
|
$
|
4
|
|
|
$
|
304
|
|
|
2021
|
|
|
17
|
|
|
|
1,132
|
|
|
2022
|
|
|
17
|
|
|
|
959
|
|
|
2023
|
|
|
17
|
|
|
|
36
|
|
|
2024
|
|
|
17
|
|
|
|
-
|
|
|
Thereafter
|
|
|
40
|
|
|
|
-
|
|
|
Total lease payments
|
|
|
112
|
|
|
|
2,431
|
|
|
Less: Interest
|
|
|
(8
|
)
|
|
|
(107
|
)
|
|
Present value of lease liabilities
|
|
$
|
104
|
|
|
$
|
2,324
|
|
The aggregate future lease payments as of December 31, 2019 are as follows (in thousands):
|
|
|
Operating
|
|
|
2020
|
|
$
|
1,173
|
|
|
2021
|
|
|
1,118
|
|
|
2022
|
|
|
957
|
|
|
2023
|
|
|
36
|
|
|
Total lease payments
|
|
|
3,284
|
|
|
Less: Interest
|
|
|
(194
|
)
|
|
Present value of lease liabilities
|
|
$
|
3,090
|
|
(9) Income Per Share
Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during each period.
The weighted average number of shares used to compute basic and diluted net income per share consisted of the following (in thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Basic weighted average common shares outstanding
|
|
|
7,495
|
|
|
|
7,432
|
|
|
|
7,480
|
|
|
|
7,419
|
|
|
Weighted average common equivalent shares due to restricted stock, stock options and RSUs
|
|
|
60
|
|
|
|
61
|
|
|
|
67
|
|
|
|
57
|
|
|
Diluted weighted average common shares outstanding
|
|
|
7,555
|
|
|
|
7,493
|
|
|
|
7,547
|
|
|
|
7,476
|
|
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These outstanding stock awards are not included in the computation of diluted income per share because the effect would be antidilutive. For both the three- and nine-month periods ended September 30, 2020, the number of stock awards excluded from the computation of diluted earnings per share for this reason was 14,892. For both the three- and nine-month periods ended September 30, 2019, the number of stock awards excluded from the computation of diluted earnings per share for this reason was 16,536.
(10) Segment Reporting
The Company consists of a single operating and reportable segment.
Revenues from customers outside of the United States are not material. No customer comprised more than 10% of the Company’s consolidated revenues for the three- and nine-month periods ended September 30, 2020 and 2019. All of the Company’s assets are located in the United States.
The Company’s products are primarily sold to customers within the Medical, Consumer, Automotive, Aerospace and Defense, Industrial, and Electronics markets. Net sales by market for the three- and nine-month periods ended September 30, 2020 and 2019 are as follows (in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Market
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
Net Sales
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
$
|
26,850
|
|
|
|
62.0
|
%
|
|
$
|
32,175
|
|
|
|
65.1
|
%
|
|
$
|
92,195
|
|
|
|
68.7
|
%
|
|
$
|
94,164
|
|
|
|
63.6
|
%
|
|
Consumer
|
|
|
5,566
|
|
|
|
12.9
|
%
|
|
|
4,602
|
|
|
|
9.3
|
%
|
|
|
12,185
|
|
|
|
9.1
|
%
|
|
|
13,693
|
|
|
|
9.2
|
%
|
|
Automotive
|
|
|
4,473
|
|
|
|
10.3
|
%
|
|
|
4,946
|
|
|
|
10.0
|
%
|
|
|
10,525
|
|
|
|
7.8
|
%
|
|
|
15,634
|
|
|
|
10.6
|
%
|
|
Aerospace & Defense
|
|
|
3,356
|
|
|
|
7.8
|
%
|
|
|
3,246
|
|
|
|
6.6
|
%
|
|
|
9,102
|
|
|
|
6.8
|
%
|
|
|
10,893
|
|
|
|
7.4
|
%
|
|
Industrial
|
|
|
1,758
|
|
|
|
4.1
|
%
|
|
|
2,421
|
|
|
|
4.9
|
%
|
|
|
5,817
|
|
|
|
4.2
|
%
|
|
|
7,232
|
|
|
|
4.9
|
%
|
|
Electronics
|
|
|
1,296
|
|
|
|
3.0
|
%
|
|
|
2,004
|
|
|
|
4.1
|
%
|
|
|
4,396
|
|
|
|
3.3
|
%
|
|
|
6,504
|
|
|
|
4.4
|
%
|
|
Net Sales
|
|
$
|
43,299
|
|
|
|
100.0
|
%
|
|
$
|
49,394
|
|
|
|
100.0
|
%
|
|
$
|
134,220
|
|
|
|
100.0
|
%
|
|
$
|
148,120
|
|
|
|
100.0
|
%
|
(11) Other Intangible Assets
The carrying values of the Company’s definite lived intangible assets as of September 30, 2020 are as follows (in thousands):
|
|
|
Tradename
& Brand
|
|
|
Non-
Compete
|
|
|
Customer
List
|
|
|
Total
|
|
|
Estimated useful life
|
|
10 years
|
|
|
5 years
|
|
|
20 years
|
|
|
|
|
|
|
Gross amount
|
|
$
|
367
|
|
|
$
|
462
|
|
|
$
|
22,555
|
|
|
$
|
23,384
|
|
|
Accumulated amortization
|
|
|
(98
|
)
|
|
|
(247
|
)
|
|
|
(3,007
|
)
|
|
|
(3,352
|
)
|
|
Net balance
|
|
$
|
269
|
|
|
$
|
215
|
|
|
$
|
19,548
|
|
|
$
|
20,032
|
|
Amortization expense related to intangible assets was approximately $314 thousand for both the three-month periods ended September 30, 2020 and 2019, and $943 thousand for both the nine-month periods ended September 30, 2020 and 2019. The estimated remaining amortization expense as of September 30, 2020 is as follows (in thousands):
|
Remainder of 2020
|
|
$
|
314
|
|
|
2021
|
|
|
1,257
|
|
|
2022
|
|
|
1,257
|
|
|
2023
|
|
|
1,172
|
|
|
2024
|
|
|
1,164
|
|
|
Thereafter
|
|
|
14,868
|
|
|
Total
|
|
$
|
20,032
|
|
(12) Income Taxes
The determination of income tax expense in the accompanying unaudited condensed consolidated statements of income is based upon the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur. The Company recorded income tax expense of approximately 19.4% and 5.2% of income before income tax expense for the three-month periods ended September 30, 2020 and 2019, respectively. The Company recorded income tax expense of approximately 19.1% and 17.4% of income before income tax expense for each of the nine-month periods ended September 30, 2020 and 2019, respectively.
(13) Indebtedness
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with 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 Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement.
The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”) consist of a $20 million unsecured term loan and an unsecured revolving credit facility, under which the Company may borrow up to $50 million. The term loan has been paid in full. The Amended and Restated Credit Agreement matures on February 1, 2023. The proceeds borrowed pursuant to the Amended and Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Agreement calls for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% 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 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 Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of September 30, 2020, there were $0.7 million in standby letters of credit outstanding drawable as a financial guarantee on worker’s compensation insurance policies. As of September 30, 2020, the applicable interest rate was approximately 1.14%, and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
Derivative Financial Instruments
The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The Company assesses interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the term loan under the Amended and Restated Credit Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap agreement was established to modify the Company’s interest rate exposure by converting the interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. As the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $12.1 million at September 30, 2020. The fair value of the swap as of September 30, 2020 and December 31, 2019 was approximately $(538) thousand and $(325) thousand, respectively, and is included in other liabilities on the condensed consolidated balance sheets, respectively. Changes in the fair value of the swap are recorded in other expense on the condensed consolidated statements of income and resulted in expense of zero and $362 thousand during the three- and nine-month periods ended September 30, 2020. In the same periods in 2019, change in the fair value of the swap resulted in expense of $24 thousand and $461 thousand, respectively.
LIBOR
The Financial Conduct Authority (the authority that regulates LIBOR) announced in 2017 that it intends to phase out LIBOR by the end of 2021. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, the Company may need to amend certain contracts, including the Amended and Restated Credit Agreement and related interest rate swap agreement, and the Company cannot guarantee what alternative rate or benchmark would be negotiated or the extent to which this would adversely affect its interest rate and the effectiveness of its interest rate hedging activity. The Company cannot assure that it will be able to amend any of these agreements in a timely manner or at all.
|
ITEM 2:
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward-looking Statements
Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Management and representatives of UFP Technologies, Inc. (the “Company”) also may from time to time make forward-looking statements. These statements are subject to known and unknown risks, uncertainties, and other factors, which may cause our or our industry’s actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about the Company’s prospects; statements about the potential impact the novel coronavirus ("COVID-19") pandemic may have on the Company’s business, financial condition and results of operations, including with respect to the different markets in which the Company participates, the demand for its products, the well-being and availability of the Company’s employees, the continuing operation of the Company’s locations, delayed payments by the Company’s customers and the potential for reduced or canceled orders, the Company’s efforts to address the pandemic, including regarding the safety of its employees, the maintenance of its facilities and the sufficiency of the Company’s supply chain, inventory, liquidity and capital resources, including increased costs in connection with such efforts, the impact of the pandemic on the businesses of the Company’s suppliers and customers, and the overall impact the pandemic may have on the Company’s financial results in 2020; statements about the Company’s acquisition strategies and opportunities and the Company’s growth potential and strategies for growth; expectations regarding customer demand; expectations regarding the Company’s liquidity and capital resources, including the sufficiency of its cash reserves and the availability of borrowing capacity to fund operations and/or potential future acquisitions; anticipated revenues and the timing of such revenues; expectations regarding the potential impact of the proposed phase out of LIBOR by the end of 2021; expectations about shifting the Company’s book of business to higher-margin, longer-run opportunities; anticipated trends and potential advantages in the different markets in which the Company competes, including the medical, aerospace and defense, automotive, consumer, electronics, and industrial markets, and the Company’s plans to expand in certain of its markets; statements regarding anticipated advantages the Company expects to realize from its investments and capital expenditures; statements regarding anticipated advantages to improvements and alterations at the Company’s existing plants; expectations regarding the Company’s manufacturing capacity, operating efficiencies, and new production equipment; statements about new product offerings and program launches; statements about the Company’s acquisition and integration of Dielectrics and the synergies and other benefits anticipated in connection with the Dielectrics business; statements about the Company’s participation and growth in multiple markets; statements about the Company’s business opportunities; and any indication that the Company may be able to sustain or increase its sales, earnings or earnings per share, or its sales, earnings or earnings per share growth rates.
Investors are cautioned that such forward-looking statements involve risks and uncertainties that could adversely affect the Company’s business and prospects, and otherwise cause actual results to differ materially from those anticipated by such forward-looking statements, or otherwise, including without limitation: the severity and duration of the COVID-19 pandemic and its impact on the markets in which the Company participates, including its impact on the Company’s customers, suppliers and employees, as well as the U.S. and worldwide economies; the timing, scope and effect of further governmental, regulatory, fiscal, monetary and public health responses to the COVID-19 pandemic; risks and uncertainties associated with the COVID-19 pandemic and its impact on the Company’s business, financial condition and results of operations, including risks relating to decreased, including substantially decreased, demand for the Company’s products; risks relating to the potential closure of any of the Company’s facilities or the unavailability of key personnel or other employees; risks that the Company’s inventory, cash reserves, liquidity or capital resources may be insufficient; risks relating to delayed payments by our customers and the potential for reduced or canceled orders; risks relating to the increased costs associated with the Company’s efforts to respond to the pandemic; risks relating to the Company’s acquisition and integration of Dielectrics; risks associated with the identification of suitable acquisition candidates and the successful, efficient execution of acquisition transactions, the integration of any such acquisition candidates, the value of those acquisitions to our customers and shareholders, and the financing of such acquisitions; risks related to our indebtedness and compliance with covenants contained in our financing arrangements, and whether any available financing may be sufficient to address our needs; risks related to the proposed phase out of LIBOR by the end of 2021; risks associated with efforts to shift the Company’s book of business to higher-margin, longer-run opportunities; risks associated with the Company’s entry into and growth in certain markets; risks and uncertainties associated with seeking and implementing manufacturing efficiencies and implementing new production equipment; risks and uncertainties associated with growth of the Company’s business and increases to sales, earnings and earnings per share; and risks associated with new product and program launches. Accordingly, actual results may differ materially.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts, and projections, and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our current beliefs, estimates and assumptions and are only as of the date of this Report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as well as the risks and uncertainties discussed elsewhere in this Report, including without limitation any risks and uncertainties included elsewhere in this “Management's Discussion and Analysis of Financial Condition and Results Of Operations” portion of this Report, or under “Risk Factors” in Part II Item 1A of this report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to UFP Technologies, Inc. and its consolidated subsidiaries.
Overview
UFP Technologies, Inc. (the “Company”) is an innovative designer and custom manufacturer of components, subassemblies, products and packaging primarily for the medical market. Utilizing highly specialized foams, films and plastics, the Company converts raw materials through laminating, molding, radio frequency welding and fabricating techniques. The Company is diversified by also providing highly engineered solutions to customers in the aerospace & defense, automotive, consumer, electronics and industrial markets. The Company consists of a single operating and reportable segment.
The Company’s current strategy includes further organic growth and growth through strategic acquisitions.
As further summarized below, the COVID-19 pandemic has had, and we believe it will continue to have, negative effects on our business and financial results. In particular, sales for the Company for the nine-month period ended September 30, 2020 decreased 9.4% to $134.2 million from $148.1 million in the same period last year largely due to the impact in demand for product as a result of the COVID-19 pandemic. Gross margins for the nine-month period ended September 30, 2020 decreased to 24.8% from 27.1% in the same period last year. Operating income and net income decreased 34.3% and 34.2%, respectively.
Recent Developments
COVID-19
COVID-19 has spread across the country to areas in which our products are designed, manufactured, distributed or sold. Authorities in states in which we do business have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, stay-at-home orders, and business shutdowns. These measures have impacted and will likely further impact us, our customers, consumers, employees, suppliers and other third parties with whom we do business. There is considerable uncertainty regarding how these and any future measures in response to the pandemic will impact our business, including whether and to what extent they will result in further changes in demand for our products or further increases in operating costs.
Our operations expose us to risks associated with the COVID-19 pandemic. Although the COVID-19 pandemic did not materially impact our first quarter results, it has since more significantly impacted our operations. While all of our factories are deemed essential, not all of our customers’ operations are essential and, therefore, demand for our products and our customers’ products has been negatively impacted, especially in the automotive and consumer markets, where the impact has been substantial. The COVID-19 pandemic has also impacted the cost of manufacturing our goods, including higher labor costs, maintenance costs and manufacturing inefficiencies due to employee absenteeism and significantly enhanced cleaning and sterilization. With regard to our supply chain, there has thus far been minimal disruption in the availability of raw materials, as most of our major suppliers have also been deemed to be essential businesses. Due to concerns regarding supply and shipping challenges at the beginning of the COVID-19 pandemic, we understand that certain of our customers increased their purchasing requirements. We believe that our customers’ increased supply levels led to decreased demand for our products in the third quarter and may lead to further decreased demand for our products in the remainder of the year.
In light of the COVID-19 pandemic, elective medical procedures and exams have been delayed or canceled, there has been a significant reduction in physician office visits, and hospitals have postponed or canceled capital purchases. We believe that these responses have had a negative impact on the demand for the Company’s components for medical devices. Additionally, many of our customers in the automotive markets experienced closures of their businesses in connection with the pandemic. Such closures negatively impacted the demand for our automobile component products particularly in the second quarter. Any continued reduced demand for our products, including reduced need for components for medical devices, packaging for consumer and electronic goods, or reduced need for automobile components, as well as continued economic uncertainty, could adversely and materially affect our business, financial condition and results of operations, as well as those of our customers, potentially resulting in customers’ inability to pay for our products and reduced or canceled orders of our products. Such adverse changes in our customers’ financial condition may also result in our recording impairment charges for our inability to recover or collect any accounts receivable or owned or leased assets.
The COVID-19 pandemic and associated economic disruptions have had, and we believe they will continue to have, negative effects on our operating results, cash flows and financial condition. While we began to experience these negative effects towards the end of March, they increased markedly during the second and third quarters. We expect these negative effects on our financial results will continue in the fourth quarter, in particular due to continued decreased product demand.
To ensure the health and safety of our employees and to comply with governmental orders, since March 2020 we have required or enabled certain employees to work from home or remotely where practicable, and expanded IT and communication support to enhance their productivity; adjusted work spaces and shifted schedules to facilitate social distancing and sterilization for those who continue to work in our facilities; enhanced cleaning and disinfecting procedures at our facilities; required face coverings and worked to procure and distributed personal protective equipment; implemented health checks and visitor protocols and restricted travel.
Additionally, in response to the economic uncertainties resulting from the COVID-19 pandemic, we have initiated cost-cutting measures, including restrictions on travel and labor cost reduction measures (including employee terminations). Terminated employees were provided with severance pay and accordingly such terminations only partially affected our results of operations for the third quarter of fiscal 2020. We expect that the impact of these cost-cutting measures will occur primarily starting in the fourth quarter of fiscal 2020.
While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 on our employees and our business, we believe the extent of the impact of the pandemic on our business and financial results will depend on future developments that are highly uncertain and cannot be predicted, and which may vary by market, including the duration and scope of the pandemic, its severity, economic conditions during and after the pandemic, governmental actions that have or may be taken in response to the pandemic, changes in customer behavior in response to the pandemic, and how quickly and to what extent more predictable economic and operating conditions can resume.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments and estimated income tax payments that we expect to defer to future periods. Accordingly, the Company has deferred social security payments of approximately $1.0 million as of September 30, 2020, which will continue to accrue thereafter. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the CARES Act may have on our business and financial results.
Results of Operations
Sales
Sales for the three-month period ended September 30, 2020 decreased approximately 12.3% to $43.3 million from sales of $49.4 million for the same period in 2019. The decrease in sales is primarily due to the impact on demand for product as a result of the COVID-19 pandemic. For instance, we believe that the cancellation or delay of elective medical procedures in connection with the COVID-19 pandemic has had a negative impact on the demand for the Company’s components for medical devices.
Sales for the nine-month period ended September 30, 2020 decreased approximately 9.4% to $134.2 million from sales of $148.1 million for the same period in 2019. We attribute the decrease in sales primarily to the impact on demand for product as a result of the COVID-19 pandemic, as described in the preceding paragraph. We refer you to “Recent Developments—COVID-19” above for additional discussion of product demand.
Gross Profit
Gross profit as a percentage of sales (“gross margin”) decreased to 24.3% for the three-month period ended September 30, 2020, from 27.0% for the same period in 2019. As a percentage of sales, material and labor costs collectively decreased 2.0%, while overhead increased 4.7%. The decrease in collective material and labor costs as a percentage of sales was primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives and an improvement in the overall book of business. The increase in overhead as a percentage of sales was primarily due to fixed overhead costs against decreased sales.
Gross margin decreased to 24.8% for the nine-month period ended September 30, 2020, from 27.1% for the same period in 2019. As a percentage of sales, material and labor costs collectively decreased 1.5%, while overhead increased 3.8%. The decrease in collective material and labor costs as a percentage of sales was primarily due to gains in manufacturing efficiencies resulting from continuous improvement initiatives and an improvement in the overall book of business. The increase in overhead as a percentage of sales was primarily due to fixed overhead costs against decreased sales.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) decreased approximately 5.5% to $6.8 million for the three-month period ended September 30, 2020, from $7.2 million for the same period in 2019. As a percentage of sales, SG&A increased to 15.7% for the three-month period ended September 30, 2020, from 14.5% for the same three-month period in 2019. The decrease in SG&A for the nine-month period ended September 30, 2020 was primarily due to decreases in compensation-related reserves and company-wide travel and entertainment.
SG&A decreased approximately 4.6% to $21.2 million for the nine-month period ended September 30, 2020, compared to $22.2 million in the same period in 2019. As a percentage of sales, SG&A increased to 15.8% from 15.0% for the same three-month period in 2019. The decrease in SG&A for the nine-month period ended September 30, 2020 was primarily due to decreases in compensation-related reserves and company-wide travel and entertainment.
Interest Income and Expense
Net interest expense was approximately $17 thousand for the three-month period ended September 30, 2020, compared to net interest expense of $165 thousand in the same period of 2019. Net interest expense was approximately $66 thousand for the nine-month period ended September 30, 2020, compared to net interest expense of $590 thousand in the same period of 2019. The decrease in net interest expense for both periods was primarily due to lower debt levels.
Other Expense
Other expense was zero and approximately $24 thousand for the three-month periods ended September 30, 2020 and 2019, respectively and approximately $362 thousand and $461 thousand for the nine-month periods ended September 30, 2020 and 2019, respectively. Other expense was primarily generated by changes in the fair value of the swap liability, which is driven by anticipated future interest rate changes.
Income Taxes
The Company recorded tax expense of approximately 19.4% and 5.2% of income before income tax expense, respectively, for each of the three-month periods ended September 30, 2020 and 2019. The increase in the effective tax rate for the current period as compared to the prior period was largely due to a lower anticipated effective tax rate in 2019 due to credits available for increased research activities. The Company recorded tax expense of approximately 19.1% and 17.4% of income before income tax expense, respectively, for each of the nine-month periods ended September 30, 2020 and 2019. The increase in the effective tax rate for the current period as compared to the prior period was largely due to a lower anticipated effective tax rate in 2019 due to credits available for increased research activities. 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.
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 nine-month period ended September 30, 2020 was approximately $16.7 million and was primarily a result of net income generated of approximately $9.2 million, depreciation and amortization of approximately $6.2 million, loss on sale of fixed assets of approximately $0.3 million, share-based compensation of approximately $1.3 million, an increase in deferred taxes of approximately $1.0 million, a decrease in accounts receivable of approximately $1.3 million due to reduced sales, and an increase of other long-term liabilities of approximately $1.2 million due primarily to an increase in the fair value of the interest rate swap and the deferral of employer social security tax payments in connection with the CARES Act. These cash inflows and adjustments to income were partially offset by an increase in inventory of approximately $1.2 million due to restocking to historical levels and for expected safety stock needs, an increase in prepaid expenses of approximately $1.4 million due primarily to insurance and progress payments on machinery, an increase in refundable income taxes of approximately $0.3 million, a decrease in accounts payable of approximately $0.3 million, due to the timing of vendor payments in the ordinary course of business and a decrease in deferred revenue of approximately $0.6 million due to the timing of customer payments and revenue recognition on tooling and machinery projects.
Net cash used in investing activities during the nine-month period ended September 30, 2020 was approximately $3.0 million and was primarily the result of additions of manufacturing machinery and equipment across the Company.
Net cash used in financing activities was approximately $0.1 million during the nine-month period ended September 30, 2020, resulting from borrowings and repayments on the Company’s credit facility of approximately $5.5 million and payments of statutory withholding for stock options exercised and restricted stock units vested of approximately $0.6 million, partially offset by net proceeds received upon stock options exercises of approximately $0.5 million.
Outstanding and Available Debt
On February 1, 2018, the Company, as the borrower, entered into an unsecured $70 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with 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 Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement.
The credit facilities under the Amended and Restated Credit Agreement (the “Amended and Restated Credit Facilities”) consist of a $20 million unsecured term loan to the Company and an unsecured revolving credit facility, under which we may borrow up to $50 million. The term loan has been paid in full. The Amended and Restated Credit Facilities mature on February 1, 2023. The proceeds of the Amended and Restated Credit Agreement may be used for general corporate purposes, as well as permitted acquisitions. Our obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Facilities call for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% 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 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 Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of September 30, 2020, there were $0.7 million in standby letters of credit outstanding drawable as a financial guarantee on worker’s compensation insurance policies. As of September 30, 2020, the applicable interest rate was approximately 1.14% and the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
Derivative Financial Instruments
The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. Derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The Company assesses interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company’s debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, in connection with the term loan under the Amended and Restated Credit Agreement, the Company entered into a $20 million, 5-year interest rate swap agreement under which the Company receives three-month LIBOR plus the applicable margin and pays a 2.7% fixed rate plus the applicable margin. The swap agreement was established to modify the Company’s interest rate exposure by converting interest on the term loan from a variable rate to a fixed rate to hedge against the possibility of rising interest rates during the term of the loan. As the Company repaid its term loan in full, the swap agreement no longer serves this purpose and may be canceled by the Company prior to its expiration date. The notional amount was approximately $12.1 million at September 30, 2020. The fair value of the swap as of September 30, 2020 and December 31, 2019 was approximately $(538) thousand and $(325) thousand, respectively, and is included in other liabilities on the condensed consolidated balance sheets, respectively. Changes in the fair value of the swap are recorded in other expense on the condensed consolidated statements of income and resulted in expense of zero and $362 thousand during the three- and nine-month periods ended September 30, 2020. In the same periods in 2019, change in the fair value of the swap resulted in expense of $24 thousand and $461 thousand, respectively.
The Financial Conduct Authority (the authority that regulates LIBOR) announced in 2017 that it intends to phase out LIBOR by the end of 2021. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts, including our Amended and Restated Credit Agreement and related interest rate swap agreement, and we cannot guarantee what alternative rate or benchmark would be negotiated or the extent to which this would adversely affect our interest rate and the effectiveness of our interest rate hedging activity. We cannot assure that we will be able to amend any of these agreements in a timely manner or at all.
Future Liquidity
We require cash to pay our operating expenses, purchase capital equipment, and to service our contractual obligations. Our principal sources of funds are cash from operations and our $50 million revolving credit facility. We generated cash of approximately $16.7 million from operations during the nine months ended September 30, 2020; however, we cannot guarantee that our operations will generate cash in future periods. Our longer-term liquidity is contingent upon future operating performance and draws on our revolving credit facility are possible. Further, the continued economic uncertainty resulting from the COVID-19 pandemic could affect our long-term ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
Throughout fiscal 2020, we plan to continue to add capacity to enhance operating efficiencies in our manufacturing plants. We may consider additional acquisitions of companies, technologies, or products that are complementary to our business. We believe that our existing resources, including our revolving credit facility, together with cash expected to be generated from operations and funds expected to be available to us through any necessary equipment financings and additional bank borrowings, will be sufficient to fund our cash flow requirements, including capital asset acquisitions, through the next twelve months.
Stock Repurchase Program
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 Exchange Act. We did not repurchase any shares of our common stock under this program in the first nine months of 2020. Through September 30, 2020, the Company repurchased a total of 29,559 shares of its common stock under this program at a cost of approximately $587 thousand. At September 30, 2020, approximately $9.4 million was available for future repurchases of the Company’s common stock under this authorization.
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.
Commitments and Contractual Obligations
There have been no material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Off-Balance-Sheet Arrangements
In addition to operating leases, the Company’s off-balance-sheet arrangements include standby letters of credit which are included in the Company’s revolving credit facility. As of September 30, 2020, there was approximately $0.7 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.