UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
We are a leading provider of manufactured vinyl coated fabrics. Our best-known brand, Naugahyde, is the product of many improvements on a rubber-coated fabric developed a century ago in
Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing. Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 525 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered prints, lamination and panel cutting. Our vinyl coated fabric products have various high-performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, health care facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated by either flame or hot melt adhesive for seating, fascia and door applications. Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other health care facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses, trains and aircraft.
We currently operate out of manufacturing facilities located in
Significant Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with
U.S.generally accepted accounting principles (" U.S.GAAP") requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of our significant accounting policies, refer to Note 1 - "Basis of Presentation and Summary of Significant Accounting Policies" to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments and Estimates" in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022. 19 Table of Contents Overview: We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending January 1, 2023and the prior year ended January 2, 2022are 52-week years. Our U.K.subsidiaries use the calendar year end of December 31. The activity of the U.K.subsidiaries that occurs on the days that do not coincide with our year-end is not material. Our Earby, Englandoperation's functional currency is the British Pound Sterling ("Pound Sterling") and has sales and purchases transactions that are denominated in currencies other than the Pound Sterling, principally the Euro. Approximately 26% of our global revenues and 33% of our global raw material purchases are derived from these Euro transactions. The average year-to-date exchange rate for the Pound Sterling to the U.S.Dollar was approximately 2.8% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 4.4% lower in 2022 compared to 2021. These exchange rate changes had the effect of decreasing net sales by approximately $515,000for the three months ended April 3, 2022. The overall currency effect on our net loss was a negative amount of approximately $44,000for the three months ended April 3, 2022. The coronavirus pandemic ("COVID-19") and its related disruption of the supply chain has had an impact on markets we serve, our operations and liquidity. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. We continue to pursue supplementary cash flow opportunities, which have included loans through the Paycheck Protection Program ("PPP"). Also to preserve cash and provide additional liquidity, our majority shareholder waived the interest expense on certain related-party debt and our executive officers agreed to a reduction in their salaries. In addition, no quarterly preferred dividends were declared in the three months ended April 3, 2022, while quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019through the three months ended April 4, 2021. See "Liquidity and Sources of Capital" below for further discussion. 20 Table of Contents
Three months completed
The following table sets forth, for the three months ended
April 3, 2022("three months 2022") and April 4, 2021("three months 2021"), certain operational data including their respective percentage of net sales: Three Months Ended % April 3, 2022 April 4, 2021 Change Change Net Sales $ 20,070,551100.0 % $ 21,896,001100.0 % $ (1,825,450 )-8.3 % Cost of Goods Sold 17,405,495 86.7 % 18,658,664 85.2 % (1,253,169 ) -6.7 % Gross Profit 2,665,056 13.3 % 3,237,337 14.8 % (572,281 ) -17.7 % Operating Expenses: Selling 724,321 3.6 % 898,712 4.1 % (174,391 ) -19.4 % General and administrative 1,800,218 9.0 % 1,579,027 7.2 % 221,191 14.0 % Research and development 389,108 1.9 % 327,458 1.5 % 61,650 18.8 % Total Operating Expenses 2,913,647 14.5 % 2,805,197 12.8 % 108,450 3.9 % Operating (Loss) Income (248,591 ) -1.2 % 432,140 2.0 % (680,731 ) <-100 % Interest expense (438,508 )
-2.2% (403,746 ) -1.8% (34,762 ) 8.6% Paycheck Protection Program Funding
0.0% 838,864 3.8% (838,864 ) -100% Other income (expenses)
-0.1% 206,304 0.9% (220,700 )
(701,495 ) -3.5 % 1,073,562 4.9 % (1,775,057 ) <-100 % Tax (benefit) provision (156,139 ) -0.8 % 37,561 0.2 % (193,700 ) <-100 % Net (Loss) Income (545,356 ) -2.7 % 1,036,001 4.7 % (1,581,357 ) <-100 % Preferred stock dividend -
0.0% (816,414 ) -3.7% 816,414 -100% Net income (loss) attributable to common shareholders
21 Table of Contents Revenue: Total revenue for the three months 2022 decreased
$1,825,450or 8.3% to $20,070,551compared to $21,896,001for the three months 2021. The decrease in revenue included an unfavorable currency effect of approximately $515,000. Sales in the first quarter of 2022 increased $4,396,706or 28.1% compared to the fourth quarter of 2021. Revenue for the three months 2022 reflects the impact of all of the price increases we implemented in 2021 due to higher costs of raw materials. To offset raw material price increases, we increased prices on most product categories in several of our markets three times in 2021 (effective dates in March, July and December of 2021) and in March 2022. We expect some additional price increases on other select products to be implemented during 2022 to further offset raw material price increases. For the three months 2022 compared to the three months 2021, automotive sales declined 15.0% due to a decline in sales of 14.4% (excluding the currency adjustment) and 9.1% for our U.K.and U.S.operations, respectively. The supply chain issues currently being experienced by the OEM's that use our automotive products has led to temporary shutdowns of their production lines, which has had a negative impact on our sales. Since these supply chain issues began during the first quarter of 2021, they had a much greater impact on our sales for the three months 2022 than on our sales for the three months 2021. Automotive sales have increased 27.7% compared to the fourth quarter of 2021 due to shutdowns becoming less prevalent and our price increases. Additionally for the three months 2022 compared to the three months 2021, sales for the industrial sector increased 3.6% (4.20% before the currency effect) primarily due to an increase in our U.S.operations contract market. Sales for the industrial sector increased 28.5% when compared to the fourth quarter of 2021 due to growth in orders from existing and new customers and our price
increases. Gross Profit:
Total gross profit for the three months 2022 decreased
$572,281or 17.7% to $2,665,056compared to $3,237,337for the three months 2021. The decrease in gross profit included an unfavorable currency effect of approximately $94,000. The gross profit percentage was 13.3% of sales for the three months 2022 compared to 14.8% for the three months 2021. The gross profit and percentage for the three months 2022 were negatively impacted by supply chain issues, as discussed above, as well as higher costs of raw materials, freight and power. As previously discussed, we increased prices in 2021 (effective dates in March, July and December of 2021) and in March 2022to offset raw material price increases. Both the gross profit amount and percentage for the first quarter of 2022 improved when compared to the fourth quarter of 2021 gross profit amount and percentage of $1,903,982and 12.1%, respectively. Operating Expenses: Selling expenses for the three months 2022 decreased $174,391or 19.4% to $724,321from $898,712for the three months 2021. The decrease in selling expenses included a $20,000favorable currency effect. When comparing the first quarter of 2022 with the fourth quarter of 2021, selling expenses increased $124,152or 20.7%. The decrease from the three months 2021 was primarily due to lower commissions from U.K.automotive programs due to UGL's lower automotive sales while the increase from the fourth quarter of 2021 was primarily due to higher commissions from U.K.automotive programs due to UGL's higher automotive sales. General and administrative expenses for the three months 2022 increased $221,191or 14.0% to $1,800,218from $1,579,027for the three months 2021. The increase in general and administrative expenses was partially offset by a $13,000favorable currency effect. When comparing the first quarter of 2022 with the fourth quarter of 2021, general and administrative expenses increased $248,810or 16.0%. Both the increase from the three months 2021 and the fourth quarter of 2021 were due to increases in various expenses, the most significant of which was higher insurance costs. 22 Table of Contents Research and development expenses for the three months 2022 increased $61,650or 18.8% to $389,108from $327,458for the three months 2021. The increase in research and development expenses was partially offset by a $5,000favorable currency effect. When comparing the first quarter of 2022 with the fourth quarter of 2021, research and development expenses increased $61,906or 18.9%. Both the increase from the three months 2021 and the fourth quarter of 2021 were primarily due to more activity including the testing and qualification of raw material substitutions as a result of supply constraints. Operating Loss:
Operating loss for the three months 2022 was
$248,591compared to operating income of $432,140for the three months 2021, a decrease of $680,731. The decrease was due to the combination of the decline in gross profit and 3.9% increase in operating expenses. The operating loss for the fourth quarter of 2021 was $574,797. The smaller operating loss for the three months 2022 compared to the fourth quarter of 2021 was due to higher gross profit more than offsetting the increase in operating expenses. The operating loss percentage was -1.2% of sales for the three months 2022 compared to 2.0% for the three months 2021 and -3.7% for the fourth quarter of 2021. Interest Expense: Interest expense for the three months 2022 increased $34,762or 8.6% to $438,508from $403,746for the three months 2021. The increase was primarily due to debt issuances and the amortization of capitalized debt issuance costs, partially offset by debt repayments.
Funding for the Paycheck Protection Program:
Funding from the PPP of
$838,864for the three months 2021 were the proceeds from the PPP loan that we used during the period for allowable expenses under the PPP. As previously discussed, all of the PPP Loan was forgiven in August 2021. Other (Expense) Income: Other expense for the three months 2022 was $(14,396)compared to other income of $206,304for the three months 2021. Included in other (expense) income are the currency gains and losses recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated during the period. Income Taxes:
We file income tax returns in
the United Statesas a C-Corporation, and in several state jurisdictions and in the United Kingdom. Our U.S.operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. We acquired Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal's taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on our tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns. We do not have a history of repatriating a significant portion of our foreign cash. However, if we decided to repatriate these foreign amounts to fund U.S.operations, we would not be required to pay any additional U.S.tax related to these amounts since we previously recorded a one-time transition tax on deemed repatriation of deferred foreign income. The tax benefit for the three months 2022 was $156,139compared to a tax provision of $37,561for the three months 2021. The tax benefit for the three months 2022 was principally attributable to the results of the U.S.operations while the tax provision for the three months 2021 was attributable to the results of the U.K.operations partially offset by the results of the U.S.
operations. 23 Table of Contents Preferred Stock Dividend: Pursuant to the terms of their acquisitions, preferred ownership units/stock of UEPH and UGEL were issued to the sellers. These preferred units/stock (collectively "preferred shares") have carried quarterly dividend requirements on a total value of
$55,000,000at rates ranging from 5.0% to 8.0%. The dividend rate on the Series B UEPH preferred units which started at 5.5% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%. Under amended documents that govern the dividends, the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. To preserve cash, quarterly preferred dividends were not declared on UEPH Series A and Series B preferred units and UGEL preferred stock during the three months ended April 3, 2022. In addition, quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019through the three months ended April 4, 2021.
Liquidity and sources of capital
Cash, as it is needed, is provided by using our lines of credit. These lines provide for a total borrowing commitment in excess of
$29,000,000subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $21,443,596at April 3, 2022, for the U.S.operations, $6.0 millionof the lines bears interest at the Eurodollar rate plus 2.25% and $6.6 millionbears interest at the Wells Fargo Capital Finance, LLC'sprime rate (3.50% at April 3, 2022) and, for the U.K.operations, $8.8 millionbears interest at the Bank of England Base Rateplus 2.25%-3.00%. The lines provided additional availability of approximately $514,000and, combined with UEP's and UGL's total cash balances, liquidity was approximately $831,000at April 3, 2022. We plan to use this availability and cash provided by operating activities to finance our cash needs for the remaining months of fiscal 2022 and future periods. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets. As previously stated, the coronavirus pandemic ("COVID-19") and its related disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. As discussed below, we continue to pursue supplementary cash flow opportunities. Through the PPP administered by the U.S. Small Business Administration("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), our U.S.operations received $2,000,000in March 2021in funds from One Community Bank. We used all proceeds from the PPP loan for allowable expenses (as defined in the PPP loan) and applied for forgiveness of the PPP loan in accordance with the terms of the CARES Act. In August 2021, we were notified that all of our PPP Loan was forgiven. See Note 9 to the consolidated financial statements for further discussion. For the remaining nine months of fiscal year 2022 and the first three months of fiscal year 2023, our majority shareholder waived the interest expense on our related party finance leases with him and our $2,000,000senior subordinated promissory notes issued to him. See Note 10 to the consolidated financial statements for further discussion. In addition, our executive officers agreed to a reduction in their salaries over the same time period. The total amount of cost savings will be approximately $731,000for fiscal year 2022 and $244,000for fiscal year 2023 which will provide us additional liquidity. Also to preserve cash, quarterly preferred dividends were not declared on UEPH Series A and Series B preferred units and UGEL preferred stock during the three months ended April 3, 2022, while quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019through the three months ended April 4, 2021.
The ratio of current assets to current liabilities, including the amount due under our credit lines, was 0.95 to
Cash balances decreased
$115,011before the effects of currency translation of $(5,463)to $324,499at April 3, 2022from $444,973at January 2, 2022. Of the above noted amounts, $205,067and $226,612were held outside the U.S.by our foreign subsidiaries as of April 3, 2022and January 2, 2022, respectively.
24 Table of Contents Cash used in operations was
$3,519,251for the three months 2022 compared to $1,794,634for the three months 2021. For the three months 2022, cash used in operations was primarily due to changes in working capital of $(3,434,691), the net loss of 545,356 and changes in other assets and liabilities of $(13,153), offset by adjustments for non-cash items of $473,949. For the three months 2021, cash used in operations was primarily due to changes in working capital of $(2,725,218), adjustments for non-cash items of $(104,409)and changes in other assets and liabilities of $(1,008), offset by net income of $1,036,001. Cash used in investing activities was $198,118for the three months 2022 compared to $252,679for the three months 2021. During 2022 and 2021, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations and payments made for company-owned key man
life insurance premiums. For the three months 2022, cash provided by financing activities was
$3,602,358compared to $2,194,415for the three months 2021. Impacting cash flows from financing activities for the three months 2022 and 2021 were net advances on lines of credit of $3,843,578and $782,781, respectively. The changes in the lines of credit reflect the funding of working capital. Additionally, payments of $406,904and $387,443were made during the three months 2022 and 2021, respectively, on long-term debt and finance lease liabilities. Impacting cash flows from financing activities for the three months 2021 were proceeds from issuance of long-term debt of $2,000,000through the Paycheck Protection Program. Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of April 3, 2022and through the date of filing of this report except for UGL's ratio of Earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt service charges, which was less than the required minimum of 1.15 to 1. PNC Business Credit is in the process of reviewing an amendment to revise the covenant calculation to more closely align with the current business environment. We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.
We have no off-balance sheet arrangements.
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