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 March 31, 1997
or
[ ] 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: 33-64142
UNITED STATES LEATHER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 13-3503310
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation) No.)
1403 West Bruce Street 53204
Milwaukee, Wisconsin (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (414) 383-6030
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 ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding at March 31, 1997
Common Stock, $.01 par value 100
As of March 31, 1997, there was no public market for the Company's
common stock.
<PAGE>
UNITED STATES LEATHER, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations . . . . . . . 3
Consolidated Condensed Balance Sheets . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows . . . . . . . 5
Notes to Consolidated Condensed Financial Statements . . . . 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 8
PART II - OTHER INFORMATION AND SIGNATURES
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Three Months Ended
March 31
1997 1996
Net sales $83,379 $79,072
Cost of sales 79,919 67,706
------- -------
Gross profit 3,460 11,366
Selling, general and administrative
expenses 6,066 6,109
Amortization of intangible assets 882 0 915
------- -------
Income (loss) from operations (3,488) 4,342
Interest expense 4,497 4,318
------- -------
Income (loss) before taxes (7,985) 24
Income tax provision (benefit) (2,494) 326
------- -------
Net loss available for Common Shares $(5,491) $ (302)
======= =======
Per Common Share Data:
Net loss per Common Share $(54,910) $(3,020)
======= =======
Weighted average Common Shares 100 100
======= =======
The accompanying notes are an integral part of these statements.
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share and per share data)
As of
As of March December
ASSETS 31, 1997 31, 1996
Current Assets:
Cash $ 2,617 $ 2,894
Accounts receivable, less allowances
of $1,903 and 2,892 49,828 35,819
Inventories 71,743 64,749
Prepaid expenses and other 1,343 1,228
Refundable income tax 2,700 2,700
-------- -------
Total current assets 128,231 107,390
Property, plant and equipment, net 46,841 47,601
Goodwill, net of amortization of
$26,494 and $25,612 100,579 101,371
Deferred income taxes 1,696 --
Other 8,593 8,460
-------- -------
Total assets $285,940 $264,822
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 209 $ 210
Revolving credit facility 60,786 31,795
Payable to bank 4,575 5,358
Accounts payable 9,670 7,898
Accrued liabilities 14,893 17,352
Income taxes payable -- 105
Deferred income taxes 555 555
------- -------
Total current liabilities 90,688 63,273
Long-term debt, less current maturities 130,042 130,047
Deferred income taxes -- 794
Other long-term liabilities 9,618 9,635
Stockholder's Equity:
Preferred Stock, $.01 par value - 5,000,000
shares authorized, no shares issued -- --
Common Shares:
Common Stock, voting, $.01 par value -
35,000,000 shares
authorized, 100 shares issued 1 1
Additional paid-in-capital 92,344 92,344
Cumulative translation adjustment (103) (112)
Accumulated deficit (36,650) (31,160)
------- -------
Total stockholder's equity 55,592 61,073
------- -------
Total liabilities and stockholder's
equity $285,940 $264,822
======= =======
The accompanying notes are an integral part of these balance sheets.
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data)
(Unaudited)
For the three months
ended March 31,
1997 1996
Cash Flows from Operating Activities:
Net loss $ (5,491) $ (302)
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 2,687 2,764
Noncash interest expense 166 359
Deferred income taxes (2,494) _
Change in assets and liabilities:
Accounts receivable (14,009) 796
Inventories (6,994) (1,676)
Prepaid expenses and other (379) 1
Accounts payable 1,772 (1,276)
Accrued liabilities (2,459) (3,632)
Income taxes payable (101) 773
Other long-term liabilities (17) (54)
------- -------
Net cash used by operating activities (27,319) (2,247)
Cash Flows from Investing Activities:
Capital expenditures (1,137) (928)
Proceeds from sales of fixed assets 91 -
Purchase of software license (130) (116)
------- -------
Net cash used in investing activities (1,176) (1,044)
------- -------
Cash Flows from Financing Activities:
Payments of revolving credit facility (15,605) (23,626)
Borrowings under revolving credit facility 44,596 26,018
Net change in payable to bank (783) (340)
Payment of long-term debt - (20)
Payment of common stock dividend - (50)
------- -------
Net cash provided by financing
activities 28,208 1,982
------- -------
Effect of Exchange Rate Changes on Cash 10 (7)
-------- -------
Net decrease in cash (277) (1,316)
Cash, beginning of period 2,894 4,614
-------- -------
Cash, end of period $ 2,617 $ 3,298
======== ========
Supplemental cash flow disclosures:
Interest paid $ 7,573 $ 7,344
Income taxes paid $ 15 $ 717
The accompanying notes are an integral part of these statements.
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
(Unaudited)
(1) Basis of Presentation:
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities Exchange Commission. In the opinion of management, all
required disclosures have been presented and all necessary adjustments
(consisting only of normal recurring adjustments) have been included to
fairly present the results of operations, financial position and cash
flows of United States Leather, Inc. (the "Company"). These consolidated
condensed financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996. Except as stated herein, significant accounting policies have
not changed materially from those set forth in said annual report.
(2) Net Income Per Common Share:
Net income per Common Share is calculated by dividing net income available
for Common Shares by the weighted average of Common Shares outstanding
during the period.
(3) Inventories:
Inventories consist of the following:
March 31, December 31,
1997 1996
At lower of cost, using the first-
in, first-out (FIFO) cost method or
market:
Raw materials and supplies $17,245 $18,556
Work in process 35,038 29,655
Finished goods 28,545 25,253
------- -------
Total FIFO inventories 80,828 73,464
Difference between FIFO and LIFO
cost of inventories (9,085) (8,715)
------- -------
Total LIFO inventories $71,743 $64,749
======= =======
(4) New Revolving Credit Agreement
The Company entered into a new five year, $80,000, asset-based revolving
credit facility (the "New Revolving Credit Facility") on November 1, 1996
with a group of banks (the "Bank Group"). The New Revolving Credit
Facility is secured by essentially all of the assets of the Company with
the exception of real property. The Company pays a 0.375% commitment fee
on the unused portion of the facility. Included in the New Revolving
Credit Facility is a $10,000 line related to letters of credit which the
Company utilizes to guarantee its compliance with certain contractual
obligations relating to imported raw material purchases. The terms of the
agreement covering the New Revolving Credit Facility includes certain
financial covenants as well restrictions related to, among other things,
capital expenditures and indebtedness. In March 1997 the New Revolving
Credit Facility was amended to (1) eliminate FIFO EBITDA related covenants
for 1996, (2) change the FIFO EBITDA related covenants for 1997,
(3) establish a fixed charge ratio covenant beginning in 1998, (4) reduce
the availability, (5) eliminate the Company's ability to utilize
overadvance borrowings and (6) increase the annual interest rate charged
on amounts borrowed to LIBOR plus 2.75% or prime plus 1.00%.
The maximum and average outstanding borrowings and the weighted average
interest rates were calculated on daily borrowings outstanding. Letters
of credit of $6,846 as of March 31, 1997, reduced available capacity under
the New Revolving Credit Facility to $4,025 as of March 31, 1997.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed herein are "forward-looking statements" intended
to qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe
the Company's future plans, objectives or goals are forward-looking
statements. Such forward-looking statements are subject to certain risks
and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from
those currently anticipated. Readers are urged to consider these factors
carefully in evaluating the forward-looking statements and are cautioned
not to place undue reliance on such forward-looking statements. The
forward-looking statements made herein are only made as of the date of
this report and the Company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events of
circumstances.
Selected Financial Data
The following table sets forth certain consolidated income statement data
of the Company as a percentage of net sales for the periods indicated.
Percentage of Net Sales
Three Months Ended March 31
1997 1996
Net sales 100.0% 100.0%
Cost of goods sold 95.8 85.6
----- -----
Gross profit 4.2 14.4
Selling, general & administrative 7.3 7.7
Amortization of intangible assets 1.1 1.3
----- -----
Income from operations (4.2) 5.4
Interest expense 5.4 5.4
----- -----
Income (loss) before taxes (9.6) 0.0
Income tax provision (3.0) 0.4
----- -----
Net Income (Loss) (6.6)% (0.4)%
===== =====
Sales
The Company's finished leather operations are divided into three principal
lines of business. The following chart summarizes the Company's sales by
line of business:
Three Months Ended
March 31 March 31
1997 1996 % Change
Furniture Group $19.5 $25.6 (24)%
Footwear and Personal
Leather Group 43.7 40.8 7%
Automotive Group 13.6 3.7 268%
By Products & Other 6.6 3.9 69%
----- ----- -----
Sales - Continuing Operations 83.4 74.0 13%
Discontinued Operations -- 5.1 (100)%
----- ----- -----
Total Sales $83.4 $79.1 5%
During the second quarter of 1996, the Company announced the
discontinuation of its USL Trading Division and the German operations of
its Furniture Group. Sales for these two operations during the first
quarter of 1996, prior to their discontinuance, were $5.1 million.
Results of Operations
General. The Company experienced a loss of $5.5 million in the
first quarter of 1997, compared with a loss of $0.3 million during the
same period in the prior year. Significantly higher cattlehide costs,
which could not be recovered through increased finished leather selling
prices, and continued ramp-up difficulties in the Company's Automotive
cut-to-pattern business were the principal reasons for the decline.
Although the remedial measures which the Company implemented to cure
quality and delivery problems experienced during 1996 showed some positive
results during the first quarter, the lingering effects of these problems
have made increasing prices very difficult. Moreover, a significant
backlog of unfilled orders at older prices delayed the effects of the
pricing actions which were implemented. Although no assurances can be
given that the price increases which have been implemented can be
maintained in the marketplace, the Company believes that some benefits
will be realized in the coming months.
Net Sales. The Company's net sales in the first quarter were
$83.4 million, an increase of $4.3 million or 5% from the same period one
year ago. Sales from continuing operations increased $9.4 million or 13%.
Sales of by-products, principally splits and wet blues, and products
tanned on a contract basis for other tanneries, principally deerhides,
accounted for $2.7 million or 4% of this increase. Square footage of
finished leather increased 2%. The remainder of the increase was
attributable to price and mix, the latter due principally to the higher
pricing, on a square footage shipped basis, associated with Automotive cut
sets.
Furniture Group sales during the first quarter were
$19.5 million, a decrease of $6.1 million or 24% from the first quarter of
1996. Contributing to the decline were (1) volume lost because of severe
price-based completion from foreign tanneries in the Group's promotional
product lines, carryover difficulties the Company experienced relating to
its 1996 quality and delivery problems and, to a lesser extent, softening
in retail furniture sales, (2) the non-recurrence of sales of certain
products which the Group discontinued during the second half of 1996, and
(3) lower volume in the Group's mid and high-fashion product lines because
of fewer cattlehides which met the Group's quality criteria for these
products.
Automotive Group sales nearly tripled from the first quarter of
1996, finishing at $13.6 million or $9.9 million higher than the prior
year period. This increase was entirely attributable to volume in the
Group's cut-to-pattern business, which had diminished volume during the
first quarter of 1996, but accounted for approximately 78% of the Group's
volume during the first quarter of 1997.
Footwear and Personal Leather Goods Group sales were
$43.7 million during the first quarter of 1997, an increase of
$2.9 million or 7% from the prior year period. The increase was
attributable to higher shipment volume resulting from improved business
conditions in the leather industry. Overall selling prices increased
slightly, reflective of hide market conditions.
Gross Profit. Gross profit for the first quarter of 1997 was
$3.5 million, a decrease of $7.9 million or 69% from the first quarter of
1996. The principal contributors to the decline were cattlehide prices
which were significantly higher than prior year and, although improving,
lingering inefficiencies in the Automotive Group's cut-to-pattern plant.
Also influencing gross profits was the change in policy implemented during
the second half of 1996 concerning the disposition of excess and off-
quality products generated during the period. Although the volume
generated of such excess and off-quality products was lower during the
first quarter of 1997 than the prior year, the Company continued to take a
much greater writedown on such product than the prior period. Gross
profit generated by higher sales volume partially offset these factors.
Gross margins dropped from 14.4% to 4.2% between the two periods.
Domestic cattlehide prices during the first quarter of 1997 were
approximately 33% higher than they were during the same period in 1996.
As a consequence, that portion of cost of goods sold which represents
cattlehides increased by approximately $10 million between the two
periods, and will continue to adversely impact gross profits in the second
quarter. Cattlehide prices have declined since the end of March, 1997,
but the benefits of these declines are not expected to be fully realized
until the second half of the year, and only if such prices remain in
decline. The Company also recorded a $0.4 million LIFO revaluation charge
to operations during the first quarter of 1997 because of the increase in
cattlehide prices from the fourth quarter of 1996 to the first quarter of
1997, compared with a $0.9 million credit in the first quarter of 1996, a
$1.3 million increase.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses during the first quarter of 1997 were
$6.1 million, a 1% reduction from the first quarter of 1996. Lower
compensation and benefits expenses during the period were partially offset
by higher professional services fees.
Earnings before Interest, Taxes, Depreciation and Amortization.
Earnings before interest, taxes, depreciation and amortization (and
provisions for LIFO revaluations) ("FIFO EBITDA") during the first quarter
of 1997 was a loss of $0.4 million compared with positive earnings of
$6.2 million during the first quarter of 1996. The decline was entirely
due to the change in gross profit as previously discussed. FIFO EBITDA,
which is the principal earnings measure in the New Revolving Credit
Facility, is not determined pursuant to generally accepted accounting
principles ("GAAP"), and should not be considered in isolation or as an
alternative to GAAP-derived measurements.
Amortization of Intangible Assets. Amortization of intangible
assets in the first quarter of 1997 and 1996 was $0.9 million.
Interest Expense. Interest expense during the first quarter of
1997 was $4.5 million as compared to $4.3 million in the first quarter of
1996, an increase of $0.2 million. The increase was due principally to
elevated average borrowings under the Company's revolving credit
facilities resulting from working capital increases due to higher
cattlehide prices and sales volume growth.
Income (Loss) Before Provision for Income Taxes. The Company
incurred a loss before taxes of $8.0 million in the first quarter of 1997,
a reduction of $8.0 million from the first quarter of 1996. The decrease
was principally the result of lower gross profits as previously discussed.
Income Tax Provision (Benefit). The Company recorded a tax
benefit of $2.5 million in the first quarter of 1997, as compared to a
$0.3 million provision for the first quarter of 1996. After adjusting
income before income taxes for nondeductible amortization of goodwill, the
effective tax rate was 35% during the first quarter of 1997, as compared
to 40% for the first quarter of 1996.
Net Loss. Due to the factors previously discussed, the Company
had a net loss of $5.5 million in the first quarter of 1997 as compared to
a net loss of $0.3 million during the first quarter of 1996.
Liquidity and Capital Resources
The Company used $27.5 million of cash from operations during
the first quarter of 1997, compared with $2.2 million used during the
first quarter of 1996. The principal reasons for the increased
consumption were (1) the $6.6 million decrease in FIFO EBITDA previously
discussed, (2) a $14.8 million comparative increase in accounts receivable
and (3) a $5.3 million comparative increase in inventories. Accounts
receivable increased by $14.0 million during the first quarter of 1997
principally because of increased sales volume. Sales during November and
December of 1996 were impacted by holiday-driven customer and factory
shutdowns which, in turn, generated lower accounts receivable balances as
of December 31, 1996. During the first quarter, sales volumes returned to
more normal historical levels, resulting in a rebuilding of such
receivables during the period. Increased sales volume in the Company's
Automotive Group also contributed to the increase. Days sales outstanding
in accounts receivable as of March 31, 1997 were 50 compared with 48 days
as of March 31, 1996. LIFO inventories increased approximately
$7.0 million during the first quarter of 1997. The increase was due
principally to volume necessary to support expected sales growth.
Capital expenditures totaled $1.0 million during the first
quarter of 1997. This represents an increase of approximately
$0.1 million from the same period in 1996.
On March 31, 1997, the Company's aggregate indebtedness was
$191.0 million. This consisted of $130.2 million principal and interest
on its 10-1/4% Senior Notes Due 2003 and $60.8 million due under the New
Revolving Credit Facility. The New Revolving Credit Facility is an
$80 million facility, maturing on October 31, 2001. Borrowing
availability is based on accounts receivable and inventory balances, less
certain exclusions, less amounts already borrowed under the facility and
letters of credit issued thereunder. Availability as of March 31, 1997
was $4.0 million. Since that time, however, the Company has implemented a
series of measures to reduce its borrowings and increase availability. As
of May 3, 1997, the Company had reduced borrowings under the New Revolving
Credit Facility to $55.9 million, and increased availability to an amount
estimated to be between $8.0 million and $8.5 million.
The Company incurred a substantial loss in 1996 and continued to
incur losses during the first quarter of 1997. Although management has
implemented measures which it believes will eventually improve the
financial performance of the Company, there can be no assurances that such
measures will be sufficient to permit the Company to reverse recent trends
and meet all of its obligations going forward. In March, the New
Revolving Credit Facility was amended to, among other things, change FIFO
EBITDA covenants for 1997. Management believes that the Company will be
in compliance with these amended covenants and that it will have
sufficient liquidity to conduct its operations. However, there can be no
assurance that the Company's operations will generate sufficient cash
flow, considered together with the amounts available under the New
Revolving Credit Agreement, to meet all of the Company's future liquidity
requirements.
Other Matters
The Company has recently determined that a section of property
at its A.R. Clarke subsidiary in Toronto, Ontario is contaminated with
industrial solvents. An adjacent property owner has alleged that such
contamination has migrated onto its property. The Company is
investigating the nature and extent of the contamination. The Company
believes the contamination is due to the activities of previous owners of
the site. The Company has informed the previous owner of the
contamination and believes it is entitled to, and expects to receive, full
indemnification pursuant to the terms of the acquisition agreement with
the previous owner.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K: NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNITED STATES LEATHER, INC.
(Registrant)
Date: May 13, 1997
/s/ Kinzie L. Weimer
Kinzie L. Weimer
Chief Financial Officer
(Signing on behalf of the Registrant
and as Chief Financial Officer)
<PAGE>
EXHIBIT INDEX
UNITED STATES LEATHER, INC.
QUARTERLY REPORT ON FORM 10-Q
Exhibit Number Exhibit
27 Financial Data Schedule (EDGAR version only
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,617
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