Unique Fabricating, Inc. - Quarter Report: 2017 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2017
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-37480
UNIQUE FABRICATING, INC.
(Exact name of registrant as specified in its Charter)
Delaware | 001-37480 | 46-1846791 | ||
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (IRS Employer Identification No.) | ||
Unique Fabricating, Inc.
800 Standard Parkway
Auburn Hills, MI 48326
(248)-853-2333
(Address including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports; and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer x | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |
Emerging growth company x | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 3, 2017 the registrant had 9,757,563 shares of common stock outstanding.
TABLE OF CONTENTS
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ITEM 1. FINANCIAL STATEMENTS
UNIQUE FABRICATING, INC.
Consolidated Balance Sheets (unaudited)
October 1, 2017 | January 1, 2017 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 1,016,308 | $ | 705,535 | |||
Accounts receivable – net | 28,972,129 | 26,887,945 | |||||
Inventory – net | 17,031,955 | 16,731,608 | |||||
Prepaid expenses and other current assets: | |||||||
Prepaid expenses and other | 3,771,880 | 2,087,069 | |||||
Refundable taxes | 900,767 | 783,139 | |||||
Total current assets | 51,693,039 | 47,195,296 | |||||
Property, plant, and equipment – net | 22,959,606 | 21,197,922 | |||||
Goodwill | 28,871,179 | 28,871,179 | |||||
Intangible assets– net | 20,666,921 | 23,758,342 | |||||
Other assets | |||||||
Investments – at cost | 1,054,120 | 1,054,120 | |||||
Deposits and other assets | 312,913 | 266,369 | |||||
Deferred tax asset | 399,405 | 193,577 | |||||
Total assets | $ | 125,957,183 | $ | 122,536,805 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 13,404,097 | $ | 13,451,816 | |||
Current maturities of long-term debt | 3,506,248 | 2,405,446 | |||||
Income taxes payable | 84,383 | 610,825 | |||||
Accrued compensation | 3,195,607 | 2,734,155 | |||||
Other accrued liabilities | 1,117,899 | 1,065,740 | |||||
Other liabilities | — | 168,880 | |||||
Total current liabilities | 21,308,234 | 20,436,862 | |||||
Long-term debt – net of current portion | 28,364,454 | 28,029,041 | |||||
Line of credit-net | 22,065,563 | 20,176,058 | |||||
Deferred tax liability | 3,964,663 | 3,836,281 | |||||
Total liabilities | 75,702,914 | 72,478,242 | |||||
Stockholders’ Equity | |||||||
Common stock, $0.001 par value – 15,000,000 shares authorized and 9,757,563 and 9,719,772 issued and outstanding at October 1, 2017 and January 1, 2017, respectively | 9,758 | 9,720 | |||||
Additional paid-in-capital | 45,677,445 | 45,525,237 | |||||
Retained earnings | 4,567,066 | 4,523,606 | |||||
Total stockholders’ equity | 50,254,269 | 50,058,563 | |||||
Total liabilities and stockholders’ equity | $ | 125,957,183 | $ | 122,536,805 | |||
See Notes to Consolidated Financial Statements.
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UNIQUE FABRICATING, INC.
Consolidated Statements of Operations (Unaudited)
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||||||||
Net sales | $ | 41,231,366 | $ | 44,753,565 | $ | 133,606,501 | $ | 126,784,289 | |||||||
Cost of sales | 32,256,440 | 33,503,217 | 102,858,323 | 96,842,757 | |||||||||||
Gross profit | 8,974,926 | 11,250,348 | 30,748,178 | 29,941,532 | |||||||||||
Selling, general, and administrative expenses | 7,268,812 | 6,949,034 | 22,455,833 | 20,668,621 | |||||||||||
Restructuring expenses | — | — | — | 35,054 | |||||||||||
Operating income | 1,706,114 | 4,301,314 | 8,292,345 | 9,237,857 | |||||||||||
Non-operating income (expense) | |||||||||||||||
Other income, net | 39,673 | (1,511 | ) | 83,748 | (25,203 | ) | |||||||||
Interest expense | (770,149 | ) | (525,167 | ) | (2,089,056 | ) | (1,739,243 | ) | |||||||
Total non-operating expense, net | (730,476 | ) | (526,678 | ) | (2,005,308 | ) | (1,764,446 | ) | |||||||
Income – before income taxes | 975,638 | 3,774,636 | 6,287,037 | 7,473,411 | |||||||||||
Income tax expense | 260,532 | 1,254,437 | 1,856,684 | 2,520,389 | |||||||||||
Net income | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
Net income per share | |||||||||||||||
Basic | $ | 0.07 | $ | 0.26 | $ | 0.45 | $ | 0.51 | |||||||
Diluted | $ | 0.07 | $ | 0.25 | $ | 0.45 | $ | 0.50 | |||||||
Cash dividends declared per share | $ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.45 | |||||||
See Notes to Consolidated Financial Statements.
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UNIQUE FABRICATING, INC.
Consolidated Statements of Stockholders’ Equity (Unaudited)
Number of Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||
Balance - January 3, 2016 | 9,591,860 | $ | 9,592 | $ | 44,352,188 | $ | 3,651,344 | $ | 48,013,124 | |||||||||
Net income | — | — | — | 4,953,022 | 4,953,022 | |||||||||||||
Stock option expense | — | — | 126,733 | — | 126,733 | |||||||||||||
Exercise of warrants and options for common stock | 48,808 | 48 | 103,941 | — | 103,989 | |||||||||||||
Common stock issued for purchase of Intasco USA, Inc. | 70,797 | 71 | 890,655 | 890,726 | ||||||||||||||
Cash dividends paid | — | — | — | (4,354,106 | ) | (4,354,106 | ) | |||||||||||
Balance - October 2, 2016 | 9,711,465 | $ | 9,711 | $ | 45,473,517 | $ | 4,250,260 | $ | 49,733,488 | |||||||||
Number of Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||
Balance - January 1, 2017 | 9,719,772 | $ | 9,720 | $ | 45,525,237 | $ | 4,523,606 | $ | 50,058,563 | |||||||||
Net income | — | — | — | 4,430,353 | 4,430,353 | |||||||||||||
Stock option expense | — | — | 115,245 | — | 115,245 | |||||||||||||
Exercise of warrants and options for common stock | 37,791 | 38 | 36,963 | — | 37,001 | |||||||||||||
Cash dividends paid | — | — | — | (4,386,893 | ) | (4,386,893 | ) | |||||||||||
Balance - October 1, 2017 | 9,757,563 | $ | 9,758 | $ | 45,677,445 | $ | 4,567,066 | $ | 50,254,269 | |||||||||
See Notes to Consolidated Financial Statements.
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UNIQUE FABRICATING, INC.
Consolidated Statements of Cash Flows (Unaudited)
Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 4,430,353 | $ | 4,953,022 | |||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||
Depreciation and amortization | 4,703,909 | 3,996,472 | |||||
Amortization of debt issuance costs | 113,412 | 94,537 | |||||
Loss on sale of assets | 12,442 | 13,867 | |||||
Loss on extinguishment of debt | — | 60,202 | |||||
Bad debt adjustment | 96,531 | (168,830 | ) | ||||
(Gain) loss on derivative instrument | (188,054 | ) | 183,402 | ||||
Stock option expense | 115,245 | 126,733 | |||||
Deferred income taxes | (77,446 | ) | (509,408 | ) | |||
Changes in operating assets and liabilities that provided (used) cash: | |||||||
Accounts receivable | (2,180,715 | ) | (6,777,982 | ) | |||
Inventory | (300,347 | ) | 269,870 | ||||
Prepaid expenses and other assets | (1,829,809 | ) | (194,521 | ) | |||
Accounts payable | 758,356 | 3,186,895 | |||||
Accrued and other liabilities | (12,831 | ) | 209,308 | ||||
Net cash provided by operating activities | 5,641,046 | 5,443,567 | |||||
Cash flows from investing activities | |||||||
Purchases of property and equipment | (3,466,432 | ) | (2,443,251 | ) | |||
Proceeds from sale of property and equipment | 29,347 | 12,181 | |||||
Acquisition of Intasco, net of cash acquired | — | (21,030,795 | ) | ||||
Working capital adjustment from acquisition of Intasco | — | 212,823 | |||||
Net cash used in investing activities | (3,437,085 | ) | (23,249,042 | ) | |||
Cash flows from financing activities | |||||||
Net change in bank overdraft | (806,075 | ) | 846,220 | ||||
Proceeds from debt | — | 32,000,000 | |||||
Payments on term loans | (2,574,545 | ) | (1,839,212 | ) | |||
Debt issuance costs | — | (514,441 | ) | ||||
Proceeds from revolving credit facilities, net | 5,837,324 | 7,716,220 | |||||
Pay-off of old senior credit facility term debt | — | (15,375,000 | ) | ||||
Proceeds from exercise of stock options and warrants | 37,001 | 103,989 | |||||
Distribution of cash dividends | (4,386,893 | ) | (4,354,106 | ) | |||
Net cash provided by financing activities | (1,893,188 | ) | 18,583,670 | ||||
Net increase (decrease) in cash and cash equivalents | 310,773 | 778,195 | |||||
Cash and cash equivalents – beginning of period | 705,535 | 726,898 | |||||
Cash and cash equivalents – end of period | $ | 1,016,308 | $ | 1,505,093 | |||
Supplemental disclosure of cash flow Information – cash paid for | |||||||
Interest | $ | 1,953,206 | $ | 1,304,890 | |||
Income taxes | $ | 1,793,316 | $ | 2,519,010 | |||
Supplemental disclosure of cash flow Information – non cash activities for | |||||||
Common stock issued for purchase of Intasco USA, Inc. | $ | — | $ | 890,726 | |||
See Notes to Consolidated Financial Statements.
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Note 1 — Nature of Business and Significant Accounting Policies
Nature of Business — UFI Acquisition, Inc. (“UFI”), a Delaware corporation, was formed on January 14, 2013, for the purpose of acquiring Unique Fabricating, Inc. and its subsidiaries (“Unique Fabricating”) (collectively, the “Company” or “Unique”) on March 18, 2013. The Company operates as one operating and reportable segment to fabricate and broker foam and rubber products, which are primarily sold to original equipment manufacturers (“OEMs”) and tiered suppliers in the automotive, appliance, water heater and heating, ventilation and air conditioning (HVAC) industries. In September 2014, UFI changed its name to Unique Fabricating, Inc. which is now the parent company of the consolidated group. As a result of the name change, the subsidiary previously named Unique Fabricating, Inc. became Unique Fabricating NA, Inc.
Basis of Presentation — The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. The interim results for the periods presented may not be indicative of the Company's actual annual results.
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all subsidiaries over which the Company exercises control. All intercompany transactions and balances have been eliminated upon consolidation.
Fiscal Years — The Company’s quarterly periods end on the Sunday closest to the end of the calendar quarterly period. The quarterly and year to date periods, which were 13 and 39 weeks during 2017, ended on October 1, 2017, and the quarterly and year to date periods, which were 13 and 39 weeks during 2016, ended on October 2, 2016. Fiscal year 2016 ended on Sunday, January 1, 2017.
Cash and Cash Equivalents — The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.
Accounts Receivable — Accounts receivable are stated at the invoiced amount and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in the existing accounts receivable. Management determines the allowance based on historical write-off experience and an understanding of individual customer payment history and financial condition. Management reviews the allowance for doubtful accounts at regular intervals. Account balances are charged off against the allowance when management determines it is probable the receivable will not be recovered. The allowance for doubtful accounts was $729,077 and $655,312 at October 1, 2017 and January 1, 2017, respectively.
Inventory — Inventory is stated at the lower of cost or market, with cost determined on the first in, first out method (FIFO). Inventory acquired as part of a business combination is recorded at its estimated fair value at the time of the business combination. The Company periodically evaluates inventory for obsolescence, excess quantities, slow moving goods and other impairments of value and establishes reserves for any identified impairments.
Valuation of Long-Lived Assets — The carrying value of long-lived assets held for use is periodically evaluated when events or circumstances warrant such a review. The carrying value of a long-lived asset held for use is considered impaired when the anticipated separately identifiable undiscounted cash flows from the asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The Company determined that no impairment indicators were present and all originally assigned useful lives remained appropriate during the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, respectively.
Property, Plant, and Equipment — Property, plant, and equipment purchases are recorded at cost. Property, plant, and equipment acquired as part of a business combination are recorded at estimated fair value at the time of the business combination. Depreciation is calculated using the straight line method over the estimated useful life of each asset. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the period of the related leases. Upon retirement or disposal, the initial cost or valuation and accumulated depreciation are removed from the accounts, and any gain or loss is included in net income. Repair and maintenance costs are expensed as incurred.
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Intangible Assets — The Company does not hold any intangible assets with indefinite lives. Identifiable intangible assets recognized as part of a business combination are recorded at their estimated fair value at the time of the business combination. Acquired intangible assets subject to amortization are amortized on a straight line basis, which approximates the pattern in which the economic benefit of the respective intangible is realized, over their respective estimated useful lives. Amortizable intangible assets are reviewed for impairment whenever events or circumstances indicate that the related carrying amount may be impaired. The remaining useful lives of intangible assets are reviewed to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that no impairment indicators were present and all originally assigned useful lives remained appropriate during the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, respectively.
Goodwill — Goodwill represents the excess of the acquisition cost of consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed from business combinations at the date of acquisition. Goodwill is not amortized, but rather is assessed at least on an annual basis for impairment. If it is determined that it is more likely than not that the fair value is greater than the carrying value of a reporting unit then a qualitative assessment may be used for the annual impairment test. Otherwise, a one-step process is used which requires estimating the fair value of each reporting unit compared to its carrying value. If the carrying value exceeds the estimated fair value, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
There were no impairment charges recognized during the 13 and 39 weeks ended October 1, 2017 and the 13 and 39 weeks ended October 2, 2016, respectively.
Debt Issuance Costs — Debt issuance costs represent legal, consulting, and other financial costs associated with debt financing and are reported netted against the related debt instrument. Amounts paid to or on behalf of lenders are presented as a debt discount and are also shown as a reduction of the associated debt instrument. Debt issuance costs on term debt are amortized using the straight line basis over the term of the related debt (which is immaterially different from the required effective interest method) while those related to revolving debt are amortized using a straight line basis over the term of the related debt.
At October 1, 2017 and January 1, 2017, debt issuance costs were $249,439 and $301,620, respectively, while amounts paid to or on behalf of lenders presented as debt discounts were $260,201 and $270,959, respectively. On April 29, 2016, the Company refinanced its existing term loan and revolving debt facility with new term loans and a new revolving debt facility which are further described in Note 6. The Company reviewed this refinancing for extinguishment accounting and concluded that $60,202 of the $160,111 remaining issuance costs not amortized on the old revolving debt facility qualified for extinguishment and were recognized as a loss on extinguishment immediately. The remaining $99,909 of unamortized issuance costs not extinguished on the old revolving debt facility and all of the $92,508 of remaining unamortized debt discounts on the old term loan did not meet extinguishment accounting and were therefore carried forward to the new revolving debt facility and term loans.
Amortization expense of both debt issuance costs and debt discounts has been recognized as a component of interest expense in the amounts of $47,373 and $113,412 for the 13 and 39 weeks ended October 1, 2017, respectively, and $33,019 and $94,537 for the 13 and 39 weeks ended October 2, 2016, respectively.
Investments — Investments in entities in which the Company has less than a 20 percent interest or is not able to exercise significant influence are carried at cost. Dividends received are included in income, except for those dividends received in excess of the Company’s proportionate share of accumulated earnings, which are applied as a reduction of the cost of the investment. Impairment losses due to a decline in the value of the investment that is other than temporary are recognized when incurred. No dividend income or impairment loss was recognized for the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, respectively.
Accounts Payable — Under the Company’s cash management system, checks issued but not yet presented to the Company’s bank frequently result in overdraft balances for accounting purposes and are classified as accounts payable on the consolidated balance sheets. Accounts payable included $2,264,314 and $2,938,750 of checks issued in excess of available cash balances at October 1, 2017 and January 1, 2017, respectively.
Stock Based Compensation — The Company accounts for its stock based compensation using the fair value of the award estimated at the grant date of the award. The Company estimates the fair value of awards, consisting of stock options, using the
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Black Scholes option pricing model. Compensation expense is recognized in earnings using the straight line method over the vesting period, which represents the requisite service period.
Revenue Recognition — Revenue is recognized by the Company upon shipment to customers when the customer takes ownership and assumes the risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sale price is fixed and determinable. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
Shipping and Handling — Shipping and handling costs are included in costs of sales as they are incurred.
Income Taxes — A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the period. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between financial reporting and tax accounting measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company also evaluates the need for valuation allowances to reduce the deferred tax assets to realizable amounts. Management evaluates all positive and negative evidence and uses judgment regarding past and future events, including operating results, to help determine when it is more likely than not that all or some portion of the deferred tax assets may not be realized. When appropriate, a valuation allowance is recorded against deferred tax assets to reserve for future tax benefits that may not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Company assesses all tax positions for which the statute of limitations remain open. The Company had no unrecognized tax benefits as of October 1, 2017 and January 1, 2017. The Company recognizes any penalties and interest when necessary as income tax expense. There were no penalties or interest recorded during the 13 and 39 weeks ended October 1, 2017 and October 2, 2016, respectively.
Foreign Currency Adjustments — The Company’s functional currency for all operations worldwide is the United States dollar. Nonmonetary assets and liabilities of foreign operations are remeasured at historical rates and monetary assets and liabilities are remeasured at exchange rates in effect at the end of each reporting period. Income statement accounts are remeasured at average exchange rates for the year. Gains and losses from translation of foreign currency financial statements into United States dollars are classified in other income in the consolidated statements of operations.
Concentration Risks — The Company is exposed to various significant concentration risks as follows:
Customer and Credit — During the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, the Company’s net sales were derived from customers principally engaged in the North American automotive industry. Company sales directly and indirectly to General Motors Company (GM), Fiat Chrysler Automobiles (FCA), and Ford Motor Company (Ford) as a percentage of total net sales were: 13, 14, and 11 percent, respectively, during the 13 weeks ended October 1, 2017; 14, 12, and 12 percent, respectively, during the 39 weeks ended October 1, 2017; 17, 10, and 12 percent, respectively, during the 13 weeks ended October 2, 2016; and 14, 11, and 13 percent, respectively, during the 39 weeks ended October 2, 2016. No Tier 1 supplier represented more than 10 percent of direct Company sales for any period noted above. No customer accounted for more than 10 percent of direct accounts receivable as of October 1, 2017. GM accounted for 12 percent of direct accounts receivable as of January 1, 2017.
Labor Markets — At October 1, 2017, of the Company’s hourly plant employees working in the United States manufacturing facilities, 32 percent were covered under a collective bargaining agreement which expires in August 2019 while another 6 percent were covered under a separate collective bargaining agreement that expires in February 2020.
Foreign Currency Exchange — The expression of assets and liabilities in a currency other than the Company's functional currency, which is the United States dollar, gives rise to exchange gains and losses when such assets and obligations are paid in another currency. Foreign currency exchange rate adjustments (i.e., differences between amounts recorded and actual amounts owed or paid) are reported in the consolidated statements of operations as the foreign currency fluctuations occur. Foreign currency exchange rate adjustments are reported in the consolidated statements of cash flows using the exchange rates in effect at the time of the cash flows. At October 1, 2017, the Company’s exposure to assets and liabilities denominated in another
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currency was not significant. To the extent there is a fluctuation in the exchange rates, the amount of local currency to be paid or received to satisfy foreign currency obligations in 2017 may increase or decrease.
International Operations — The Company manufactures and sells products outside of the United States primarily in Mexico and Canada. Foreign operations are subject to various political, economic and other risks and uncertainties inherent in foreign countries. Among other risks, the Company’s operations may be subject to the risks of: restrictions on transfers of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; political conditions; and governmental regulations. During the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, 16, 14, 12 and 11 percent, respectively, of the Company’s production occurred in Mexico. During the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, 10, 11, 8 and 5 percent, respectively, of the Company's production occurred in Canada. Sales derived from customers located in Mexico, Canada, and other foreign countries were 17, 9, and 2 percent, respectively during the 13 weeks ended October 1, 2017; 15, 10, and 1 percent, respectively, during the 39 weeks ended October 1, 2017; 12, 9, and 1 percent, respectively, during the 13 weeks ended October 2, 2016; and 12, 7, and 1 percent, respectively, during the 39 weeks ended October 2, 2016, of the Company’s total sales.
Derivative Financial Instruments — All derivative instruments are required to be reported on the consolidated balance sheets at fair value unless the transactions qualify and are designated as normal purchases or sales. Changes in fair value are reported currently through earnings unless they meet hedge accounting criteria. See Note 7 for further information regarding the Company's derivative instrument makeup.
Use of Estimates — The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes most of the existing guidance on revenue recognition in ASC Topic 605, Revenue Recognition, and establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer implementation of ASU 2014-09 by one year. The guidance is now currently effective for fiscal years beginning after December 15, 2018 and is to be applied retrospectively at the entity's election either to each prior reporting period presented or with the cumulative effect of application recognized at the date of initial application. The ASU allows for early adoption for fiscal years beginning after December 15, 2016, and the Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the consolidated statements of operations and cash flows will be generally consistent with current guidance. The ASU is effective for the Company for financial statements issued for fiscal years beginning after December 15, 2019. The Company believes the impact that the adoption of this guidance will have on its consolidated financial statements will be to materially increase assets and liabilities on the consolidated balance sheet, but it is not expected to materially impact the consolidated statements of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting (ASU 2016-09), to simplify the accounting for share-based payment transactions. The ASU is effective for the Company for financial statements issued for fiscal years beginning after December 15, 2017. The Company early adopted this ASU during 2016 and applied the change to this period and future periods in the consolidated financial statements. Excess tax benefits are no longer disclosed in the consolidated statements of cash flows as a result of this
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early adoption and are also recognized as income tax expense in the income statement. The Company adopted the provisions related to forfeitures as well to record actual forfeitures as they occur, and the impact on our condensed consolidated balance sheet as of October 1, 2017 and January 1, 2017 was immaterial.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, accounting guidance which removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual or interim reporting periods beginning after December 15, 2021. Early adoption is permitted. The Company adopted the provisions related to this ASU during the 39 weeks ended October 1, 2017 and the impact is expected to be immaterial.
Note 2 — Business Combinations
2016
On April 29, 2016, Unique-Intasco Canada, Inc. (the “Canadian Buyer”), a newly formed subsidiary of the Company, acquired the business and substantially all of the assets of Intasco Corporation, a Canadian based tape manufacturer, for a purchase price of $21,049,045 in cash at closing. On the same date, Unique Fabricating NA, Inc. (the “US Buyer”), an existing subsidiary of the Company, purchased 100% of the outstanding capital stock of Intasco USA, Inc., a United States based tape manufacturer, for a purchase price of $890,726 paid by the issuance of 70,797 shares of the Company's common stock. These shares were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended. A portion of the purchase price is being held in escrow to fund the obligations of Intasco Corporation and Intasco USA, Inc., (together “Intasco”) and a related party to indemnify the Canadian Buyer and US Buyer against certain claims, losses, and liabilities. The purchase agreement included a potential purchase price adjustment provision based on the actual working capital acquired on the day of closing as compared to what was originally estimated at closing. On the date of closing, the Company paid an estimated working capital adjustment of $126,047 to Intasco, which is included in the total cash consideration paid above. During August 2016, Intasco paid the Company $212,823 for the actual final working capital adjustment. This final actual working capital settlement is included in the table below. The cash purchase price was paid with borrowings under a new senior credit facility which replaced the Company's existing facility as further described in Note 6. The Company incurred transaction costs of $852,580 related to the acquisition of Intasco. The acquisition significantly broadens the Company's solution offering, production capabilities, and potentially expands its reach into new markets.
In connection with the business combination, Intasco terminated the leases it had with an affiliated entity for its operating facilities in the United States and Canada and the Company entered into new leases for the same facilities. The terms of the Company's lease in the United States provides for a term of two years with monthly rental payments of $4,000 beginning on May 1, 2016 and $4,080 beginning on May 1, 2017. The terms of the Company's lease in Canada provides for a term of five years with monthly rental payments of $16,750 Canadian Dollars beginning on May 1, 2016, $17,085 Canadian Dollars beginning on May 1, 2017, and $17,427 Canadian Dollars beginning on May 1, 2019.
The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed.
Cash | $ | 18,250 | |
Accounts receivable | 2,146,082 | ||
Inventory | 2,485,781 | ||
Other current assets | 74,194 | ||
Property, plant, and equipment | 861,491 | ||
Identifiable intangible assets | 7,316,694 | ||
Accounts payable and accrued liabilities | (716,080 | ) | |
Deferred tax liability | (97,622 | ) | |
Total identifiable net assets | 12,088,790 | ||
Goodwill | 9,657,221 | ||
Total | 21,746,011 | ||
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The goodwill arising from the acquisition consists largely of Intasco's reputation, trained employees, and other unique features that cannot be associated with a specific identifiable asset. Of the total amount of goodwill recognized, $7,267,507 is expected to be deductible for tax purposes. The Company also recognized intangible assets as part of the acquisition which consisted of customer contracts, trade names, and unpatented technology. For further detail of the Company's intangibles please see Note 5.
The consolidated operating results for the 13 and 39 weeks ended October 2, 2016 included the operating results of Intasco from April 29, 2016. Intasco's revenue included in the accompanying statement of operations for the 13 and 39 weeks ended October 2, 2016, totaled $4,338,694 and $8,022,702, respectively from the date of acquisition. Intasco's net income included in the accompanying statement of operations for the 13 and 39 weeks ended October 2, 2016, totaled $$254,833 and $(47,578), respectively from the date of acquisition. The loss was primarily due to $521,071 of transaction costs incurred by the Company being recorded on Intasco's financial statements.
The following pro forma supplementary data for the 13 and 39 weeks October 2, 2016 gives effect to the acquisition of Intasco as if it had occurred on January 5, 2015 (the first day of the Company's 2015 fiscal year). The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company’s results of operations had the acquisition been consummated on the dates assumed and does not project the Company’s results of operations for any future date.
Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
Net sales | $ | 44,753,565 | $ | 132,630,816 | |||
Net income | $ | 2,216,205 | $ | 5,244,766 | |||
Net income per common share – basic | $ | 0.23 | $ | 0.54 | |||
Net income per common share – diluted | $ | 0.22 | $ | 0.53 | |||
Note 3 — Inventory
Inventory consists of the following:
October 1, 2017 | January 1, 2017 | ||||||
Raw materials | $ | 9,452,816 | $ | 9,513,980 | |||
Work in progress | 696,590 | 623,504 | |||||
Finished goods | 6,882,549 | 6,594,124 | |||||
Total inventory | $ | 17,031,955 | $ | 16,731,608 | |||
Included in inventory are assets located in Mexico with a carrying amount of $3,546,956 at October 1, 2017 and $2,911,926 at January 1, 2017, and assets located in Canada with a carrying amount of $1,442,008 at October 1, 2017 and $1,180,400 at January 1, 2017.
The inventory acquired in the 2016 acquisition of Intasco included a fair value adjustment of $318,518 which was all included in cost of goods sold in 2016.
Note 4 — Property, Plant, and Equipment
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Property, plant, and equipment consists of the following:
October 1, 2017 | January 1, 2017 | Depreciable Life – Years | |||||||
Land | $ | 1,663,153 | $ | 1,663,153 | |||||
Buildings | 7,606,125 | 7,541,976 | 23 – 40 | ||||||
Shop equipment | 16,042,895 | 13,003,025 | 7 – 10 | ||||||
Leasehold improvements | 997,277 | 913,097 | 3 – 10 | ||||||
Office equipment | 1,391,781 | 1,188,746 | 3 – 7 | ||||||
Mobile equipment | 223,474 | 218,743 | 3 | ||||||
Construction in progress | 1,367,955 | 1,425,090 | |||||||
Total cost | 29,292,660 | 25,953,830 | |||||||
Accumulated depreciation | 6,333,054 | 4,755,908 | |||||||
Net property, plant, and equipment | $ | 22,959,606 | $ | 21,197,922 | |||||
Depreciation expense was $565,132 and $1,612,487 for the 13 and 39 weeks ended October 1, 2017, respectively, and $457,584 and $1,330,047 for the 13 and 39 weeks ended October 2, 2016, respectively.
Included in property, plant, and equipment are assets located in Mexico with a carrying amount of $2,589,314 and $1,586,472 at October 1, 2017 and January 1, 2017, respectively, and assets located in Canada with a carrying amount of $675,686 and $755,040 at October 1, 2017 and January 1, 2017, respectively.
Note 5 — Intangible Assets
Intangible assets of the Company consist of the following at October 1, 2017:
Gross Carrying Amount | Accumulated Amortization | Weighted Average Life – Years | |||||||
Customer contracts | $ | 26,523,065 | $ | 10,751,424 | 8.16 | ||||
Trade names | 4,673,044 | 1,087,643 | 16.43 | ||||||
Non-compete agreements | 1,161,790 | 951,071 | 2.53 | ||||||
Unpatented technology | $ | 1,534,787 | $ | 435,627 | 5.00 | ||||
Total | $ | 33,892,686 | $ | 13,225,765 | |||||
Intangible assets of the Company consist of the following at January 1, 2017:
Gross Carrying Amount | Accumulated Amortization | Weighted Average Life – Years | |||||||
Customer contracts | $ | 26,523,065 | $ | 8,240,853 | 8.16 | ||||
Trade names | 4,673,044 | 868,866 | 16.43 | ||||||
Non-compete agreements | 1,161,790 | 818,585 | 2.53 | ||||||
Unpatented technology | 1,534,787 | $ | 206,040 | 5.00 | |||||
Total | $ | 33,892,686 | $ | 10,134,344 | |||||
The weighted average amortization period for all intangible assets is 8.96 years. Amortization expense for intangible assets totaled $1,031,140 and $3,091,422 for the 13 and 39 weeks ended October 1, 2017, respectively, and $1,031,138 and $2,666,425 for the 13 and 39 weeks ended October 2, 2016, respectively.
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Estimated amortization expense is as follows:
2017 | $ | 1,029,509 | |
2018 | 4,070,321 | ||
2019 | 3,945,264 | ||
2020 | 3,913,627 | ||
2021 | 2,455,712 | ||
Thereafter | 5,252,488 | ||
Total | $ | 20,666,921 | |
Note 6 — Long-term Debt
Old Senior Credit Facility
Until April 29, 2016, the Company had a senior credit facility with Citizens Bank, National Association pursuant to which we could borrow up to $20.0 million under a term loan and $25.0 million under a revolving line of credit. On April 29, 2016, in conjunction with the acquisition of Intasco, this senior credit facility was repaid and terminated and replaced with a new senior credit facility which is described below. On the date of termination, there was $15.4 million outstanding under the term loan and $17.3 million outstanding under the revolving line of credit, all of which were repaid.
Borrowings under the revolving line of credit were subject to a borrowing base, bore interest at the 30 day LIBOR plus a margin that ranged from 2.75 percent to 3.25 percent, and were secured by substantially all of the Company’s assets. The half percent range per annum on the term loan and revolving line of credit was determined quarterly based on the senior leverage ratio. The revolving line of credit was going to mature on December 18, 2017.
New Credit Agreement
On April 29, 2016, Unique Fabricating NA, Inc. (the “US Borrower”) and Unique-Intasco Canada, Inc. (the “CA Borrower”) and Citizens Bank, National Association (“Citizens”), acting as syndication agent, and other lenders, entered into a credit agreement (the “New Credit Agreement”) providing for borrowings of up to the aggregate principal amount of $62.0 million. The New Credit Agreement is a senior secured credit facility and consists of a revolving line of credit of up to $30.0 million (the “New Revolver”) to the US Borrower, a $17.0 million principal amount term loan (the “US Term Loan”) to the US Borrower, and a $15.0 million principal amount term loan (the “CA Term Loan”) to the CA Borrower. At Closing, the US Term Loan and the CA Term Loan were fully funded and the US Borrower borrowed approximately $22.9 million under the New Revolver. The borrowings were used to finance the acquisition of Intasco, including working capital adjustments and amounts paid into escrow, and to repay the Company’s existing senior credit facility, which was terminated as noted above.
On August 18, 2017, the US Borrower and the CA Borrower entered into the Second Amendment (the “Amendment”) to the New Credit Agreement, with Citizens acting as syndication agent, and other lenders. The Amendment converted $4.0 million of outstanding borrowings under the New Revolver under into an additional $4.0 million term loan to the US Borrower (the “US Term Loan II”). The conversion of a portion of the outstanding borrowings under the New Revolver did not reduce the aggregate amount available to be borrowed under it.
The New Revolver, US Term Loan, US Term Loan II, and CA Term Loan all mature on April 28, 2021 and bear interest at the Company's election of either (i) the greater of the Prime Rate or the Federal Funds Effective Rate (the “Base Rate”) or ii) the LIBOR rate, plus an applicable margin ranging from 1.75% to 2.50% per annum in the case of the Base Rate and 2.75% to 3.50% per annum in the case of the LIBOR rate, in each case, based on senior leverage ratio thresholds, measured quarterly.
In addition, the New Credit Agreement allows for increases in the principal amount of the New Revolver and the US and CA Term Loans not to exceed a $10.0 million principal amount, in the aggregate, provided that before and after giving effect to the proposed increase (and any transactions to be consummated using proceeds of the increase), the total leverage and debt service coverage ratios do not exceed specified amounts. The New Credit Agreement also provides for the issuance of letters of credit with a face amount of up to a $2.0 million, in the aggregate, provided that any letter of credit that is issued will reduce availability under the New Revolver.
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As of October 1, 2017, $22,315,002 was outstanding under the New Revolver. This amount is gross of debt issuance costs which are further described in Note 1. The New Revolver had an effective interest rate of 4.7356% percent per annum at October 1, 2017, and is secured by substantially all of the Company’s assets. At October 1, 2017, the maximum additional available borrowings under the New Revolver were $7,584,998, which includes a reduction for a $100,000 letter of credit issued for the benefit of the landlord of one of the Company’s leased facilities. The maximum amount available to be borrowed under the New Revolver is further subject to borrowing base restrictions.
Long term debt consists of the following:
October 1, 2017 | January 1, 2017 | ||||||
US Term Loan, payable to lenders in quarterly installments of $318,750 through March 31, 2018, $425,000 through March 31, 2019, and $531,250 through March 31, 2021, with a lump sum due at maturity. The effective interest rate was 4.7356% per annum at October 1, 2017. At October 1, 2017, the balance of the US Term Loan is presented net of a debt discount of $150,051 from costs paid to or on behalf of the lenders. | $ | 14,368,352 | $ | 15,862,309 | |||
US Term Loan II, payable to lenders in quarterly installments of $200,000 through March 31, 2021, with a lump sum due at maturity. The effective interest rate was 4.7356% per annum at October 1, 2017. At October 1, 2017, the balance of the US Term Loan II is presented net of a debt discount of $36,119 from costs paid to or on behalf of the lenders. | $ | 3,763,881 | $ | — | |||
CA Term Loan, payable to lenders in quarterly installments of $281,250 through March 31, 2018, $375,000 through March 31, 2019, and $468,750 through March 31, 2021, with a lump sum due at maturity. The effective interest rate was 4.7356% per annum at October 1, 2017. At October 1, 2017, the balance of the US Term Loan is presented net of a debt discount of $74,031 from costs paid to or on behalf of the lenders. | $ | 13,238,469 | $ | 14,066,732 | |||
Note payable to the seller of former owner of business Unique acquired in 2014 which is unsecured and subordinated to the New Credit Agreement. Interest accrues monthly at an annual rate of 6.00%. The note payable is due in full on February 6, 2019. | 500,000 | 500,000 | |||||
Other debt | — | 5,446 | |||||
Total debt excluding New Revolver | 31,870,702 | 30,434,487 | |||||
Less current maturities | 3,506,248 | 2,405,446 | |||||
Long-term debt – Less current maturities | $ | 28,364,454 | $ | 28,029,041 | |||
The New Credit Agreement contains customary negative covenants and requires that the Company comply with various financial covenants, including a total leverage ratio and debt service coverage ratio, as defined. As of October 1, 2017, the Company was in compliance with these financial covenants. Additionally, the US Term Loan and CA Term Loan each contain a provision, effective January 1, 2017, that requires an excess cash flow payment to be made if the Company’s cash flow exceeds certain thresholds as defined by the New Credit Agreement and the total leverage ratio exceeds the defined threshold. The Company made a payment in the second quarter of 2017 in the amount of $569,095 on the US Term Loan as the cash flow and total leverage ratio exceeded the specified thresholds noted above.
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Maturities on the Company’s New Credit Agreement and other long term debt obligations for the remainder of the current fiscal year and future fiscal years are as follows:
2017 | $ | 800,000 | |
2018 | 3,800,000 | ||
2019 | 5,100,000 | ||
2020 | 4,800,000 | ||
2021 | 39,945,905 | ||
Thereafter | — | ||
Total | 54,445,905 | ||
Discounts | (260,201 | ) | |
Debt issuance costs | (249,439 | ) | |
Total debt – Net | $ | 53,936,265 | |
Note 7 — Derivative Financial Instruments
Interest Rate Swap
The Company holds a derivative financial instrument, in the form of an interest rate swap, as required by its New Credit Agreement, for the purpose of hedging certain identifiable transactions in order to mitigate risks relating to the variability of future earnings and cash flows caused by interest rate fluctuations. The Company has elected not to apply hedge accounting for financial reporting purposes. The interest rate swap is recognized in the accompanying consolidated balance sheets at its fair value. Monthly settlement payments due on the interest rate swap and changes in its fair value are recognized currently in net income as interest expense in the consolidated statements of operations.
Effective June 30, 2016, as required under the New Credit Agreement, and as discussed in Note 6, the Company entered into an interest rate swap which requires the Company to pay a fixed rate of 1.055 percent per annum while receiving a variable rate per annum based on the one month LIBOR for a net monthly settlement based on the notional amount beginning immediately. This terminated the old swap previously entered into on January 17, 2014. The notional amount at the effective date was $16,681,250 which decreased by $318,750 each quarter until June 30, 2017, and began decreasing by $425,000 per quarter until June 29, 2018, when it will begin decreasing by $531,250 per quarter until it expires on June 28, 2019. At October 1, 2017, the fair value of this new interest rate swap was $120,094, and was included in other long-term assets in the consolidated balance sheets. The Company paid $(6,878) and $13,231, in the aggregate, in net monthly settlements with respect to the interest rate swap for the 13 and 39 weeks ended October 1, 2017. The Company paid $23,291 with respect to the interest rate swap for both the 13 and 39 weeks ended October 2, 2016. Both the change in fair value and the monthly settlements were included in interest expense in the consolidated statements of operations.
Subsequent to October 1, 2017, effective October 2, 2017, as required under the US Term Loan II, as discussed in Note 6, the Company entered into an additional interest rate swap with requires the Company to pay a fixed rate of 1.093% percent per annum while receiving a variable interest rate per annum based on the one month LIBOR for a net monthly settlement based on half of the notional amount beginning immediately. The notional amount at the effective date was $1,900,000 which decreases by $100,000 each quarter until it expires on September 30, 2020.
Foreign Currency Forward Contract
Effective June 29, 2016, the Company entered into a foreign currency forward contract to hedge the Mexican Peso. The forward contract had an equivalent USD notional amount of $3,300,000 and expired on June 30, 2017. The Company is exposed to market risk, including fluctuations in foreign currency exchange rates which may result in cash flow risks, and as a result from time to time may enter into forward contracts to mitigate risks relating to the variability of future earnings and cash flows caused by foreign currency rate fluctuations. The Company has elected not to apply hedge accounting for financial reporting purposes. The foreign currency forward contract was recognized in the accompanying consolidated balance sheets at its fair value and changes in its fair value were recognized currently in net income as gain/losses on foreign currency exchange (which is part of other income (expense), net) in the consolidated statements of operations. At October 1, 2017, the fair value of this foreign currency forward contract was $0.
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Note 8 — Restructuring
Unique's restructuring activities are undertaken as necessary to implement management's strategy, streamline operations, take advantage of available capacity and resources, and achieve net cost reductions. The restructuring activities generally relate to realignment of existing manufacturing capacity and closure of facilities and other exit or disposal activities, either in the normal course of business or pursuant to specific restructuring programs.
On October 27, 2015, the Company announced the planned closure of its manufacturing facility located in Murfreesboro, Tennessee that resulted in a workforce reduction of approximately 30 employees. The planned closure of the Murfreesboro facility was effective in the fourth quarter of 2015 and completed in January 2016. The action was necessary due to the tight labor market in Murfreesboro and the struggle to staff production levels to meet the ongoing growth strategy for Murfreesboro's respective products manufactured at the plant. In order to ensure the Company's ability to service its customers at the increasing volumes projected for the future, the Company decided to move existing Murfreesboro production including equipment to the Company's other manufacturing facilities in Evansville, Indiana and LaFayette, Georgia. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that the closing did not meet the definition as the closing does not represent a strategic shift in the Company's operations and the Company will have continuing cash flows from the production being moved to other facilities within the Company.
There were no costs incurred with this restructuring in 2017 as the restructuring and costs associated with the closure were all completed in 2016.
The Company sold the building it owned in Murfreesboro, which had a net book value of $2,033,327 on October 31, 2016 for cash proceeds of $2,175,185 resulting in a gain on the sale of $147,413.
Note 9 — Stock Incentive Plans
2013 Stock Incentive Plan
The Company’s board of directors approved a stock incentive plan (the “Plan”) in 2013. The Plan permits the Company to grant 495,000 non statutory or incentive stock options to the employees, directors and consultants of the Company. 495,000 shares of unissued common stock are required to be reserved for the Plan. The board of directors has the authority to determine the participants to whom stock options shall be awarded as well as any restrictions to be placed upon the awards. The exercise price cannot be less than the fair value of the underlying shares at the time the stock options are issued and the maximum length of an award is ten years.
On July 17, 2013 and January 1, 2014, the board of directors approved the issuance of 375,000 and 120,000 non statutory stock option awards, respectively, to employees of the Company with an exercise price of $3.33 per share with a weighted average grant date fair value of $86,450 and $42,000 respectively. On April 29, 2016 the Company issued 7,200 non statutory stock option awards to employees of the Company with an exercise price of $12.58 and with a weighted average grant date fair value of $20,160. On September 15, 2017 the Company issued 5,000 non statutory stock option awards to employees of the Company with an exercise price of $7.65 and with a weighted average grant date fair value of $7,050. All 4 grants of awards vest 20 percent on the grant date and an additional 20 percent on each of the first, second, third and fourth anniversaries thereafter. Vested awards can only be exercised while the participants are employed by the Company. Upon termination, the Company may repurchase the vested awards at their fair value (or their exercise price if terminated for cause) prior to their exercise.
The fair value of each option award is estimated on the grant date using a Black Scholes option pricing model that uses the weighted average assumptions noted in the following table. The expected volatility is based on the historical volatility of comparable companies. The expected term of the awards was estimated based on findings from academic studies investigating the average holding period for options adjusted for the Company’s size and risk factors. The risk free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of grant.
September 15, 2017 | April 29, 2016 | January 1, 2014 | July 17, 2013 | ||||||||
Expected volatility | 40.00 | % | 40.00 | % | 34.00 | % | 34.00 | % | |||
Dividend yield | 7.00 | % | 5.00 | % | — | % | — | % | |||
Expected term (in years) | 7 | 5 | 4 | 4 | |||||||
Risk-free rate | 1.81 | % | 1.28 | % | 1.27 | % | 0.96 | % | |||
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2014 Omnibus Performance Award Plan
In 2014, the board of directors and stockholders adopted the Unique Fabricating, Inc. 2014 Omnibus Performance Award Plan, or the 2014 Plan. The 2014 Plan provides for the grant of cash awards, stock options, stock appreciation rights, or SARs, shares of restricted stock and restricted stock units, or RSUs, performance shares and performance units. The 2014 Plan initially authorized the grant of awards relating to 250,000 shares of our common stock. In the event of any transaction that causes a change in capitalization, the Compensation Committee, such other committee administering the 2014 Plan or the board of directors will make such adjustments to the number of shares of common stock delivered, and the number and/or price of shares of common stock subject to outstanding awards granted under the 2014 Plan, as it deems appropriate and equitable to prevent dilution or enlargement of participants’ rights. An amendment approved in March 2016 by our board of directors which was approved by our stockholders at our annual meeting of stockholders in June 2016, increased the number of shares authorized for grant of awards under the 2014 Plan to a total of 450,000 shares of our common stock.
On August 17, 2015, the board of directors approved the issuance of a total of 230,000 stock option awards of which 45,000 non statutory awards were granted to the board of directors and 185,000 incentive stock options were granted to employees of the Company. All of the awards had an exercise price of $12.50 per share with a weighted average grant date fair value of $625,600. These awards vest 20 percent on the grant date and an additional 20 percent on each of the first, second, third and fourth anniversaries thereafter. Vested awards can only be exercised while the participants are employed by the Company.
On November 20, 2015, the board of directors approved the issuance of incentive stock option awards for 15,000 shares to employees of the Company. All of the awards had an exercise price of $11.50 per share with a weighted average grant date fair value of $33,500. The vesting schedule, vesting percentage, and capability of the employees to exercise these options have the exact same conditions as the August 17, 2015 grants discussed above.
On April 29, 2016, the board of directors approved the issuance of incentive stock option awards for 5,000 shares to employees of the Company. All of the awards had an exercise price of $12.58 per share with a weighted average grant date fair value of $14,000. The vesting schedule, vesting percentage, and capability of the employees to exercise these options have the exact same conditions as the November 20 and August 17, 2015 grants discussed above.
On September 15, 2017 the board of directors approved the issuance of incentive stock option awards for 15,000 shares to employees of the Company. All of the awards had an exercise price of $7.65 with a weighted average grant date fair value of $21,150. The vesting schedule, vesting percentage, and capability of the employees to exercise these options have the exact same conditions as the November 20, August 17, 2015, and April 29, 2016 grants discussed above.
The fair value of each option award is estimated on the grant date using a Black Scholes option pricing model that uses the weighted average assumptions noted in the following table. The expected volatility is based on the historical volatility of comparable companies. The expected term of the awards was estimated based on findings from academic studies investigating the average holding period for options for adjusted for the Company’s size and risk factors. The risk free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of grant.
September 15, 2017 | April 29, 2016 | November 20, 2015 | August 17, 2015 | ||||||||
Expected volatility | 40.00 | % | 40.00 | % | 35.00 | % | 38.00 | % | |||
Dividend yield | 7.00 | % | 5.00 | % | 5.00 | % | 4.80 | % | |||
Expected term (in years) | 7 | 5 | 5 | 5 | |||||||
Risk-free rate | 1.81 | % | 1.28 | % | 1.70 | % | 1.58 | % | |||
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A summary of option activity under both plans is presented below:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value(1) | |||||||||
Outstanding at January 1, 2017 | 629,880 | $ | 6.76 | 7.40 | ||||||||
Granted | 20,000 | $ | 7.65 | 10.00 | ||||||||
Exercised | 47,400 | $ | 3.33 | 0 | ||||||||
Forfeited or expired | — | $ | — | 0 | ||||||||
Outstanding at October 1, 2017 | 602,480 | $ | 7.06 | 6.82 | $ | 837,447 | ||||||
Vested and exercisable at October 1, 2017 | 451,160 | $ | 5.92 | 6.46 | $ | 1,141,435 | ||||||
(1) | The aggregate intrinsic value above is obtained by subtracting the weighted average exercise price from the estimated fair value of the underlying shares as of October 1, 2017 and multiplying this result by the related number of options outstanding and exercisable at October 1, 2017. The estimated fair value of the shares is based on the closing price of the stock of $8.45 as of October 1, 2017. |
The Company recorded compensation expense of $40,229 and $115,245 for the 13 and 39 weeks ended October 1, 2017, respectively, and $40,736 and $126,733 for the 13 and 39 weeks ended October 2, 2016, respectively, in its consolidated statements of operations, as a component of sales, general and administrative expenses. The income tax benefit related to share based compensation expense was $8,232 and $30,774 for the 13 and 39 weeks ended October 1, 2017, respectively, and $13,941 and $43,376 for the 13 and 39 weeks ended October 2, 2016, respectively.
As of October 1, 2017, there was $270,411 of total unrecognized compensation cost related to nonvested stock option awards under the plans. That cost is expected to be recognized over a weighted average period of 1.98 years.
Note 10 — Income Taxes
For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date income before income taxes. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effect of changes in tax laws or rates, are reported in the interim period in which they occur, if applicable.
Income tax expense for the 13 and 39 weeks ended October 1, 2017 was $260,532 and $1,856,684, respectively, compared to $1,254,437 and $2,520,389 for the 13 and 39 weeks ended October 2, 2016, respectively. During the 13 and 39 weeks ended October 1, 2017, the difference between the actual effective tax rate of 26.7% and 29.5%, respectively, and the statutory rate of 34.0% was due to income earning in jurisdictions with tax rates lower than the U.S. statutory rate, and the domestic production activities deduction, or DPAD benefit in the U.S. During both the 13 and 39 weeks ended October 2, 2016, the effective tax rate and statutory rate were in alignment with each other.
Note 11 — Operating Leases
The Company leases office space, production facilities and equipment under operating leases with various expiration dates through the year 2021. The leases for office space and production facilities require the Company to pay taxes, insurance, utilities and maintenance costs. Four of the leases for office space and production facilities provide for escalating rents over the life of the respective leases and rent expense for these leases is recognized over the term of the lease on a straight line basis, with the difference between lease payments and rent expense recorded as deferred rent in other accrued liabilities in the consolidated balance sheets. Total rent expense charged to operations was approximately $550,452 and $1,661,082 for the 13 and 39 weeks ended October 1, 2017, respectively, and $577,470 and $1,504,775 for the 13 and 39 weeks ended October 2, 2016, respectively.
Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows at October 1, 2017:
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2017 | $ | 503,294 | |
2018 | 1,892,642 | ||
2019 | 1,472,932 | ||
2020 | 928,599 | ||
2021 | 111,977 | ||
Thereafter | 18,886 | ||
Total | $ | 4,928,330 | |
Note 12 — Retirement Plans
The Company maintains a defined contribution plan covering certain full time salaried employees. Employees can make elective contributions to the plan. The Company contributes 100 percent of an employee’s contribution in an amount up to the first 3 percent of such employee’s total compensation and 50 percent of the contribution in an amount equal up to the next 2 percent of such employee’s total compensation. In addition, the Company, at the discretion of the board of directors, may make additional contributions to the plan on behalf of the plan participants. The Company contributed $81,615 and $317,032 for the 13 and 39 weeks ended October 1, 2017, respectively and $96,088 and $312,069 for the 13 and 39 weeks ended October 2, 2016, respectively.
The Intasco operations acquired in April 2016 have separate retirement plans. The United States facility sponsors a SIMPLE IRA account for qualifying employees. The plan makes a contribution equal to 3 percent of a participant's gross wages to the participating employees' SIMPLE IRA accounts. Contributions by Intasco in the United States totaled $621 and $2,576 for the 13 and 39 weeks ended October 1, 2017, respectively, and $556 and $2,227 for the 13 and 39 weeks ended October 2, 2016, respectively.
The Canadian facility sponsors a retirement plan whereby Intasco makes a matching contribution of participant contributions up to a maximum amount based on the participants' number of years of service. Contributions by Intasco in Canada totaled $8,475 and $33,794 for the 13 and 39 weeks ended October 1, 2017, respectively, and $4,872 and $20,120 for the 13 and 39 weeks ended October 2, 2016, respectively.
Note 13 — Related Party Transactions
Effective March 18, 2013, the Company is under a five year management agreement with a firm related to several stockholders. The agreement initially required annual management fees of $300,000 and additional fees for assistance provided in connection with acquisitions. Effective upon completion of the initial public offering by the Company in July 2015, the agreement was amended to reduce the annual management fee by an amount equal to the total, if any, of annual cash retainers and equity awards paid as compensation for service on the board of directors to any person who is a related person of Taglich Private Equity, LLC or Taglich Brothers, Inc. The Company incurred management fees of $56,250 and $168,750 for the 13 and 39 weeks ended October 1, 2017, respectively, and $56,250 and $168,750 for the 13 and 39 weeks ended October 2, 2016. During the 39 weeks ended October 2, 2016, the Company paid acquisition related fees under the management agreement of $259,900 as a result of the Intasco acquisition on April 29, 2016.
Note 14 — Fair Value Measurements
Financial instruments consist of cash equivalents, accounts receivable, accounts payable and debt. The carrying amount of all significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.
Accounting standards require certain other items be reported at fair value in the financial statements and provides a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.
Fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
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Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. Level 2 inputs may include quoted prices for similar items in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related item. Level 3 fair value measurements are based primarily on management’s own estimates using inputs such as pricing models, discounted cash flow methodologies or similar techniques taking into account the characteristics of the item.
In instances whereby inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each item.
The Company measures its interest rate swap at fair value on a recurring basis based primarily on Level 2 inputs using an income model based on disparity between variance and fixed interest rates, the scheduled balance of principal outstanding, yield curves and other information readily available in the market.
The Company measures its foreign currency forward contract on a recurring basis based primarily on Level 2 inputs using the present value of future cash flows to be incurred on the contracts. In accordance with market standards and conventions for valuing such contracts, the transactions reflect the current direction and amounts expected in each currency, spot exchange rates at period-end, discount factors and forward interest rate curves for each relevant currency pair and future maturity date. This forward contract expired in the 26 weeks ended October 1, 2017.
Note 15 — Contingencies
The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. While uncertainties are inherent in the final outcome of such matters, the Company believes that there are no pending proceedings in which the Company is currently involved that will have a material effect on its financial position, results of operations or cash flow.
Note 16 — Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed giving effect to all potentially weighted average dilutive shares including options and warrants. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per share.
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||||||||
Basic earnings per share calculation: | |||||||||||||||
Net income | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
Net income attributable to common stockholders | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
Weighted average shares outstanding | 9,757,187 | 9,703,791 | 9,748,743 | 9,665,441 | |||||||||||
Net income per share-basic | $ | 0.07 | $ | 0.26 | $ | 0.45 | $ | 0.51 | |||||||
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Diluted earnings per share calculation: | |||||||||||||||
Net income | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
Weighted average shares outstanding | 9,757,187 | 9,703,791 | 9,748,743 | 9,665,441 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Stock options(1)(2) | 139,654 | 204,111 | 152,924 | 209,133 | |||||||||||
Warrants(1)(2) | 1,432 | 11,054 | 1,573 | 11,375 | |||||||||||
Diluted weighted average shares outstanding | 9,898,273 | 9,918,956 | 9,903,240 | 9,885,949 | |||||||||||
Net income per share-diluted | $ | 0.07 | $ | 0.25 | $ | 0.45 | $ | 0.50 | |||||||
(1)Options to purchase 357,480 shares of common stock remaining to be exercised under the 2013 plan, and warrants to purchase 1,185 shares of common stock remaining to be exercised, were considered in the computation of diluted earnings per share using the treasury stock method in the 2017 calculation. Options to purchase 245,000 shares of common stock that were granted in August 2015 and November 2015 remaining to be exercised, as discussed in Note 9, under the 2014 plan, options to purchase 7,200 shares of common stock and 5,000 shares of common stock that were granted under the 2013 and 2014 plan, respectively, in April 2016, 5,000 and 15,000 shares of common stock that were granted under the 2013 and 2014 plan, respectively, in September 2017, and warrants to purchase 141,000 shares of common stock issued to the underwriters of the Company's IPO in July 2015, were not included in the computation of diluted earnings per share in the 2017 period because the effect would have been anti-dilutive.
(2)Options to purchase 409,680 shares of common stock remaining to be exercised under the 2013 plan, warrants to purchase 2,286 shares of common stock remaining to be exercised, and warrants to purchase 141,000 shares of common stock issued to the underwriters of the Company's IPO in July 2015, were considered in the computation of diluted earnings per share using the treasury stock method in the 2016 calculation. Options to purchase 245,000 shares of common stock that were granted in August 2015 as discussed in Note 9 under the 2014 plan and options to purchase 7,200 shares of common stock and 5,000 shares of common stock that were granted under the 2013 and 2014 plan, respectively, in April 2016 were not included in the computation of diluted earnings per share in the 2016 period because the effect would have been anti-dilutive.
Note 17 — Subsequent Event
Declaration of Cash Dividend
On November 9, 2017, our board of directors declared a quarterly cash dividend of $0.15 per common share. The dividend will be payable on December 7, 2017 to stockholders of record at the close of business on November 30, 2017. The aggregate amount of the dividend is approximately $1.5 million.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Results of Operation is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the accompanying unaudited consolidated financial statements and the related notes to unaudited consolidated financial statements included elsewhere in this document as well as the consolidated financial statements and the related notes to consolidated financial statements for the year ended January 1, 2017 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC"). Our actual results and the timing of events could differ materially from those discussed in forward-looking statements contained herein. Factors that could cause or contribute to these differences include those discussed below as well as in our Annual Report on Form 10-K, particularly in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” We make no guarantees regarding outcomes, and assume no obligation to update the forward-looking statements herein, except as may be required by law.
Forward-Looking Statements
The following discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. These statements are based on management's beliefs and assumptions and on information currently available to us. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. When used in this document the words “anticipate,” “believe,” “continue,” “could,” “seek,” “might,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “approximately,” “project,” “should,” “will,” “would,” or the negative or plural of these words or similar expressions, as they relate to our company, business and management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the future events and circumstances discussed may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements, including those discussed in our Annual Report on Form 10-K and in particular the section entitled “Risk Factors” of the Annual Report on Form 10-K.
Forward-looking statements speak only as of the date of this Form 10-Q filing. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement to reflect actual results, changes in assumptions based on new information, future events or otherwise. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Basis of Presentation
The Company’s policy is that quarterly periods end on the Sunday closest to the end of the calendar quarterly period. The third quarter of 2017 ended on October 1, 2017 and the third quarter of 2016 ended on October 2, 2016. The Company’s policy is that fiscal years end annually on the Sunday closest to the end of the calendar year end. Our 2016 fiscal year ended on January 1, 2017 and the current fiscal year will end on December 31, 2017. The Company’s operations are aggregated in one reportable business segment. Although we expanded the products that we manufacture and sell to include components used in the appliance, HVAC and water heater industries, products for these industries are manufactured at facilities that also manufacture or are capable of manufacturing products for the automotive industries. All of our manufacturing locations have similar capabilities, and most plants serve multiple markets. The manufacturing operations for our automotive, appliance, HVAC and water heater products share management and labor forces and use common personnel and strategies for new product development, marketing and the sourcing of raw materials.
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
• | have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; |
• | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
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• | submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency” and |
• | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will remain an “emerging growth company” for up to five years from the date of our IPO, or until the earliest to occur of (1) the last day of the first fiscal year in which our total annual gross revenues exceed $1.0 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three year period.
Overview
Unique is engaged in the engineering and manufacture of multi-material foam, rubber, and plastic components utilized in noise, vibration and harshness, acoustical management, water and air sealing, decorative and other functional applications. The Company combines a long history of organic growth with some more recent strategic acquisitions to diversify both product capabilities and markets served.
Unique currently services the North America automotive and heavy duty truck markets, in addition to the appliance, water heater and HVAC markets. Sales are conducted directly with major automotive and heavy duty truck, appliance, water heater and HVAC companies, referred throughout this Quarterly Report on Form 10-Q as original equipment manufacturers (OEMs), or indirectly through the Tier 1 suppliers of these OEMs. The Company has its principal executive offices in Auburn Hills, Michigan and has sales, engineering and production facilities in Auburn Hills, Michigan, Concord, Michigan, LaFayette, Georgia, Louisville, Kentucky, Evansville, Indiana, Ft. Smith, Arkansas, Bryan, Ohio, Port Huron, Michigan, London, Ontario, Monterrey, Mexico and Queretaro, Mexico. The Company also has an independent client sales representative who maintains offices in Baldham, Germany.
Unique derives the majority of its net sales from the sales of foam, rubber, plastic, and tape adhesive related automotive products. These products are produced from a variety of manufacturing processes including die cutting, compression molding, thermoforming, reaction injection molding, and fusion molding. We believe Unique has a broader array of processes and materials utilized than any of its direct competitors, based on our product offerings. By sealing out air noise and water intrusion, and by providing sound absorption and blocking, Unique’s products improve the interior comfort of a vehicle, increasing perceived vehicle quality and the overall experience of its passengers. Unique’s products perform similar functions for appliances, water heaters and HVAC systems, improving thermal characteristics, reducing noise and prolonging equipment life.
We primarily operate within the highly competitive and cyclical automotive parts industry. Over the past seven years the industry has experienced consistent growth as it recovered from the recession of 2009. Many sectors of the supply chain are operating near capacity. Over the same period we have grown our core automotive parts business at a faster rate than the industry as a whole, reflecting our growth through acquisitions as well as taking market share from competitors and increasing our content per vehicle on the programs we supply. We expect these trends to continue.
Recent Developments
Trends, Uncertainties and Opportunities
Our business is directly related to automotive sales and more specifically automotive vehicle production in North America. Light vehicle sales for the first nine months of 2017 decreased about 2% compared to the same period of 2016, driven by a decline in passenger car sales of about 9%. Helped by continued low fuel prices, light truck and SUV market demand however continued to be relatively strong in this year's first nine months, with sales up 3% compared to last year. Overall light vehicle
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production increased by 2% in North America in 2016, as consumer demand for vehicles increased. However, after several years of increases, consumer demand for light vehicles in North America has decreased this year, primarily due to reduced demand for passenger cars. This has resulted in a 3.6% decrease in overall North American light vehicle production in the first nine months of 2017, with passenger car production down 12% and light truck/SUV production 2% higher. This shift in demand and production from passenger cars to light trucks and SUVs has caused overall production levels to fall, since much light truck and SUV production is already at capacity. There have been a number of plant shutdowns to reduce excess vehicle inventory levels, particularly in passenger cars. Days’ supply of total light vehicles in the U.S. at the end of September 2017 was around 64 days, up from 62 days at the end of December 2016 and comparable with September 2016. As Unique is heavily dependent on light vehicle production in North America, our revenues have been impacted by the decline in 2017 production.
Dividend Declaration
On November 9, 2017, our board of directors declared a quarterly cash dividend of $0.15 per common share. The dividend will be payable on December 7, 2017 to stockholders of record at the close of business on November 30, 2017.
Acquisition of Intasco
On April 29, 2016, Unique-Intasco Canada, Inc. (the “Canadian Buyer”), a newly formed subsidiary of Unique Fabricating, Inc., (the “Company”) acquired the business and substantially all of the assets of Intasco Corporation, a Canadian based tape manufacturer, for a purchase price of $21.03 million , net of cash acquired, at closing. On the same date, Unique Fabricating NA, Inc. (the “US Buyer”), an existing subsidiary of the Company, purchased 100% of the outstanding capital stock of Intasco USA, Inc., a United States based tape manufacturer, for a purchase price of $0.89 million paid by the issuance of 70,797 shares of the Company's common stock, par value $0.001 per share. The shares issued are “restricted shares” issued in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended. A portion of the purchase price is being held in escrow to fund the obligations of Intasco Corporation and Intasco USA, Inc.(together “Intasco”) and a related party to indemnify the Canadian Buyer and US Buyer against certain claims, losses, and liabilities. The purchase price was paid with borrowings under a New Credit Facility which replaced the Company's existing facility and is described below.
Intasco is a material converter of pressure sensitive products such as film, label stock, foams and adhesives primarily to the automotive industry in the United States and Canada. Intasco specializes in interior and exterior attachment tape systems. This acquisition significantly broadens the Company's solution offerings, production capabilities, and potentially expands its reach into new markets.
New Credit Agreement
On April 29, 2016, Unique Fabricating NA, Inc. (the “US Borrower”) and Unique-Intasco Canada, Inc. (the “CA Borrower”) and Citizens Bank, National Association (“Citizens”), acting as lender and Administrative Agent and the other lenders, entered into a Credit Agreement (the “New Credit Agreement”) providing for borrowings of up to the aggregate principal amount of $62.00 million. The New Credit Agreement is a senior secured credit facility and consists of a revolving line of credit of up to $30.00 million (the “New Revolver”) to the US Borrower, a $17.00 million principal amount Term Loan (the “US Term Loan”) to the US Borrower, and a $15.00 million principal Term Loan (the “CA Term Loan”) to the CA Borrower. In conjunction with the acquisition of Intasco, the Company's old senior credit facility was repaid and terminated. On the date of termination of the old senior credit facility, $15.40 million outstanding principal amount on the term loan under the old senior credit facility was repaid and $17.30 million outstanding was repaid on the revolver.
On August 18, 2017, the US Borrower and the CA Borrower entered into the Second Amendment (the “Amendment”) to the New Credit Agreement, with Citizens, acting as syndication agent, and other lenders. The Amendment converted $4.0 million of outstanding borrowings under the New Revolver into an additional $4.0 million term loan to the US Borrower (the “US Term Loan II”). The conversion of a portion of the outstanding borrowings under the New Revolver did not reduce the aggregate amount available to be borrowed under it.
Comparison of Results of Operations for the Thirteen and Thirty-Nine Weeks Ended October 1, 2017 and the Thirteen and Thirty-Nine Weeks Ended October 2, 2016
On April 29, 2016, the Company acquired the business and substantially all of the assets of Intasco Corporation, a Canadian Corporation, for a purchase price of approximately $21.03 million, net of cash acquired at closing. On the same date,
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the US Buyer, an existing subsidiary of the Company, purchased 100% of the outstanding capital stock of Intasco USA, Inc., for a purchase price of $0.89 million paid by the issuance of 70,797 shares of the Company's common stock, par value $0.001 per share. For the 13 and 39 weeks ended October 1, 2017 and the 13 weeks ended October 2, 2016, our financial results include the results of operations of the Intasco business. Such results are included from the date of acquisition for the 39 weeks ended October 2, 2016.
Thirteen Weeks Ended October 1, 2017 and Thirteen Weeks Ended October 2, 2016
Net Sales
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||||
(in thousands) | |||||||
Net sales | $ | 41,231 | $ | 44,754 | |||
Net sales for the 13 weeks ended October 1, 2017 were approximately $41.23 million compared to $44.75 million for the 13 weeks ended October 2, 2016. The decrease in sales for the 13 weeks ended October 1, 2017, was primarily attributable to a 11.5% overall decline in North American vehicle production in such period as compared to production in the 13 weeks ended October 2, 2016. partially offset by increased market penetration.
Cost of Sales
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||||
(in thousands) | |||||||
Materials | $ | 20,708 | $ | 22,555 | |||
Direct labor and benefits | 6,719 | 6,327 | |||||
Manufacturing overhead | 4,334 | 4,226 | |||||
Sub-total | 31,761 | 33,108 | |||||
Depreciation | 495 | 396 | |||||
Cost of Sales | 32,256 | 33,504 | |||||
Gross Profit | $ | 8,975 | $ | 11,251 | |||
The major components of cost of sales are raw materials purchased from third parties, direct labor and benefits, and manufacturing overhead, including facility costs, utilities, supplies, repairs and maintenance, insurance, freight costs of products shipped to customers and depreciation.
Cost of Sales as a percent of Net Sales
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||
Materials | 50.2 | % | 50.4 | % | |
Direct labor and benefits | 16.3 | % | 14.1 | % | |
Manufacturing overhead | 10.5 | % | 9.5 | % | |
Sub-total | 77.0 | % | 74.0 | % | |
Depreciation | 1.2 | % | 0.9 | % | |
Cost of Sales | 78.2 | % | 74.9 | % | |
Gross Profit | 21.8 | % | 25.1 | % | |
Cost of sales as a percentage of net sales for the 13 weeks ended October 1, 2017 increased to 78.2% from 74.9% for the 13 weeks ended October 2, 2016. The increase in cost of sales as a percentage of net sales was primarily attributable to higher direct labor and benefits, manufacturing overhead, and depreciation as a percentage of net sales, partially offset by a decrease in
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costs of material. Material costs decreased to 50.2% of net sales for the 13 weeks ended October 1, 2017 from 50.4% for the 13 weeks ended October 2, 2016. The decline was primarily due to favorable product mix. Direct labor and benefit costs as a percentage of net sales was 16.3% for the 13 weeks ended October 1, 2017 compared to 14.1% for the 13 weeks ended October 2, 2016. Labor and benefit costs as a percentage of net sales increased for the 13 weeks ended October 1, 2017 compared to the 13 weeks ended October 2, 2016 due to manufacturing inefficiencies caused by excessive personnel turnover at various plant locations, an unfavorable product mix, and a decline in the use of temporary employees at one of our facilities in Michigan as required under our collective bargaining agreement resulting in an increase in benefit related costs. Manufacturing overhead costs as a percentage of net sales was 10.5% for the 13 weeks ended October 1, 2017 versus 9.5% for the 13 weeks ended October 2, 2016. The increase in manufacturing overhead costs as a percentage of net sales was due to the decline in sales during the 13 weeks ended October 1, 2017 and the fixed nature of a portion of the costs. Depreciation costs increased to 1.2% of net sales for the 13 weeks ended October 1, 2017 compared to 0.9% for the 13 weeks ended October 2, 2016. The increase was a result of the lower sales in the 13 weeks ended October 1, 2017, as well as the investment in new equipment we made to increase our capacity to meet expected future demand and to add production capabilities at our manufacturing facilities.
Gross Profit
As a result of the decrease in net sales and the increase in cost of sales as a percentage of sales described above, gross profit as a percentage of net sales for the 13 weeks ended October 1, 2017 decreased to 21.8% from 25.1% for the 13 weeks ended October 2, 2016.
Selling, General and Administrative Expenses
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||||
(in thousands, except SG&A as a % of net sales) | |||||||
SG&A, exclusive of line items below | $ | 6,168 | $ | 5,846 | |||
Transaction expenses | — | 10 | |||||
Subtotal | 6,168 | 5,856 | |||||
Depreciation and amortization | 1,101 | 1,093 | |||||
SG&A | $ | 7,269 | $ | 6,949 | |||
SG&A as a % of net sales | 17.6 | % | 15.5 | % | |||
SG&A as a percentage of net sales for the 13 weeks ended October 1, 2017 increased to 17.6% from 15.5% for the 13 weeks ended October 2, 2016. The increase is primarily related to the decline in sales in the 13 weeks ended October 1, 2017 compared to the 13 weeks ended October 2, 2016.
Operating Income
As a result of the foregoing factors, operating income for the 13 weeks ended October 1, 2017 was $1.71 million compared to operating income of $4.30 million for the 13 weeks ended October 2, 2016.
Non-Operating Expense
Non-operating expense for the 13 weeks ended October 1, 2017 was $0.73 million compared to $0.53 million for the 13 weeks ended October 2, 2016. The change in non-operating expense was primarily driven by an increase in interest expense due to higher interest rates.
Income Before Income Taxes
As a result of the foregoing factors, income before income taxes for the 13 weeks ended October 1, 2017 was $0.98 million, compared to $3.77 million for the 13 weeks ended October 2, 2016.
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Income Tax Provision
During the 13 weeks ended October 1, 2017, income tax expense was $0.26 million, and the effective income tax rate was 26.7%. The difference between the actual effective rate and the statutory rate was due to income earning in jurisdictions with tax rates lower than the U.S. statutory rate, and the domestic production activities deduction, or DPAD benefit in the U.S. During the 13 weeks ended October 2, 2016, income tax expense was $1.25 million, and the effective income tax rate was 33.2%. The effective tax rate and statutory rate were in alignment with each other for the 13 weeks ended October 2, 2016.
The Company has deferred tax assets associated with timing differences between when an expense is recorded for book purposes versus when it is deductible for tax. The Company has considered evidence both supporting and not supporting the determination that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance as of October 1, 2017. The Company will continue to evaluate whether the deferred tax assets will be realizable, and if appropriate, will record a valuation allowance against these assets.
Net income
As a result of decreased net sales and changes in expenses discussed above, net income for the 13 weeks ended October 1, 2017 was $0.72 million compared to $2.52 million during the 13 weeks ended October 2, 2016.
Thirty-Nine Weeks Ended October 1, 2017 and Thirty-Nine Weeks Ended October 2, 2016
Net Sales
Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
(in thousands) | |||||||
Net sales | $ | 133,606 | $ | 126,784 | |||
Net sales for the 39 weeks ended October 1, 2017 were approximately $133.61 million compared to $126.78 million for the 39 weeks ended October 2, 2016. For the 39 weeks ended October 1, 2017, approximately $11.00 million of the growth in net sales was attributable to our increased market penetration and new product introductions, including 39 weeks of sales from the Intasco business. The acquisition occurred on April 29, 2016, and only 22 weeks of Intasco sales are included for the 39 weeks ended October 2, 2016. This growth was partially offset by a 3.6% overall decrease in North American vehicle production in the 39 weeks ended October 1, 2017 period as compared to production in the 39 weeks ended October 2, 2016.
Cost of Sales
Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
(in thousands) | |||||||
Materials | $ | 67,404 | $ | 64,432 | |||
Direct labor and benefits | 20,202 | 18,673 | |||||
Manufacturing overhead | 13,852 | 12,572 | |||||
Sub-total | 101,458 | 95,677 | |||||
Depreciation | 1,400 | 1,166 | |||||
Cost of Sales | 102,858 | 96,843 | |||||
Gross Profit | $ | 30,748 | $ | 29,942 | |||
The major components of cost of sales are raw materials purchased from third parties, direct labor and benefits, and manufacturing overhead, including facility costs, utilities, supplies, repairs and maintenance, insurance, freight costs of products shipped to customers and depreciation.
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Cost of Sales as a percent of Net Sales
Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||
Materials | 50.4 | % | 50.8 | % | |
Direct labor and benefits | 15.1 | % | 14.8 | % | |
Manufacturing overhead | 10.4 | % | 9.9 | % | |
Sub-total | 75.9 | % | 75.5 | % | |
Depreciation | 1.1 | % | 0.9 | % | |
Cost of Sales | 77.0 | % | 76.4 | % | |
Gross Profit | 23.0 | % | 23.6 | % | |
Cost of sales as a percentage of net sales for the 39 weeks ended October 1, 2017 increased to 77.0% from 76.4% for the 39 weeks ended October 2, 2016. The increase in cost of sales as a percentage of net sales was primarily attributable to higher direct labor and benefits, manufacturing overhead, and depreciation as a percentage of net sales, partially offset by a decrease in costs of material. Material costs decreased to 50.4% of net sales for the 39 weeks ended October 1, 2017 from 50.8% for the 39 weeks ended October 2, 2016. The decline was primarily due to favorable product mix as well as increased costs in 2016 due to the amortization of the markup to fair market value of the inventory acquired in the Intasco acquisition. Direct labor and benefit costs as a percentage of net sales was 15.1% for the 39 weeks ended October 1, 2017 compared to 14.8% for the 39 weeks ended October 2, 2016. Labor and benefit costs as a percentage of net sales increased due to an increase in direct and temporary labor hours as a result of change in product mix, and a decline in the use of temporary employees at one of our facilities in Michigan as required under our collective bargaining agreement, resulting in an increase in benefit related costs during the 39 weeks ended October 1, 2017 when compared to the 39 weeks ended October 2, 2016. Manufacturing overhead costs as a percentage of net sales was 10.4% for the 39 weeks ended October 1, 2017 versus 9.9% for the 39 weeks ended October 2, 2016. Manufacturing overhead costs as a percentage of net sales increased due to an increase in shipping related costs due to a change in product mix and in wages as we upgrade supervision and add production capabilities at some of our facilities. Depreciation costs increased to 1.1% of net sales for the 39 weeks ended October 1, 2017 compared to 0.9% for the 39 weeks ended October 2, 2016. The increase was a result of the investment in new equipment we made to increase our capacity in order to meet expected future demand and to add production capabilities at our manufacturing facilities.
Gross Profit
As a result of the increase in net sales and the increase in cost of sales as a percentage of sales described above, gross profit as a percentage of net sales for the 39 weeks ended October 1, 2017 decreased to 23.0% from 23.6% for the 39 weeks ended October 2, 2016.
Selling, General and Administrative Expenses
Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
(in thousands, except SG&A as a % of net sales) | |||||||
SG&A, exclusive of line items below | $ | 19,142 | $ | 16,979 | |||
Transaction expenses | 10 | 859 | |||||
Subtotal | 19,152 | 17,838 | |||||
Depreciation and amortization | 3,304 | 2,831 | |||||
SG&A | $ | 22,456 | $ | 20,669 | |||
SG&A as a % of net sales | 16.8 | % | 16.3 | % | |||
SG&A as a percentage of net sales for the 39 weeks ended October 1, 2017 increased to 16.8% from 16.3% for the 39 weeks ended October 2, 2016. The increase is primarily the result of one-time consulting and licensing costs associated with the implementation of our new ERP system in the 39 weeks ended October 1, 2017 compared to the 39 weeks ended October 2, 2016.
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Operating Income
As a result of the foregoing factors, operating income for the 39 weeks ended October 1, 2017 was $8.29 million compared to operating income of $9.24 million for the 39 weeks ended October 2, 2016.
Non-Operating Expense
Non-operating expense for the 39 weeks ended October 1, 2017 was $2.01 million compared to $1.76 million for the 39 weeks ended October 2, 2016. The change in non-operating expense was primarily driven by an increase in interest expense due to higher interest rates and a higher average outstanding debt balance in the 39 weeks ended October 1, 2017.
Income Before Income Taxes
As a result of the foregoing factors, income before income taxes for the 39 weeks ended October 1, 2017 was $6.29 million, compared to $7.47 million for the 26 weeks ended October 2, 2016.
Income Tax Provision
During the 39 weeks ended October 1, 2017, income tax expense was $1.86 million, and the effective income tax rate was 29.5%. The difference between the actual effective rate and the statutory rate was due to income earning in jurisdictions with tax rates lower than the U.S. statutory rate, and the domestic production activities deduction, or DPAD benefit in the U.S. During the 39 weeks ended October 2, 2016, income tax expense was $2.52 million, and the effective income tax rate was 33.7%. The Company has deferred tax assets associated with timing differences between when an expense is recorded for book purposes versus when it is deductible for tax. The Company has considered evidence both supporting and not supporting the determination that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance as of October 1, 2017. The Company will continue to evaluate whether the deferred tax assets will be realizable, and if appropriate, will record a valuation allowance against these assets.
Net income
As a result of increased net sales and changes in expenses discussed above, net income for the 39 weeks ended October 1, 2017 was $4.43 million compared to $4.95 million during the 39 weeks ended October 2, 2016.
Non-GAAP Financial Measures
Adjusted EBITDA
We present Adjusted EBITDA (defined below), a measure that is not in accordance with generally accepted accounting principles in the United States of America (non-GAAP), in this document to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and it is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for Company management. In addition, the financial covenants in our new credit facility are based on Adjusted EBITDA, as calculated below, subject to dollar limitations on certain adjustments and certain other addbacks permitted by our new credit facility.
We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, non-cash stock awards, non-recurring integration expenses, transaction fees related to our acquisitions, restructuring expenses, and one-time consulting and licensing ERP system implementation costs as we implement a new ERP system at all locations. We believe omitting these items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
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The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, generally accepted accounting principles in the Unites States of America (GAAP) measures such as net income. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include that: (1) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) it does not reflect changes in, or cash requirements for, our working capital needs; (3) it does not reflect income tax payments we may be required to make; and (4) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness.
To properly and prudently evaluate our business, we encourage you to review our unaudited consolidated financial statements included elsewhere in this document, our audited consolidated financial statements included in our Annual Report on Form 10-K, and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (1) non-cash items or (2) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.
Thirteen and Thirty-Nine Weeks Ended October 1, 2017 and Thirteen and Thirty-Nine Weeks Ended October 2, 2016
Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Net income | $ | 715 | $ | 2,520 | $ | 4,430 | $ | 4,953 | |||||||
Plus: Interest expense, net | 770 | 525 | 2,089 | 1,739 | |||||||||||
Plus: Income tax expense | 261 | 1,254 | 1,857 | 2,520 | |||||||||||
Plus: Depreciation and amortization | 1,596 | 1,489 | 4,704 | 3,996 | |||||||||||
Plus: Non-cash stock award | 40 | 41 | 115 | 127 | |||||||||||
Plus: Non-recurring integration expenses | 28 | 36 | 32 | 105 | |||||||||||
Plus: Non-recurring step-up of inventory basis to fair market value | — | 39 | — | 319 | |||||||||||
Plus: Transaction fees | — | 10 | 23 | 859 | |||||||||||
Plus: Restructuring expenses | — | — | — | 35 | |||||||||||
Plus: One-time consulting and licensing ERP system implementation costs | 276 | — | 815 | — | |||||||||||
Adjusted EBITDA | $ | 3,686 | $ | 5,914 | $ | 14,065 | $ | 14,653 | |||||||
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow from operations and borrowings under our New Credit Agreement from our senior lenders.
Our primary uses of cash are payment of vendors, payroll, operating costs, capital expenditures and debt service. As of October 1, 2017 and January 1, 2017, we had a cash balance of $1.02 million and $0.71 million, respectively. Our excess cash balance is swept daily and applied to reduce borrowings under our revolving line of credit, which remains available for re-borrowing, as needed, subject to compliance with the terms of the facility. As of October 1, 2017 and January 1, 2017, we had $7.58 million and $9.42 million, respectively, available to be borrowed under our revolving credit facility, subject to borrowing base restrictions and outstanding letters of credit. At each such date, we were in compliance with all debt covenants. We believe that our sources of liquidity, including cash flow from operations, existing cash and our revolving line of credit are sufficient to meet our projected cash requirements for at least the next fifty two weeks.
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We financed the acquisition of Intasco on April 29, 2016, with borrowings under our $62.00 million New Credit Agreement described below.
While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional growth opportunities that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected.
Dividends
Our payment of dividends on our common stock in the future will be determined by our board of directors in its sole discretion and will depend on business conditions, our financial condition, earnings, liquidity and capital requirements. Our New Credit Agreement contains financial covenants which may have the effect of precluding or limiting the amounts that we can pay as dividends.
The following table presents cash flow data for the periods indicated.
Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
(in thousands) | |||||||
Cash flow data | |||||||
Cash flow provided by (used in): | |||||||
Operating activities | $ | 5,641 | $ | 5,444 | |||
Investing activities | (3,437 | ) | (23,249 | ) | |||
Financing activities | (1,893 | ) | 18,584 | ||||
Operating Activities
Cash provided by operating activities consists of: net income adjusted for non-cash items; including depreciation and amortization; gain or loss on sale of assets; gain or loss on extinguishments of debt; gain or loss on derivative instruments; bad debt adjustments; stock option expense; changes in deferred income taxes; accrued and other liabilities; prepaid expenses and other assets; and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, inventory, prepaid expenses and other assets, and accounts payable and accrued interest.
During the thirty-nine weeks ended October 1, 2017, net cash provided by operating activities was $5.64 million, compared to net cash provided by operating activities of $5.44 million for the thirty-nine weeks ended October 2, 2016.
Net cash provided by operations for the thirty-nine weeks ended October 1, 2017 was also impacted by working capital changes, primarily due to increases in accounts receivable and prepaid expense balances, resulting from the expansion of our operations.
Net cash provided by operations for the thirty-nine weeks ended October 2, 2016 was also impacted by working capital changes, again due to increases in accounts receivable resulting from increased sales.
Investing Activities
Cash used in investing activities consists principally of purchases of property, plant and equipment.
In the thirty-nine weeks ended October 1, 2017 and thirty-nine weeks ended October 2, 2016, we made capital expenditures of $3.47 million and $2.44 million, respectively. We also acquired Intasco for a purchase price, net of cash acquired, of $21.03 million during the thirty-nine weeks ended October 2, 2016.
We plan to spend a total of approximately $5.30 million in capital expenditures during 2017, including the $3.47 million spent to date.
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Financing Activities
Cash flows (used in) provided by financing activities consists primarily of borrowings and payments under our new and old senior credit facility, debt issuance costs, proceeds from the exercise of stock options and warrants, and distribution of cash dividends.
In the thirty-nine weeks ended October 1, 2017, we had outflows of $1.89 million primarily due to $2.57 million of pay-off of the principal amount of our term loans under our new senior credit facility, and $4.39 million for payments of cash dividends. These outflows were partially offset by $5.84 million net proceeds from borrowings under our revolving credit facility.
As of October 1, 2017, $22.32 million was outstanding under the new revolving credit facility, gross of debt issuance costs. Borrowings under the new revolving credit facility are subject to borrowing base restrictions and reduced to the extent of letters of credit issued under the new senior credit facility. As of October 1, 2017, the maximum additional available borrowings under the new revolver was $7.58 million, subject to borrowing base restrictions and a reduction for a $0.1 million letter of credit issued for the benefit of the landlord of one of the Company’s leased facilities.. Amounts repaid under the new revolving credit facility will be available to be re-borrowed, subject to compliance with the terms of the facility.
In the thirty-nine weeks ended October 2, 2016, we had inflows of $18.58 million primarily due to $32.00 million of gross proceeds from our term loans under our new senior credit facility, and $7.72 million net proceeds from our revolving credit facility. These inflows were partially offset by $15.38 million of pay-off of the principal amount of our term loan under our old senior credit facility, and $4.35 million for payments of cash dividends.
New Credit Agreement
On April 29, 2016, the US Borrower and the CA Borrower and Citizens, acting as lender and Administrative Agent and the other lenders, entered into the New Credit Agreement providing for borrowings of up to the aggregate principal amount of $62.00 million. The New Credit Agreement is a senior secured credit facility and consists of a revolving line of credit of up to $30.00 million to the US Borrower, a $17.00 million principal amount term loan to the US Borrower, and a $15.00 million term loan to the CA Borrower. The borrowings were used to finance the acquisition of Intasco, including working capital adjustments and amounts paid into escrow, plus to repay the Company’s existing senior credit facility, which was terminated as noted below.
On August 18, 2017, the US Borrower and the CA Borrower entered into the Second Amendment (the “Amendment”) to the New Credit Agreement, with Citizens, acting as syndication agent, and other lenders. The Amendment converted $4.00 million of outstanding borrowings under the New Revolver under the New Credit Agreement into an additional $4.00 million term loan to the US Borrower (the “US Term Loan II”). The conversion of a portion of the outstanding borrowings under the New Revolver did not reduce the aggregate amount available to be borrowed under it.
The New Revolver, US Term Loan, US Term Loan II, and CA Term Loan all mature on April 28, 2021 and bear interest at the Company's election of either (i) the greater of the Prime Rate or the Federal Funds Effective Rate (the “Base Rate”) or (ii) the LIBOR rate plus an applicable margin ranging from 1.75% to 2.50% in the case of the Base Rate and 2.75% to 3.50% in the case of the LIBOR rate, in each case, based on senior leverage ratio thresholds measured quarterly. The effective interest rate as of October 1, 2017 was 4.7356%.
In addition, the New Credit Agreement allows for increases in the principal amount of the New Revolver and US and CA Term Loans not to exceed $10.00 million principal amount, in the aggregate, provided that before and after giving effect to any proposed increase (and any transactions to be consummated using proceeds of the increase), the total leverage and debt service coverage ratios do not exceed specified amounts. The New Credit Agreement also provides for the issuance of letters of credit with a face amount of up to $2.00 million, in the aggregate, provided that any letter of credit issued will reduce availability under the New Revolver.
We are permitted to prepay in part or in full the amounts due under the New Credit Agreement without penalty, provided that with respect to prepayment of the New Revolver at least $0.10 million remains outstanding. Our obligations under the New Credit Agreement may be accelerated upon the occurrence of an event of default, which include customary events for a financing arrangement of this type, including, without limitation, payment defaults, defaults in the performance of affirmative or negative covenants (including financial ratio maintenance requirements), bankruptcy or related defaults, defaults on certain other indebtedness, the material inaccuracy of representations or warranties, material adverse changes, and changes related to ownership of the U.S. Borrower or Unique Fabricating, Inc. In the event of an event of default, the interest rate on the New
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Revolver and US Term Loan and CA Term Loan will increase by 3.0% per annum plus the then applicable rate. The New Credit Agreement requires that we repay both the US Term Loan and CA Term Loan principal annually in an amount equal to 25% of excess cash flow, as defined, for the year ended January 1, 2017 and for each subsequent fiscal year until the total leverage ratio, as defined, calculated as of the end of such year is less than 2:00 to 1:00. Additionally, the US Term Loan and CA Term Loan contains a clause, effective January 1, 2017, that requires an excess cash flow payment to be made if the Company’s cash flow exceeds certain thresholds as defined by the New Credit Agreement and certain performance thresholds are not met. The Company made a payment in the second quarter of 2017 in the amount of $0.57 million on the US Term Loan. The Company entered into an amendment to allow for the sale by the US Borrower and its domestic subsidiaries of accounts receivable, pursuant to agreements in form and content satisfactory to the Administrative Agent, in an aggregate amount of not more than $3,000,000 in any calendar month. To date, we have not sold any receivables and there are currently no plans to do so.
The US Borrower's obligations under the New Credit Agreement are guaranteed by each of its United States subsidiaries and by Unique Fabricating, Inc. and secured by a first priority security interest in all tangible and intangible assets, including a pledge of capital stock of the United States subsidiaries of the US Borrower and of 65% of the capital stock of the CA Borrower, and by mortgages on our facilities in LaFayette, Georgia, Louisville, Kentucky, Evansville, Indiana, and Fort Smith, Arkansas. The US borrower guarantees all of the obligations and liabilities of the CA Borrower. Unique Fabricating, Inc. also pledged all of the capital stock of the US Borrower.
Effective June 30, 2016, as required under the New Credit Agreement, the Company purchased a derivative financial instrument, in the form of an interest rate swap, for the purpose of hedging certain identifiable transactions in order to mitigate risks related to cash flow variability caused by interest rate fluctuations. The Company elected not to apply hedge accounting for financial reporting purposes. The interest rate swap requires the Company to pay a fixed rate of 1.055% while receiving a variable rate of one-month LIBOR. The notional amount at the effective date began at $16.68 million and decreases by $0.32 million each quarter until June 30, 2017, when it begins decreasing by $0.43 million per quarter until June 29, 2018, when it begins decreasing by $0.53 million until it expires on June 28, 2019. The interest rate swap was recognized at its fair value. Monthly settlement payments due on the interest rate swap and changes in its fair value are recognized as interest expense in the period incurred.
Subsequent to October 1, 2017, effective October 2, 2017, as required under the US Term Loan II, as discussed in Note 6, the Company entered into an interest rate swap with requires the Company to pay a fixed rate of 1.093% percent per annum while receiving a variable interest rate per annum based on one month LIBOR for a net monthly settlement based on half of the notional amount beginning immediately. The notional amount at the effective date was $1.90 million which decreases by $0.10 million each quarter until it expires on September 30, 2020.
We must comply with a minimum debt service financial covenant and a senior funded indebtedness to EBITDA covenant, as defined. As of October 1, 2017, we were in compliance with all loan covenants.
The New Credit Agreement also contains customary affirmative covenants, including: (1) maintenance of legal existence and compliance with laws and regulations; (2) delivery of consolidated financial statements and other information; (3) maintenance of properties in good working order; (4) payment of taxes; (5) delivery of notices of defaults, litigation, ERISA events and material adverse changes; (6) maintenance of adequate insurance; and (7) inspection of books and records.
The New Credit Agreement contains customary negative covenants, including restrictions on: (1) the incurrence of additional debt; (2) liens and sale-leaseback transactions; (3) loans and investments; (4) guarantees and hedging agreements; (5) the sale, transfer or disposition of assets and businesses; (6) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the issuer by its subsidiaries; (7) transactions with affiliates; (8) changes in the business conducted by us; (9) payment or amendment of subordinated debt and organizational documents; and (10) maximum capital expenditures. The New Credit Agreement prohibits the payment of any dividend, redemption or other payment or distribution by the Borrowers other than distributions to the US Borrower by its subsidiaries, unless after giving effect to the dividend or other distribution, the post distribution DSCR, as defined, is greater than 1.1 to 1.0, and Borrowers remain in compliance with the other financial covenants.
Old Senior Credit Facility
Until April 29, 2016, we maintained a senior credit facility with Citizens Bank, National Association pursuant to which we could borrow up to $25.00 million under a revolving line of credit and up to $20.00 million under a term loan. The borrower under the facility was Unique Fabricating NA, Inc., and borrowings were guaranteed by the Company and each of our subsidiaries. The term loan bore interest at the LIBOR rate for a period equal to one month, plus 3.0% to 3.5% per annum. The
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term loan would have matured in December 2017. The revolver bore interest at the LIBOR rate plus an applicable margin ranging from 2.75% to 3.25%. The half percent range per annum on the term loan and revolver was determined quarterly based on the senior leverage ratio. We were permitted to prepay in part or in full amounts due under the senior credit facility without penalty. The senior credit facility required that we repay term loan principal annually in an amount equal to 25% of excess cash flow, as defined, for the year ended January 3, 2016 and for each subsequent fiscal year until the total leverage ratio, as defined, calculated as of the end of each year was less than 2:00 to 1:00.
On April 29, 2016, in conjunction with the acquisition of Intasco, the old senior credit facility was repaid and terminated and replaced with a new senior credit facility which is described above. On the date of termination of the old senior credit facility, $15.38 million outstanding was repaid on the term loan and $17.26 million outstanding was repaid on the revolver.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
Indemnification Agreements
In the normal course of business, we provide customers with indemnification provisions of varying scope against claims of intellectual property infringement by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ equity or consolidated cash flows.
Contractual Obligations and Commitments
The Company's contractual obligations and commitments outstanding as of October 1, 2017 have changed materially since the amounts as of January 1, 2017 as set forth in our Annual Report on Form 10-K. These obligations and commitments relate to operating leases, future debt payments, and a management services agreement. The material changes relate to the new $4.0 million US Term Loan II under the New Credit Agreement which is further discussed in Note 6 of notes to our consolidated financial statements and in the Liquidity and Capital Resources section.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect amounts reported in those statements. We have made our best estimates of certain amounts contained in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. However, application of our accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. Management believes that the estimates, assumptions, and judgments involved in the accounting policies that have the most significant impact on our consolidated financial statements are discussed in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K. There have been no material changes to our critical accounting policies or uses of estimates since the date of our Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements in Part I Item 1 of this Quarterly Report on Form 10-Q.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign exchange risks.
Interest Rate Fluctuation Risk
Our borrowings under our New Credit Agreement bear interest at fluctuating rates. In order to mitigate, in part, the potential effects of the fluctuating rates, effective June 30, 2016, we entered into a interest rate swap with a notional amount initially of $16.68 million, which decreases by $0.32 million each quarter until June 30, 2017, when it will begin decreasing by $0.43 million each quarter until June 29, 2018, when it then begins decreasing by $0.53 million per quarter until the swap terminates on June 28, 2019. The interest rate swap requires the Company to pay a fixed rate of 1.055 percent per annum while receiving a variable rate per annum based upon the one month LIBOR rate for a net monthly settlement based on the notional amount in effect. See Note 7 of notes to our consolidated financial statements for further information. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition.
Foreign Currency Risk
Our functional currency is the U.S. dollar. To date, substantially all of our net sales and operating expenses have been denominated in U.S. dollars, therefore we are not currently subject to significant foreign currency risk. However, if our international operations continue to grow, our risks associated with fluctuation in currency rates may become greater. Currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. We intend to continue to assess our approach to managing this potential risk. We do not believe that the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have had a material impact on our consolidated financial statements. To date, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements. However, in order to mitigate some of the risk that we do have with regard to foreign currency, effective June 29, 2016 we entered into a 1 year foreign currency forward contract to hedge the Mexican Peso. The forward contract had an equivalent USD notional amount of $3.30 million and expired on June 30, 2017. See Note 7 to our consolidated financial statements for further information.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management establishes and maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) to ensure that the information we disclose under the Exchange Act is properly and timely reported. We provide this information to our Chief Executive Officer and Chief Financial Officers as appropriate to allow for timely decisions.
Our controls and procedures are based on assumptions. Additionally, even effective controls and procedures only provide reasonable assurance of achieving their objectives. Accordingly, we cannot guarantee that our controls and procedures will succeed or be adhered to in all circumstances.
We have evaluated our disclosure controls and procedures, with the participation, and under the supervision, of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no material changes in the Company's internal controls over financial reporting during the thirty-nine weeks ended October 1, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017 filed with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
Exhibit No. | Description | |
31.1* | Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS+ | XBRL Instance Document | |
101.SCH+ | XBRL Taxonomy Extension Schema Document | |
101.CAL+ | XBRL Taxonomy Calculation Linkbase Document | |
101.DEF+ | XBRL Taxonomy Definition Linkbase Document | |
101.LAB+ | XBRL Taxonomy Label Linkbase Document | |
101.PRE+ | XBRL Taxonomy Presentation Linkbase Document | |
* Filed herewith.
** Pursuant to Item 601(b)(32)(ii) of Regulation S-K(17 C.F.R 229.601(b)(32)(ii)), this certification is deemed furnished, not filed, for purposes of section 18 of the Exchange Act, nor is it otherwise subject to liability under that section. It will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except if the registrant specifically incorporates it by reference.
*** Previously filed.
+ Filed electronically with the report.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIQUE FABRICATING, INC. | ||
Date: November 9, 2017 | By: | /s/ John Weinhardt |
Name: John Weinhardt | ||
Title: President and Chief Executive Officer | ||
Date: November 9, 2017 | By: | /s/ Thomas Tekiele |
Name: Thomas Tekiele | ||
Title: Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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