UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. Business Description
We are a leading provider of manufactured vinyl coated fabrics. Our best-known brand, Naugahyde, is the product of many improvements on a rubber-coated fabric developed a century ago inNaugatuck, Connecticut . We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing. Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 600 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered prints, lamination and panel cutting. Our vinyl coated fabric products have various high-performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated by either flame or hot melt adhesive for seating, fascia and door applications. Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses, trains and aircraft.
We currently conduct our operations in manufacturing facilities that are located
in
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of our significant accounting policies, refer to Note 1 - "Summary of Significant Accounting Policies" to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments and Estimates" in our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 . 21 Table of Contents
Recent Accounting Pronouncements
See Note 14 - "Recent Accounting Standards" to the consolidated financial statements for a discussion of recent accounting guidance.
Overview:
The Company and its subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest toDecember 31 . The current year endingJanuary 3, 2021 is a 53-week year whereas the prior year endedDecember 29, 2019 was a 52-week year. The Company'sU.K. subsidiaries use the calendar year end ofDecember 31 . The activity of theU.K. subsidiaries that occurs on the days that do not coincide with the Company's year-end is not material. The three months endedOctober 4, 2020 andSeptember 29, 2019 were both 13-week periods while the nine months endedOctober 4, 2020 was a 40-week period and the nine months endedSeptember 29, 2019 was a 39-week period. Our Earby,England operation's functional currency is the British Pound Sterling ("Pound Sterling") and has sales and purchases transactions that are denominated in currencies other than the Pound Sterling, principally the Euro. Approximately 26% of the Company's global revenues and 29% of its global raw material purchases are derived from these Euro transactions. The average year-to-date exchange rate for the Pound Sterling to theU.S. Dollar was approximately 0.5% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 0.1% higher in 2020 compared to 2019. These small exchange rate changes had the effect of slightly increasing net sales by approximately$2,000 for the nine months endedOctober 4, 2020 . The overall currency effect on the Company's net loss was a positive amount of approximately$4,000 for the nine months endedOctober 4, 2020 . OnJanuary 27, 2020 , the Company announced a one-for-five reverse stock split ("reverse stock split") on its common stock that became effective onFebruary 24, 2020 . The amounts in common stock and additional paid-in capital were adjusted as of the effective date to reflect the reverse stock split. Share and per share amounts for the three and nine months endedSeptember 29, 2019 have been restated to give effect to the reverse stock split. TheU.K. exit from theEuropean Union onJanuary 31, 2020 , commonly referred to as Brexit, has caused, and may continue to cause, uncertainty in the global markets. Political and regulatory responses to the withdrawal are still developing, and we are in the process of assessing the impact that the withdrawal may have on our business as more information becomes available. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations theU.K. conducts. Subsequent to year-end 2019, theWorld Health Organization declared the novel coronavirus ("COVID-19") outbreak a public health emergency. There have been mandates from international, federal, state and local authorities requiring forced closures of various schools, businesses and other facilities and organizations although there have been some recent easings of these closures. These forced closures have negatively impacted the Company's business. Primarily due to the negative impact that COVID-19 is having on the global economy, the Company began to experience a decline in sales during the latter part ofMarch 2020 . In order to mitigate the effect of the decrease in revenue, the Company is managing its costs, which included initially reducing staff at its manufacturing facilities with production at one-third capacity at theU.S. facility and the entire production staff furloughed at theU.K. facility beginning in late March. DuringJune 2020 , the Company had some employees return to work as itsU.K. facility started limited production of vinyl products based on orders it was receiving from its customers. The Company brought back additional production workers as incoming orders increased during the third quarter of 2020. Demand for our products continues to improve in the fourth quarter although it is
well below normalized levels. Additionally, the Company has applied for loans under programs offered by the governmental agencies inthe United States and in theUnited Kingdom and is exploring options for other supplementary cash flow opportunities to provide further liquidity. 22 Table of Contents For theU.S. operations, during the second quarter of 2020 the Company received$2,217,500 in funds fromOne Community Bank (formerlyOregon Community Bank ) through the Paycheck Protection Program ("PPP") administered by theU.S. Small Business Administration ("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"). The loan matures onApril 13, 2022 and bears an interest rate of 1.0%. The Company is required to make monthly payments of principal and interest beginningNovember 13, 2020 based on the amount that is outstanding onOctober 13, 2020 in order to fully amortize the loan byApril 13, 2022 . The loan may be prepaid by the Company at any time prior to maturity
with no prepayment penalties. All or a portion of the loan may be forgiven by the SBA for costs the Company incurs for payroll, rent, utilities and all other allowable expenses during the 24-week period beginningApril 13, 2020 . The Company used all proceeds from the loan to maintain payroll and make payments for lease, utility and other allowable expenses. Included in the accompanying consolidated statements of operations for the nine months endedOctober 4, 2020 was$2,217,500 of loan forgiveness that the Company expects to receive from the SBA. Although the Company has not been legally released from this amount of the loan, management concluded that there was reasonable assurance that the Company had substantially met the terms for forgiveness and therefore recognized this amount as income as a component of other income (expense). The Company submitted its application for loan forgiveness toOne Community Bank inSeptember 2020 .
Also for the
For theU.K. operations, during the three and nine months endedOctober 4, 2020 the Company recorded reimbursed costs of approximately$474,000 and$1,560,000 , respectively, under the Coronavirus Job Retention Scheme ("CJRS") set up by theU.K. government to help employers pay the wages of those employeeswho would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. This program reimbursed the Company for 80% of the compensation expense plus national insurance and certain benefits paid to the furloughed employees, resulting in lower salary expense for the Company. While the employees were on furlough, the compensation paid to them was limited to the amount reimbursed by the CJRS. The Company recorded the reimbursed amounts as reductions to the associated expenses.
Additionally for the
While the closures and limitations on movement, domestically and internationally, are expected to be temporary due to the COVID-19 outbreak, the duration of the supply chain disruption and related financial impact cannot be estimated at this time. Should the closures continue for an extended period of time or should the effects of the coronavirus continue to spread, the impact could have a material adverse effect on the Company's financial position, results of operations and cash flows which may require that the Company obtain additional financing. 23 Table of Contents
Three Months Ended
The following table sets forth, for the three months ended
Three Months Ended
%
October 4, 2020 September 29, 2019 Change Change
Net Sales $ 15,171,898 100.0 % $ 22,033,539 100.0 % $ (6,861,641 ) -31.1%
Cost of Goods Sold 13,114,967 86.4 % 18,471,639 83.8 % (5,356,672 ) -29.0%
Gross Profit 2,056,931 13.6 % 3,561,900 16.2 % (1,504,969 ) -42.3%
Operating Expenses:
Selling 778,699 5.1 % 1,061,781 4.8 % (283,082 ) -26.7%
General and administrative 1,957,486 12.9 % 1,373,118 6.2 % 584,368 42.6%
Research and development 198,182 1.3 % 377,989 1.7 % (179,807 ) -47.6%
Total Operating Expenses 2,934,367 19.3 % 2,812,888 12.8 % 121,479 4.3%
Operating (Loss) Income (877,436 ) -5.8 % 749,012 3.4 % (1,626,448 ) <-100%
Interest expense (367,454 ) -2.4 % (509,829 ) -2.3 % 142,375 -27.9%
Funding from Paycheck
Protection Program 33,824 0.2 % - 0.0 % 33,824 -
Other income 85,753 0.6 % 50,213 0.2 % 35,540 70.8%
(Loss) Income before Tax
Provision (1,125,313 ) -7.4 % 289,396 1.3 % (1,414,709 ) <-100%
Tax (benefit) provision (111,318 ) -0.7 % 12,022 0.1 % (123,340 ) <-100%
Net (Loss) Income (1,013,995 ) -6.7 % 277,374 1.3 % (1,291,369 ) <-100%
Preferred stock dividend (808,638 ) -5.3 % (777,372 ) -3.5 % (31,266 ) 4.0%
Net Loss Allocable to Common
Shareholders $ (1,822,633 ) -12.0 % $ (499,998 ) -2.3 % $ (1,322,635 ) >100%
Revenue:
Total revenue for the three months 2020 decreased
For the three months 2020 compared to the three months 2019,U.S. automotive sales decreased 47.7% and European automotive sales decreased 33.8% (excluding the currency adjustment). This significant decrease was principally due to the COVID-19 pandemic, where most of the Company's customers in this market and the OEMs of the automobiles that use the Company's products, shut down production lines or their entire production facilities at the end of the first quarter 2020 and continued into the second quarter 2020 as the pandemic continued. The automotive market began to improve at the end of the second quarter as most of the customers and OEMs were restarting their production facilities. Due to the continuing improvement in the automotive market and the Company retaining all of its programs, the Company's sales activity increased significantly in the third quarter 2020 as compared to the second quarter 2020. However, it had not yet reached the run-rate of the period prior to the onset of COVID-19. 24 Table of Contents
Additionally, sales for the industrial sector decreased 22.7% (23.2% before currency effect) primarily due to a decline in theU.S. contract market. The negative impact of COVID-19 on the global economy was a major factor in the overall decline in sales. However, as with automobile sales, industrial sales increased in the third quarter 2020 as compared to the second quarter 2020. Also impacting 2020 revenue to a lesser degree, the Company inAugust 2019 , decommissioned and shut down equipment in theU.K. that manufactured calender product for both the automotive and industrial market. The Company had built sufficient inventory of this product to service its customers for several months after the shutdown. Shortly before the shutdown, the Company entered into agreements with another company to provide some of the calender film it originally produced. Once the film was further processed by the Company, it was able to continue offering certain products to one of its customers. During the three months 2020, the Company sold$407,550 of calender product principally using the purchased film compared to$1,159,209 for the three months 2019. Of these amounts, all were in the automotive market for the three months 2020 and$957,578 were in the automotive market for the three months 2019. Gross Profit:
Total gross profit for the three months 2020 decreased$1,504,969 or 42.3% to$2,056,931 from$3,561,900 for the three months 2019. The gross profit percentage was 13.6% of sales for the three months 2020 compared to 16.2% for the three months 2019. The lower amount and percentage for the three months 2020 were primarily due to the impact of COVID-19 including production inefficiencies caused by smaller runs associated with less demand. Gross profit amount and percentage were much higher as compared to the second quarter of 2020 primarily due to the continuing improvement in sales. During the third quarter of 2020, manufacturing costs were reduced approximately$370,000 due to reimbursements through the CJRS for the salaries of furloughed employees. There was a favorable currency effect of approximately$36,000 on gross profit. Operating Expenses: Selling expenses for the three months 2020 decreased$283,082 or 26.7% to$778,699 from$1,061,781 for the three months 2019. Due to the lower sales activity primarily as a result of COVID-19, selling expenses such as commission, travel and entertainment were reduced in 2020. In addition, the Company was reimbursed approximately$43,000 through the CJRS for the wages of furloughed employees resulting in lower salary expense. Also contributing to the lower selling expenses in 2020 was the 2019 closure of the calender product line and the elimination of its applicable employment and commission costs. There was a$16,000 unfavorable currency effect that partially offset the decrease in selling expenses. General and administrative expenses for the three months 2020 increased$584,368 or 42.6% to$1,957,486 from$1,373,118 for the three months 2019. The increase was primarily due to costs for cash management consulting services provided to the Company and a charge relating to a legal proceeding in theU.K. , as previously discussed. Partially offsetting the increase were approximately$15,000 in wages that were reimbursed through the CJRS. Included in the increase in general and administrative expenses was an unfavorable currency effect of$46,000 . Research and development expenses for the three months 2020 decreased$179,807 or 47.6% to$198,182 from$377,989 for the three months 2019. The decrease was principally a decline in activities attributable to the COVID-19 pandemic including lower development costs for new trials and wages of approximately$46,000 that were reimbursed through the CJRS. There was a$3,000 unfavorable currency effect that partially offset the decrease in research and development expenses. 25 Table of Contents Operating Income (Loss):
Operating loss for the three months 2020 was$877,436 compared to operating income of$749,012 for the three months 2019, a decrease of$1,626,448 . The decrease was primarily due to the decline in gross profit as a result of COVID-19. The operating loss percentage was -5.8% of sales for the three months 2020 compared to the operating income percentage of 3.4% for the three months 2019. Interest Expense: Interest expense for the three months 2020 decreased$142,375 or 27.9% to$367,454 from$509,829 for the three months 2019. The decrease was primarily due to lower interest rates on LIBOR and prime during the three months 2020 compared to the three months 2019.
Funding from Paycheck Protection Program:
For the three months 2020, the$33,824 funding from the PPP was the amount of proceeds from the PPP loan that the Company used during the third quarter for allowable expenses under the PPP. The Company expects to receive forgiveness on this debt from the SBA under the CARES Act for these eligible costs incurred by the Company, as previously discussed. Other Income:
Other income for the three months 2020 was$85,753 compared to other income of$50,213 for the three months 2019. Included in other income are the currency gains and losses recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated during the period. Also included in other income are gains and losses from the change in fair values on the Company's foreign currency exchange contracts. Tax Provision (Benefit): The Company files income tax returns inthe United States as a C-Corporation, and in several state jurisdictions and in theUnited Kingdom . The Company'sU.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. The Company made the acquisition of Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal's taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on the Company's tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellerswho report it on their respective individual tax returns. The Company does not have a history of repatriating a significant portion of its foreign cash. However, if it decided to repatriate these foreign amounts to fundU.S. operations, the Company would not be required to pay any additionalU.S. tax related to these amounts since the Company previously recorded a one-time transition tax on deemed repatriation of deferred foreign income. The tax benefit for the three months 2020 was$111,318 compared to a tax provision of$12,022 for the three months 2019. The tax benefit for the three months 2020 was principally attributable to the results of theU.K. operations and the tax provision for the three months 2019 was principally attributable to the results of theU.S. operations. Preferred Stock Dividend:
The terms of the acquisitions inNovember 2014 resulted in the issuance of preferred ownership units/stock ofUEP Holdings, LLC and UGEL (formerlyEPAL ) to the sellers. These preferred units have carried quarterly dividend requirements on a total value of$55,000,000 at rates ranging from 5.0% to 8.0%. The dividend rate on theSeries B UEP Holdings preferred units which started at 5.5% increases by 0.5% on the anniversary of the issuance up to a maximum of 8.0%. The payment of dividends for the first three quarters of 2020 and the three months endedDecember 29, 2019 was deferred to preserve cash and provide additional liquidity. As ofOctober 4, 2020 andDecember 29, 2019 , accrued dividends of$3,154,042 and$788,599 , respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. 26 Table of Contents
Nine Months Ended
The following table sets forth, for the nine months endedOctober 4, 2020 ("nine months 2020") andSeptember 29, 2019 ("nine months 2019"), certain operational data including their respective percentage of net sales: Nine Months Ended % October 4, 2020 September 29, 2019 Change Change Net Sales$ 43,528,393 100.0 %$ 71,523,182 100.0 %$ (27,994,789 ) -39.1% Cost of Goods Sold 37,931,227 87.1 % 59,434,689 83.1 % (21,503,462 ) -36.2% Gross Profit 5,597,166 12.9 % 12,088,493 16.9 % (6,491,327 ) -53.7% Operating Expenses: Selling 2,278,279 5.2 % 3,348,622 4.7 % (1,070,343 ) -32.0% General and administrative 4,834,011 11.1 % 4,332,978 6.1 % 501,033 11.6% Research and development 704,239 1.6 % 1,302,707 1.8 % (598,468 ) -45.9% Other operating expenses - 0.0 % 343,003 0.5 % (343,003 ) -100.0% Total Operating Expenses 7,816,529 18.0 % 9,327,310 13.0 % (1,510,781 ) -16.2% Operating (Loss) Income (2,219,363 ) -5.1 % 2,761,183 3.9 % (4,980,546 ) <-100% Interest expense (1,215,771 ) -2.8 % (1,547,343 ) -2.2 % 331,572 -21.4% Funding from Paycheck Protection Program 2,217,500 5.1 % - 0.0 % 2,217,500 - Other (expense) income (185,417 ) -0.4 % 53,396 0.1 % (238,813 ) <-100% (Loss) Income before Tax Provision (1,403,051 ) -3.2 % 1,267,236 1.8 % (2,670,287 ) <-100% Tax benefit (404,141 ) -0.9 % (6,287 ) 0.0 % (397,854 ) >100% Net (Loss) Income (998,910 ) -2.3 % 1,273,523 1.8 % (2,272,433 ) <-100% Preferred stock dividend (2,396,479 ) -5.5 % (2,339,862 ) -3.3 % (56,617 ) 2.4% Net Loss Allocable to Common Shareholders$ (3,395,389 ) -7.8 %$ (1,066,339 ) -1.5 %$ (2,329,050 ) >100% Revenue:
Total revenue for the nine months 2020 decreased
For the nine months 2020 compared to the nine months 2019,U.S. automotive sales decreased 49.2% and European automotive sales decreased 45.2% (excluding the currency adjustment). This significant decrease was principally due to the COVID-19 pandemic, where most of the Company's customers in this market and the OEMs of the automobiles that use the Company's products, shut down production lines or their entire production facilities at the end of the first quarter 2020 and continued into the second quarter 2020 as the pandemic continued. The automotive market began to improve at the end of the second quarter as most of the customers and OEMs were restarting their production facilities. Due to the continuing improvement in the automotive market and the Company retaining all of its programs, the Company's sales activity increased significantly in the third quarter 2020 as compared to the second quarter 2020. However, it had not yet reached the run-rate of the period prior to the onset of COVID-19. Additionally, sales for the industrial sector decreased 25.6% (the same as before the currency effect) primarily due to a decline in theU.S. contract market. The negative impact of COVID-19 on the global economy was a major factor in the overall decline in sales which principally began during the latter part ofMarch 2020 . 27 Table of Contents
Also impacting 2020 revenue to a lesser degree, the Company inAugust 2019 , decommissioned and shut down equipment in theU.K. that manufactured calender product for both the automotive and industrial market. The Company had built sufficient inventory of this product to service its customers for several months after the shutdown. Shortly before the shutdown, the Company entered into agreements with another company to provide some of the calender film it originally produced. Once the film was further processed by the Company, it was able to continue offering certain products to one of its customers. During the nine months 2020, the Company sold$1,153,432 of calender product principally using the purchased film compared to$3,980,459 for the nine months 2019. Of these amounts,$1,098,901 and$2,944,107 were in the automotive market for the nine months 2020 and 2019, respectively. Gross Profit: Total gross profit for the nine months 2020 decreased$6,491,327 or 53.7% to$5,597,166 from$12,088,493 for the nine months 2019. The gross profit percentage was 12.9% of sales for the nine months 2020 compared to 16.9% for the nine months 2019. Gross profit amount and percentage were negatively impacted by the effect of COVID-19 including production inefficiencies caused by smaller runs associated with less demand. During the nine months 2020, manufacturing costs were reduced approximately$1,304,000 due to reimbursements through the CJRS for the salaries of furloughed employees. There was a favorable currency effect of approximately$4,000 on gross profit. Operating Expenses:
Selling expenses for the nine months 2020 decreased$1,070,343 or 32.0% to$2,278,279 from$3,348,622 for the nine months 2019. Due to lower sales activity primarily as a result of COVID-19, selling expenses such as commission, travel and entertainment were reduced in 2020. In addition, the Company was reimbursed approximately$99,000 through the CJRS for the wages of furloughed employees resulting in lower salary expense. Also contributing to the lower selling expenses in 2020 was the 2019 closure of the calender product line and the elimination of its applicable employment and commission costs. There was a favorable currency effect that slightly contributed to the decrease in selling expenses also. General and administrative expenses for the nine months 2020 increased$501,033 or 11.6% to$4,834,011 from$4,332,978 for the nine months 2019. This increase was primarily due to costs for cash management consulting services provided to the Company and a charge relating to a legal proceeding in theU.K. , as previously discussed. Partially offsetting the increase were wages of approximately$35,000 that were reimbursed through the CJRS. There was a favorable currency effect that slightly offset the increase in general and administrative expenses. Research and development expenses for the nine months 2020 decreased$598,468 or 45.9% to$704,239 from$1,302,707 for the nine months 2019. The decrease was principally decreased activities attributable to the COVID-19 pandemic including lower development costs for new trials and wages of approximately$122,000 that were reimbursed through the CJRS. There was a favorable currency effect that slightly contributed to the decrease in selling expenses also.
There were no other operating expenses for the nine months 2020 and
Operating Income (Loss): Operating loss for the nine months 2020 was$2,219,363 compared to operating income of$2,761,183 for the nine months 2019, a decrease of$4,980,546 . The decrease was due to the decline in gross profit partially offset by the decrease in operating expenses, which included the$343,003 non-recurring restructuring charge in 2019. The operating loss percentage was -5.1% of sales for the nine months 2020 compared to the operating income percentage of 3.9% for the nine months 2019. Interest Expense:
Interest expense for the nine months 2020 decreased
Funding from Paycheck Protection Program:
For the nine months 2020, the
28 Table of Contents Other Income (Expense): Other expense for the nine months 2020 was$185,417 compared to other income of$53,396 for the nine months 2019. Included in other income (expense) are the currency gains and losses recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated during the period. Also included in other income (expense) are gains and losses from the change in fair values on the Company's foreign currency exchange contracts. Tax Benefit: The Company files income tax returns inthe United States as a C-Corporation, and in several state jurisdictions and in theUnited Kingdom . The Company'sU.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. The Company made the acquisition of Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal's taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on the Company's tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellerswho report it on their respective individual tax returns. The Company does not have a history of repatriating a significant portion of its foreign cash. However, if it decided to repatriate these foreign amounts to fundU.S. operations, the Company would not be required to pay any additionalU.S. tax related to these amounts since the Company previously recorded a one-time transition tax on deemed repatriation of deferred foreign income. The tax benefit for the nine months 2020 was$404,141 , principally attributable to the results of theU.S. operations, compared to$6,287 for the nine months 2019, principally attributable to the results of theU.K. operations partially offset by a tax provision for theU.S. operations. Preferred Stock Dividend:
The terms of the acquisitions inNovember 2014 resulted in the issuance of preferred ownership units/stock ofUEP Holdings, LLC and UGEL (formerlyEPAL ) to the sellers. These preferred units have carried quarterly dividend requirements on a total value of$55,000,000 at rates ranging from 5.0% to 8.0%. The dividend rate on theSeries B UEP Holdings preferred units which started at 5.5% increases by 0.5% on the anniversary of the issuance up to a maximum of 8.0%. The payment of dividends for the nine months endedOctober 4, 2020 and the three months endedDecember 29, 2019 was deferred to preserve cash and provide additional liquidity. As ofOctober 4, 2020 andDecember 29, 2019 , accrued dividends of$3,154,042 and$788,599 , respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Liquidity and Sources of Capital
Cash, as it is needed, is provided by using the Company's lines of credit. These lines provide for a total borrowing commitment in excess of$43,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of$18,452,489 atOctober 4, 2020 ,$13.9 million of the lines bears interest at LIBOR or the Eurodollar rate plus a range of 1.95% to 2.45%, depending on the underlying borrowing base and$4.6 million bears interest at the bank's prime or base lending rate which was 3.25% atOctober 4, 2020 . The lines provided additional availability of approximately$1.7 million and, combined with UEP's and UGL's total cash balances, liquidity was approximately$2.4 million atOctober 4, 2020 . We plan to use this availability and cash provided by operating activities to finance our cash needs for the remaining months of fiscal 2020 and future periods. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets. As a result of the COVID-19 pandemic, sales of the Company's products are lower than expected. This has had a negative impact on the Company's working capital which could affect its ability to borrow using the Company's lines of credit. To increase its liquidity, as previously discussed, the Company has applied for loans under programs offered by the governmental agencies inthe United States and in theUnited Kingdom . 29 Table of Contents For theU.S. operations, early in the second quarter of 2020 the Company received$2,217,500 in funds through the Paycheck Protection Program administered by theUnited States Small Business Administration . The Company believes that all of this debt will be forgiven; it submitted its application for loan forgiveness inSeptember 2020 . Also for theU.S. operations, during the third quarter of 2020 the Company applied for a$3.2 million loan fromWells Fargo Capital Finance, LLC through the Main Street Lending Program established by theFederal Reserve Board ; however, there can be no guarantee that the Company will be successful in obtaining this funding. In theU.K. , the Company has recorded £1,245,000 ($1,560,000 ) in funding available under the Coronavirus Job Retention Scheme which reimbursed the Company for the compensation expense paid to furloughed employees. Additionally for theU.K. operations, during the third quarter of 2020 the Company received a$783,958 loan from its principal shareholder and$1,545,538 in loans from automotive lenders. Subsequent toOctober 4, 2020 , the Company received approximately$384,000 in a loan from its majority shareholder and$1.6 million in loans from automotive lenders with additional availability of approximately$400,000 . These funds provided more working capital to meet various short-term cash needs.
The Company continues to attempt to manage its operating costs to match the reduced sales volume. We believe that the increasing sales activities combined with the funding from nontraditional sources (U.S. andU.K. governments and automotive lenders) will be sufficient to provide for short-term cash needs. However, there can be no assurance that additional financing will be available on favorable terms, if at all. The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.83 atOctober 4, 2020 and 0.89 at December
29, 2019. Cash balances increased$260,281 , before the effects of currency translation of$(5,995) , to$767,874 atOctober 4, 2020 from$513,588 atDecember 29, 2019 . Of the above noted amounts,$507,370 and$498,007 were held outside theU.S. by our foreign subsidiaries as ofOctober 4, 2020 andDecember 29, 2019 , respectively. Cash provided by operations was$966,649 for the nine months 2020 compared to$2,455,877 for the nine months 2019. For the nine months 2020, cash provided by operations was primarily due to changes in working capital of$2,772,839 offset by the net loss of$998,910 , changes in other assets and liabilities of$(428,504) and adjustments for non-cash items of$(378,776) . For the nine months 2019, cash provided by operations was primarily due to adjustments for non-cash items of$1,656,649 , net income of$1,273,523 and changes in other assets and liabilities of$48,683 offset by changes in working capital of$(522,978) . Cash used in investing activities was$1,171,258 for the nine months 2020 compared to$1,457,071 for the nine months 2019. During 2020 and 2019, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations and payments made for company-owned key man life insurance premiums. For the nine months 2020 and 2019, the payments made for the life insurance premiums were offset by proceeds from policy loans of$130,000 and$249,051 , respectively. For the nine months 2020, cash provided by financing activities was$464,890 compared to cash used in financing activities of$1,186,609 for the nine months 2019. Impacting cash flows from financing activities for the nine months 2020 and 2019 were net payments on lines of credit of$1,913,810 and net advances on lines of credit of$1,893,069 , respectively. The changes in the lines of credit reflect the funding of working capital. There were no preferred dividend payments during the nine months 2020 compared to$2,332,503 during the nine months 2019, which also impacted cash flows from financing activities. As previously stated, the dividends for the nine months 2020 were deferred to preserve cash and provide additional liquidity. Also impacting cash flows from financing activities were proceeds from issuance of long-term debt of$3,737,361 ($2,217,500 through the Paycheck Protection Program and$1,545,538 , net of translation adjustment of$25,677 , from automotive lenders) for the nine months 2020 and$454,088 for the nine months 2019. Additionally during the nine months 2020 and 2019, our majority shareholder provided$938,958 and$800,000 , respectively, in financing in the form of subordinated secured promissory notes. Payments of$875,000 and$550,000 were made on these notes during the nine months 2020 and 2019, respectively. Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as ofOctober 4, 2020 and through the date of filing of this report. 30 Table of Contents We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.
We have no material off balance sheet arrangements.
31 Table of Contents
© Edgar Online, source
