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 525 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered prints, lamination and panel cutting. Our vinyl coated fabric products have various high-performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, health care facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated by either flame or hot melt adhesive for seating, fascia and door applications. Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other health care facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses, trains and aircraft.
We currently 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 - "Basis of Presentation and Summary of Significant Accounting Policies" to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments and Estimates" in our Annual Report on Form 10-K for the fiscal year endedJanuary 3, 2021 . 20 Table of Contents Overview: We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest toDecember 31 . The current year endingJanuary 2, 2022 is a 52-week year whereas the prior year endedJanuary 3, 2021 was a 53-week year. OurU.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 our year-end is not material. Both the three months endedJuly 4, 2021 andJuly 5, 2020 were 13-week periods while the six months endedJuly 4, 2021 was a 26-week period and the six months endedJuly 5, 2020 was a 27-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 31% of our global revenues and 34% of our 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 9.9% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 0.7% lower in 2021 compared to 2020. These exchange rate changes had the effect of increasing net sales by approximately$1,740,000 for the six months endedJuly 4, 2021 . The overall currency effect on our net income was a negative amount of approximately$24,000 for the six months endedJuly 4, 2021 . Through the first quarter of 2021, demand for our products continued to improve since the initial impact of COVID-19 on the global economy, which began for us in the latter part ofMarch 2020 . However, sales in the second quarter of 2021 declined compared to the first quarter of 2021 as supply chain issues experienced by the OEM's that use our automotive products lead to temporary shutdowns of their production lines. As this supply chain problem exemplifies, COVID-19 is a continually evolving situation and we cannot predict the long-term impact the coronavirus will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. We continue to pursue supplementary cash flow opportunities to provide further liquidity, as described below. InMarch 2021 and inApril 2020 , ourU.S. operations received$2,000,000 and$2,217,500 , respectively, in funds fromOne 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$2,000,000 loan ("Second Draw PPP Loan") matures inMarch 2026 and the$2,217,500 loan ("First Draw PPP Loan") matures inApril 2022 , and each bears an interest rate of 1.0%. The loans may be prepaid at any time prior to maturity with no prepayment penalties. All or a portion of the loans may be forgiven by the SBA for costs we incurred for payroll, rent, utilities and all other allowable expenses during the 24-week period that beganMarch 1, 2021 for the Second Draw PPP Loan andApril 13, 2020 for the First Draw PPP Loan. We used all proceeds from the loans to maintain payroll and make payments for lease, utility and other allowable expenses. As a result, management believes that we have met the PPP eligibility criteria for forgiveness and has concluded that the loans represent, in substance, government grants that are expected to be forgiven. As such, in accordance with International Accounting Standards ("IAS") 20, "Accounting for Government Grants and Disclosure of Government Assistance," we recognized the funding from the PPP as grant income of$1,161,136 and$2,000,000 for the three and six months endedJuly 4, 2021 , respectively, and$2,183,676 for the three and six months endedJuly 5, 2020 . The remaining$33,824 of the First Draw PPP Loan was recognized as grant income during the third quarter of 2020. These amounts are included as a component of net other income in the consolidated statements of operations.
In
21 Table of Contents For theU.K. operations, during the second quarter of 2021 and 2020, we recorded reimbursed costs of approximately$101,000 and$1,086,000 , respectively, under the Coronavirus Job Retention Scheme ("CJRS") set up by theU.K. government to help employers pay the salaries of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. The much lower reimbursed costs for the second quarter of 2021 reflected that employees were furloughed significantly less than in the second quarter of 2020. This program reimbursed us for up to 80% of the compensation expense plus national insurance and certain benefits paid to the furloughed employees, resulting in lower salary expense for us. While the employees were on furlough, the compensation paid to them was limited to the amount reimbursed by the CJRS. We recorded the reimbursed amounts as reductions to the associated expenses. Additionally for theU.K. operations, inJune 2021 its bank lending facilities withLloyds Bank Commercial Finance Limited ("Lloyds") were refinanced with PNC Business Credit ("PNC"). PNC provided us additional availability by expanding our borrowing base to include eligible equipment. This transaction was accounted for as a debt extinguishment per Accounting Standards Codification ("ASC") 470, "Debt", under which the existing Lloyds debt was derecognized and the new PNC debt was recorded at fair value. A loss of £46,813 ($64,911 ) was recognized on this transaction and recorded in general and administrative expenses in the consolidated statements of operations for the three and six months endedJuly 4, 2021 . The loss was due to fees that were charged by Lloyds relating to the debt extinguishment. Debt issuance costs of £247,114 ($339,712 ) were capitalized and recorded in other long-term assets in the consolidated balance sheet as ofJuly 4, 2021 . These capitalized costs will be amortized over 36 months. See Notes 8 and 9 to the consolidated financial statements for further discussion.
Three Months Ended
The following table sets forth, for the three months endedJuly 4, 2021 ("three months 2021") andJuly 5, 2020 ("three months 2020"), certain operational data including their respective percentage of net sales: Three Months Ended % July 4, 2021 July 5, 2020 Change Change Net Sales$ 17,749,235 100.0 %$ 7,216,371 100.0 %$ 10,532,864 >100 % Cost of Goods Sold 15,927,442 89.7 % 7,506,718 104.0 % 8,420,724 >100 % Gross Profit (Loss) 1,821,793 10.3 % (290,347 ) -4.0 % 2,112,140 <-100 % Operating Expenses: Selling 834,738 4.7 % 507,133 7.0 % 327,605 64.6 % General and administrative 1,439,488 8.1 %
1,272,808 17.6 % 166,680 13.1 % Research and development 331,965 1.9 % 157,655 2.2 % 174,310 >100 % Total Operating Expenses 2,606,191 14.7 % 1,937,596 26.9 % 668,595 34.5 % Operating Loss (784,398 ) -4.4 % (2,227,943 ) -30.9 % 1,443,545 -64.8 % Interest expense (383,938 ) -2.2 % (380,834 ) -5.3 % (3,104 ) 0.8 % Funding from Paycheck Protection Program 1,161,136 6.5 % 2,183,676 30.3 % (1,022,540 ) -46.8 % Other expense (40,945 ) -0.2 % (80,281 ) -1.1 % 39,336 -49.0 % Loss before Tax Benefit (48,145 ) -0.3 % (505,382 ) -7.0 % 457,237 -90.5 % Tax benefit (244,184 ) -1.4 % (240,193 ) -3.3 % (3,991 ) 1.7 % Net Income (Loss) 196,039 1.1 % (265,189 ) -3.7 % 461,228 <-100 % Preferred stock dividend (815,973 ) -4.6 % (795,006 ) -11.0 % (20,967 ) 2.6 % Net Loss Allocable to Common Shareholders$ (619,934 ) -3.50 %$ (1,060,195 ) -14.7 %$ 440,261 -41.5 % 22 Table of Contents Revenue: Total revenue for the three months 2021 increased$10,532,864 to$17,749,235 compared to$7,216,371 for the three months 2020. The much lower amount for the three months 2020 reflected the negative effect of COVID-19, which impacted our sales the most during the second quarter of 2020. The increase in revenue included a favorable currency effect of approximately$743,000 . For the three months 2021 compared to the three months 2020, automotive sales for both ourU.S. operations andU.K. operations (excluding the currency adjustment) grew more than 200% due to the negative effect of COVID-19 during the second quarter of 2020. However, when comparing the second quarter of 2021 with the first quarter of 2021, automotive sales declined 27.7% primarily due to a decline in sales for ourU.K. operations, which was partially offset by a 1.7% increase in automotive sales for ourU.S. operations. As previously stated, supply chain issues experienced by the OEM's that use our automotive products lead to temporary shutdowns of their production lines, which negatively impacted our sales. Additionally for the three months 2021 compared to the three months 2020, sales for the industrial sector increased 61.6% (58.8% before the currency effect) mostly due to an increase in ourU.S. operations (primarily in the contract market) as well as in ourU.K. operations. As discussed above, COVID-19 had a negative effect on our operations during the second quarter of 2020. When comparing the second quarter of 2021 with the first quarter of 2021, sales for the industrial sector decreased 3.3% primarily due to a decline in the technical market of ourU.S. operations as the plant experienced difficulties in fulfilling orders. Production changes have been implemented to resolve these issues. Gross Profit: Total gross profit for the three months 2021 was$1,821,793 compared to$(290,347) for the three months 2020. The gross profit percentage was 10.3% of sales for the three months 2021 compared to -4.0% for the three months 2020. Both the gross profit amount and percentage for the three months 2020 reflected the negative impact of COVID-19. Manufacturing costs were reduced$83,000 and$934,000 for the three months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in gross profit included an unfavorable currency effect of approximately$19,000 . Total gross profit amount and percentage for the first quarter of 2021 were$3,237,337 and 14.8%, respectively. When comparing the second quarter of 2021 with the first quarter of 2021, the decline in both the gross profit amount and percentage were due to lower sales and higher costs of raw materials. To offset raw material price increases, we increased prices during the first quarter of 2021 in several of our markets and announced an additional price increase effectiveJuly 1, 2021 . Operating Expenses: Selling expenses for the three months 2021 increased$327,605 or 64.6% to$834,738 from$507,133 for the three months 2020. The lower amount for the three months 2020 reflected reduced selling-related expenses due to lower sales activity from the negative effect of COVID-19. Selling expenses were reduced$7,000 and$56,000 for the three months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in selling expenses was partially offset by a$50,000 favorable currency effect. When comparing the second quarter of 2021 with the first quarter of 2021, selling expenses decreased$63,974 or 7.1% primarily due to lower employment costs. General and administrative expenses for the three months 2021 increased$166,680 or 13.1% to$1,439,488 from$1,272,808 for the three months 2020. The increase was primarily due to higher employment related costs and the loss associated with the debt extinguishment. General and administrative expenses were reduced$4,000 and$20,000 for the three months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in general and administrative expenses was partially offset by a$38,000 favorable currency effect. Research and development expenses for the three months 2021 increased$174,310 or more than 100% to$331,965 from$157,655 for the three months 2020. The lower amount for the three months 2020 reflected reduced activities including fewer new trials due to the negative effect of COVID-19. Research and development expenses were reduced$7,000 and$76,000 for the three months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in research and development expenses was partially offset by a$17,000 favorable currency effect. When comparing the second quarter of 2021 with the first quarter of 2021, research and development expenses increased$4,507 or 1.4% as higher costs of more activity in ourU.S. operations was mainly offset by lower costs of less activity in ourU.K. operations. 23 Table of Contents Operating Loss: Operating loss for the three months 2021 was$784,398 compared to$2,227,943 for the three months 2020. Operating losses in both periods were due to gross profit being less than operating expenses with the much greater loss in the three months 2020 reflecting the negative impact of COVID-19. The operating loss percentage was -4.4% of sales for the three months 2021 compared to -30.9% for the three months 2020. The$1,216,538 lower amount when comparing the second quarter of 2021 operating loss with the first quarter of 2021 operating income was due to the decline in gross profit, which was partially offset by the decrease in operating expenses. Interest Expense: Interest expense for the three months 2021 increased less than 1.0% compared to the three months 2020. When comparing the second quarter of 2021 with the first quarter of 2021, interest expense decreased$19,808 or 4.9% due to debt repayments.
Funding from Paycheck Protection Program:
Funding from the PPP of$1,161,136 (from the Second Draw PPP Loan) for the three months 2021 and$2,183,676 (from the First Draw PPP Loan) for the three months 2020, were the proceeds from the PPP loans that we used during those periods for allowable expenses under the PPP. As previously discussed, the First and Second Draw PPP Loans were forgiven inJune 2021 andAugust 2021 , respectively. Other Expense:
Other expense for the three months 2021 was$40,945 compared to$80,281 for the three months 2020. Included in other 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. Income Taxes:
We file income tax returns inthe United States as a C-Corporation, and in several state jurisdictions and in theUnited Kingdom . OurU.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. We 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 our tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns. We do not have a history of repatriating a significant portion of our foreign cash. However, if we decided to repatriate these foreign amounts to fundU.S. operations, we would not be required to pay any additionalU.S. tax related to these amounts since we previously recorded a one-time transition tax on deemed repatriation of deferred foreign income. The tax benefit for the three months 2021 was$244,184 compared to$240,193 for the three months 2020. The tax benefit for the three months 2021 was attributable almost equally to the results of theU.S. andU.K. operations while the tax benefit for the three months 2020 was principally attributable to the results of theU.S. operations. Preferred Stock Dividend: Pursuant to the terms of their acquisitions, the issuance of preferred ownership units/stock ofUEP Holdings, LLC and UGEL were issued 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% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%. Quarterly dividend payments have been deferred each quarter beginning with the dividends that were accrued for the three months endedDecember 29, 2019 through the dividends that were accrued for the three months endedJuly 4, 2021 in order to preserve cash and provide additional liquidity. As ofJuly 4, 2021 andJanuary 3, 2021 , accrued dividends of$5,596,391 and$4,019,905 , respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. 24 Table of Contents
Six Months EndedJuly 4, 2021 Compared to the Six Months EndedJuly 5, 2020
The following table sets forth, for the six months ended
Six Months Ended
%
July 4, 2021 July 5, 2020 Change Change
Net Sales $ 39,645,236 100.0 % $ 28,356,495 100.0 % $ 11,288,741 39.8 %
Cost of Goods Sold 34,586,106 87.2 % 24,816,260 87.5 % 9,769,846 39.4 %
Gross Profit 5,059,130 12.8 % 3,540,235 12.5 % 1,518,895 42.9 %
Operating Expenses:
Selling 1,733,450 4.4 % 1,499,580 5.3 % 233,870 15.6 % General and administrative
3,018,515 7.6 % 2,876,525 10.1 % 141,990 4.9 %
Research and development 659,423 1.7 % 506,057 1.8 % 153,366 30.3 %
Total Operating Expenses 5,411,388 13.6 % 4,882,162 17.2 % 529,226 10.8 %
Operating Loss (352,258 ) -0.9 % (1,341,927 ) -4.7 % 989,669 -73.7 %
Interest expense (787,684 ) -2.0 % (848,317 ) -3.0 % 60,633 -7.1 % Funding from Paycheck Protection Program 2,000,000 5.0 % 2,183,676 7.7 % (183,676 ) -8.4 % Other income (expense)
165,359 0.4 % (271,170 ) -1.0 % 436,529 <-100 % Income (Loss) before Tax Benefit
1,025,417 2.6 % (277,738 ) -1.0 % 1,303,155 <-100 %
Tax benefit (206,623 ) -0.5 % (292,823 ) -1.0 % 86,200 -29.4 %
Net Income 1,232,040 3.1 % 15,085 0.1 % 1,216,955 >100 %
Preferred stock dividend (1,632,387 ) -4.1 % (1,587,841 ) -5.6 % (44,546 ) 2.8 %
Net Loss Allocable to Common
Shareholders $ (400,347 ) -1.0 % $ (1,572,756 ) -5.5 % $ 1,172,409 -74.5 %
Revenue:
Total revenue for the six months 2021 increased $11,288,741 or 39.8% to
$39,645,236 from $28,356,495 for the six months 2020. The lower amount for the
six months 2020 reflected the negative effect of COVID-19, which primarily
occurred during the second quarter of 2020. The increase in revenue included a
favorable currency effect of approximately $1,740,000 .
For the six months 2021 compared to the six months 2020, automotive sales for
our U.K. operations increased 46.8% (excluding the currency adjustment) and
automotive sales for our U.S. operations increased 34.1% due to the negative
effect of COVID-19 primarily during the second quarter of 2020. However, the
year-to-date growth was negatively impacted by supply chain issues experienced
by the OEM's that use our automotive products, which lead to temporary shutdowns
of their production lines during the second quarter of 2021.
25
Table of Contents
Additionally, sales for the industrial sector increased 23.4% (21.6% before the currency effect) mostly due to an increase in ourU.S. operations (primarily in the contract market) as well as in ourU.K. operations. As discussed above, COVID-19 had a negative effect on our operations primarily during the second quarter of 2020. However, the year-to-date growth was negatively impacted by difficulties in fulfilling orders at the plant of ourU.S. operations during the second quarter of 2021. Production changes have been implemented to resolve
these issues. Gross Profit:
Total gross profit for the six months 2021 increased$1,518,895 or 42.9% to$5,059,130 from$3,540,235 for the six months 2020. The gross profit percentage was 12.8% of sales for the six months 2021 compared to 12.5% for the six months 2020. Both the gross profit amount and percentage for the six months 2020 reflected the negative impact of COVID-19. The year-to- date increase in the gross profit and percentage for the six months 2021 was negatively impacted by supply chain and fulfillment issues, as discussed above, as well as higher costs of raw materials. To offset raw material price increases, we increased prices during the first quarter of 2021 in several of our markets and announced an additional price increase effectiveJuly 1, 2021 . Manufacturing costs were reduced$83,000 and$934,000 for the six months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in gross profit included a favorable currency effect of approximately$166,000 . Operating Expenses: Selling expenses for the six months 2021 increased$233,870 or 15.6% to$1,733,450 from$1,499,580 for the six months 2020. The lower amount for the six months 2020 reflected reduced selling-related expenses due to lower sales activity from the negative effect of COVID-19 primarily during the second quarter of 2020. Selling expenses were reduced$7,000 and$56,000 for the six months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in selling expenses was partially offset by a$94,000 favorable currency effect. General and administrative expenses for the six months 2021 increased$141,990 or 4.9% to$3,018,515 from$2,876,525 for the six months 2020. The increase was primarily due to higher employment related costs and the loss associated with the debt extinguishment. General and administrative expenses were reduced$4,000 and$20,000 for the six months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in general and administrative expenses was partially offset by a favorable currency effect of$68,000 . Research and development expenses for the six months 2021 increased$153,366 or 30.3% to$659,423 from$506,057 for the six months 2020. The lower amount for the six months 2020 reflected reduced activities including fewer new trials due to the negative effect of COVID-19 primarily during the second quarter of 2020. Research and development expenses were reduced$7,000 and$76,000 for the six months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in research and development expenses was partially offset by a$31,000 favorable currency effect. Operating Loss:
Operating loss for the six months 2021 was$352,258 compared to$1,341,927 for the six months 2020. Operating losses in both periods were due to gross profit being less than operating expenses with the much greater loss in the six months 2020 reflecting the negative impact of COVID-19 primarily during the second quarter of 2020. The operating loss percentage was -0.9% of sales for the six months 2021 compared to -4.7% for the six months 2020. Interest Expense: Interest expense for the six months 2021 decreased$60,633 or 7.1% to$787,684 from$848,317 for the six months 2020. The decrease was primarily due to lower interest rates on LIBOR and prime during the six months 2021 and debt repayments.
Funding from Paycheck Protection Program:
Funding from the PPP of$2,000,000 (from the Second Draw PPP Loan) for the six months 2021 and$2,183,676 (from the First Draw PPP Loan) for the six months 2020, were the proceeds from the PPP loans that we used during those periods for allowable expenses under the PPP. As previously discussed, the First and Second Draw PPP Loans were forgiven inJune 2021 andAugust 2021 , respectively. 26 Table of Contents Other Income (Expense):
Other income for the six months 2021 was$165,359 compared to other expense of$(271,170) for the six months 2020. 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. Income Taxes:
We file income tax returns inthe United States as a C-Corporation, and in several state jurisdictions and in theUnited Kingdom . OurU.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. We 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 our tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns. We do not have a history of repatriating a significant portion of our foreign cash. However, if we decided to repatriate these foreign amounts to fundU.S. operations, we would not be required to pay any additionalU.S. tax related to these amounts since we previously recorded a one-time transition tax on deemed repatriation of deferred foreign income.
The tax benefit for the six months 2021 was
Preferred Stock Dividend: Pursuant to the terms of their acquisitions, the issuance of preferred ownership units/stock ofUEP Holdings, LLC and UGEL were issued 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% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%. Quarterly dividend payments have been deferred each quarter beginning with the dividends that were accrued for the three months endedDecember 29, 2019 through the dividends that were accrued for the three months endedJuly 4, 2021 in order to preserve cash and provide additional liquidity. As ofJuly 4, 2021 andJanuary 3, 2021 , accrued dividends of$5,596,391 and$4,019,905 , 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 our lines of credit. These lines provide for a total borrowing commitment in excess of$30,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of$17,397,346 atJuly 4, 2021 , for theU.S. operations,$6.0 million of the lines bears interest at the Eurodollar rate plus 2.25% and$4.5 million bears interest at theWells Fargo Capital Finance, LLC's prime rate (3.25% atJuly 4, 2021 ), and for theU.K. operations,$6.9 million bears interest at theBank of England Base Rate plus 2.25%-3.00%. The lines provided additional availability of approximately$2.0 million and, combined with UEP's and UGL's total cash balances, liquidity was approximately$3.1 million atJuly 4, 2021 . We plan to use this availability and cash provided by operating activities to finance our cash needs for the remaining months of fiscal 2021 and future periods. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets. Impacting the liquidity discussion above, in March of 2021, ourU.S. operations received$2.0 million in funds through the Paycheck Protection Program administered by theUnited States Small Business Administration . As previously stated, this debt was forgiven inAugust 2021 .
The ratio of current assets to current liabilities, including the amount due
under our lines of credit, was 0.88 at
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Cash balances decreased$566,071 before the effects of currency translation of$24,968 , to$1,115,779 atJuly 4, 2021 from$1,656,882 atJanuary 3, 2021 . Of the above noted amounts,$94,667 and$1,621,692 were held outside theU.S. by our foreign subsidiaries as ofJuly 4, 2021 andJanuary 3, 2021 , respectively. Cash used in operations was$1,415,663 for the six months 2021 compared to cash provided by operations of$5,752,683 for the six months 2020. For the six months 2021, cash used in operations was primarily due to changes in working capital of$(1,850,065) , adjustments for non-cash items of$(780,125) and changes in other assets and liabilities of$(17,513) offset by net income of$1,232,040 . For the six months 2020, cash provided by operations was primarily due to changes in working capital of$7,017,139 and net income of$15,085 offset by adjustments for non-cash items of$(1,255,414) and changes in other assets and liabilities of$(24,127) . Cash used in investing activities was$464,073 for the six months 2021 compared to$919,610 for the six months 2020. During 2021 and 2020, 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 six months 2021, cash provided by financing activities was$1,313,665 compared to cash used in financing activities of$4,085,134 for the six months 2020. Impacting cash flows from financing activities for the six months 2021 and 2020 were proceeds from issuance of long-term debt of$2,000,000 and$2,217,500 , respectively, through the Paycheck Protection Program. Also impacting cash flows from financing activities for the six months 2021 and 2020 were net advances on lines of credit of$376,351 and net payments of$4,685,592 , respectively. The changes in the lines of credit reflect the funding of working capital. Payments of$694,065 and$856,442 were also made during the six months 2021 and 2020, respectively, on long-term debt (excluding debt extinguishment) and finance lease liabilities. For the six months 2021, payments were$1,489,800 and proceeds were$2,333,683 relating to the extinguishment of existing long-term debt and recognition of new long-term debt, respectively, while payments were$7,395,719 and proceeds were$6,579,847 relating to the extinguishment of an existing line of credit and recognition of a new line of credit, respectively. Also included for the six months 2021 were payments for capitalized debt issuance costs of$342,653 . For the six months 2020, payments of$575,000 were made on subordinated secured promissory notes to our majority shareholder. Proceeds of$200,000 were received from a short-term advance from our majority shareholder during the first six months of 2020 which was repaid in the same period.
Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as ofJuly 4, 2021 and through the date of filing of this report. We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.
We have no off balance sheet arrangements.
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