UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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activity Descrition



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 Stoughton, Wis. and Earby, England.

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.



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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, 2023 and the prior
year ended January 2, 2022 are 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, England operation'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
$515,000 for the three months ended April 3, 2022. The overall currency effect
on our net loss was a negative amount of approximately $44,000 for 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, 2019 through the three months ended April 4, 2021. See "Liquidity and
Sources of Capital" below for further discussion.



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Three months completed April 3, 2022 Compared to the three months ended April 4, 2021



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                                            $ 20,070,551       100.0 %   $ 21,896,001       100.0 %   $ (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)

                                    (14,396 )      

-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 ($545,356) -2.7% $219,587 1.0% ($764,943)



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Revenue:



Total revenue for the three months 2022 decreased $1,825,450 or 8.3% to
$20,070,551 compared to $21,896,001 for 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 $4,396,706 or 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 $572,281 or 17.7% to
$2,665,056 compared to $3,237,337 for 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 2022 to 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 $1,903,982 and 12.1%, respectively.



Operating Expenses:



Selling expenses for the three months 2022 decreased $174,391 or 19.4% to
$724,321 from $898,712 for the three months 2021. The decrease in selling
expenses included a $20,000 favorable currency effect. When comparing the first
quarter of 2022 with the fourth quarter of 2021, selling expenses increased
$124,152 or 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 $221,191
or 14.0% to $1,800,218 from $1,579,027 for the three months 2021. The increase
in general and administrative expenses was partially offset by a $13,000
favorable currency effect. When comparing the first quarter of 2022 with the
fourth quarter of 2021, general and administrative expenses increased $248,810
or 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.



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Research and development expenses for the three months 2022 increased $61,650 or
18.8% to $389,108 from $327,458 for the three months 2021. The increase in
research and development expenses was partially offset by a $5,000 favorable
currency effect. When comparing the first quarter of 2022 with the fourth
quarter of 2021, research and development expenses increased $61,906 or 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 $248,591 compared to operating
income of $432,140 for 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 $34,762 or 8.6% to $438,508
from $403,746 for 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 $838,864 for 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 $206,304 for 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 States as 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 $156,139 compared to a tax
provision of $37,561 for 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.



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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 $55,000,000 at 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, 2019 through 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 $29,000,000 subject to the
underlying borrowing base specified in the agreements. Of the total outstanding
borrowings of $21,443,596 at April 3, 2022, for the U.S. operations, $6.0
million of the lines bears interest at the Eurodollar rate plus 2.25% and $6.6
million bears interest at the Wells Fargo Capital Finance, LLC's prime rate
(3.50% at April 3, 2022) and, for the U.K. operations, $8.8 million bears
interest at the Bank of England Base Rate plus 2.25%-3.00%. The lines provided
additional availability of approximately $514,000 and, combined with UEP's and
UGL's total cash balances, liquidity was approximately $831,000 at 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 $2,000,000 in March 2021 in 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 $2,000,000 senior 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 $731,000 for fiscal year 2022 and $244,000
for 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, 2019 through 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 April 3, 2022 and 0.99 to January 2, 2022.

Cash balances decreased $115,011 before the effects of currency translation of
$(5,463) to $324,499 at April 3, 2022 from $444,973 at January 2, 2022. Of the
above noted amounts, $205,067 and $226,612 were held outside the U.S. by our
foreign subsidiaries as of April 3, 2022 and January 2, 2022, respectively.

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Cash used in operations was $3,519,251 for the three months 2022 compared to
$1,794,634 for 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 $198,118 for the three months 2022
compared to $252,679 for 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 $3,602,358
compared to $2,194,415 for 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 $3,843,578 and $782,781, respectively. The changes in the
lines of credit reflect the funding of working capital. Additionally, payments
of $406,904 and $387,443 were 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 $2,000,000 through 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, 2022 and 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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