PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the exhibits being filed or incorporated by reference as part of this report, as well as other statements made by Unique Fabricating, Inc. (“Unique,” the “Company,” “we,” “us,” and “our”), contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. These forward-looking statements are contained principally in, but not limited to, the sections entitled “Business,” “Risk Factors,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements are based on management's beliefs and assumptions and on information currently available to us. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. When used in this document the words “anticipate,” “believe,” “continue,” “could,” “seek,” “might,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “approximately,” “project,” “should,” “will,” “would,” or the negative or plural of these words or similar expressions, as they relate to our company, business and management, are intended to identify forward-looking statements. Considering these risks and uncertainties, the future events and circumstances discussed may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.
Forward-looking statements speak only as of the date of this Annual Report on Form 10-K filing. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement to reflect actual results, changes in assumptions based on new information, future events or otherwise. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
PART I
ITEMItem 1. BUSINESS
Business
Overview
Unique Fabricating is engaged in the engineering and manufacture of multi-material foam, rubber, and plastic components utilized in noise, vibration and harshness, acoustical management, water and air sealing, decorative and other functional applications. Unique Fabricating has combined a history of organic growth with recent strategic acquisitions to diversify both its productproducts and process capabilities and the markets it serves.
we serve.
Unique Fabricating's markets served are the North America automotivetransportation, appliance, medical, and heavy- duty truck markets, as well as the medical, appliance, water heater and HVACconsumer off-road markets. Sales are conducted directly to major automotivetransportation, appliance, medical, and heavy-duty truck, appliance, water heater and HVACconsumer off-road manufacturers, referred throughout this Annual Report on Form 10-K as OEMs,original equipment manufacturers (“OEMs”), or indirectly through the Tier 1 suppliers of these OEMs. The Company has its principal executive offices in Auburn Hills, Michigan and has sales, engineering and production facilities in Auburn Hills, Michigan,Michigan; Concord, Michigan,Michigan; LaFayette, Georgia,Georgia; Louisville, Kentucky, Bryan, Ohio,Kentucky; Monterrey, Mexico, Queretaro, MexicoMexico; Querétaro, Mexico; and London, Ontario. The Company also has an independent client sales representative who maintains offices in Baldham, Germany.
Unique Fabricating derives most of its net sales from the sales of foam, rubber plastic, and tape adhesive related automotive products. These products are produced by a variety of manufacturing processes including die cutting, compression molding, thermoforming, reaction injection molding and fusion molding. We believe Unique Fabricating has a broader array of processes and materials utilized than any of its direct competitors, based on our product offerings. By sealing out air, noise, and water intrusion, and by providing sound absorption and blocking, Unique Fabricating’s products improve the interior comfort of a vehicle, increasing perceived vehicle quality and the overall experience of its passengers. Unique Fabricating’s products perform similar functions for appliances, water heaters, and HVACheating, ventilation, and air conditioning systems (“HVAC”), improving thermal characteristics, reducing noise, and prolonging equipment life.
Our principal executive offices are currently located at 800 Standard Parkway, Auburn Hills, Michigan, 48326. UFI Acquisition, Inc, a Delaware Corporation (“UFI”), was formed in January 2013 to acquire 100% of the outstanding equity of Unique Fabricating, Inc., and its wholly-owned subsidiaries, Unique Fabricating South, Inc. and Unique Fabricating de Mexico, S.A. de C.V. (collectively, such subsidiaries and other subsidiaries referenced in this Annual Report on Form 10-K, as the “Company” or “Unique” or "Unique Fabricating"“Unique Fabricating”). In September 2014, UFI Acquisition, Inc. changed its name to Unique Fabricating, Inc. (“UFI”) which is now the parent company of the group. As a result of the name change, the subsidiary previously named Unique Fabricating, Inc. became Unique Fabricating NA, Inc.
Initial Public Offering (the “IPO”)
On July 7, 2015, we completed our IPO of 2,702,500 shares of common stock at a price to the public of $9.50 per share, including 352,500 shares subject to an over-allotment option granted to the underwriters. After underwriting discounts, commissions, and approximate fees and expenses of the offering, we received net IPO proceeds of approximately $22.2 million. We used part of these proceeds to repay the $13.1 million principal amount of our 16% senior subordinated note together with accrued interest through the date of payment. We used the remaining proceeds to temporarily reduce borrowings under the revolver portion of our then senior secured credit facility. We also issued to the underwriters warrants to purchase up to 141,000 shares of common stock, as additional compensation in the IPO. The warrants are exercisable at a per share exercise price equal to 125% of the initial public offering price of $9.50 per share and may be exercised until the date five years from the date of the IPO.
Automotive Industry Analysis and Industry Trends
North America is the Company’s core market. We manufacture multi-material foam, rubber, plastic components, and tape adhesive related products utilized in noise, vibration and harshness management, acoustical management, water and air sealing, decorative and other functional applications.
Demand for automotive parts in the OEM market is generally a function of the number of new vehicles produced, which is primarily driven by macro-economic factors such as credit availability, interest rates, fuel prices, consumer confidence, employment, and other trends. Although OEM demand is tied to actual vehicle production, participants in the automotive parts industry also can grow through increasing product content per vehicle by increasing business with current customers and in existing markets, gaining new customers, and increasing share in adjacent markets. We believe that we are well-positioned to take advantage of these opportunities with the Company's strong North American geographical presence and advanced technology, engineering, manufacturing and customer support capabilities.
Over the next 8 yearsBased upon industry sources, we expect recovery in 2021 in North American light vehicle production from the COVID-19 impacted low tolevels in 2020. We also expect 7% growth in 2022 from 2021 production levels which have been impacted by the first half supply chain issues, including the chip shortage, logistics, and weather related challenges. We expect no growth in overall North AmericaAmerican light vehicle production while worldwide production will tend to grow slowly, as depicted inover the following table.5 years.
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| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
| (production units in thousands, except percentages) |
North America | 13,024 | | | 15,762 | | 21 | % | | 16,836 | | 7 | % | | 16,587 | | (1) | % | | 16,504 | | (1) | % | | 16,513 | | — | % | | 16,471 | | — | % | | 16,615 | | 1 | % |
(Source: IHS Automotive (February 2020)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) |
By Region | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 |
Europe | 20,689 |
| 21,244 |
| 3 | % | 21,509 |
| 1 | % | 21,743 |
| 1 | % | 21,918 |
| 1 | % | 22,017 |
| — | % | 22,151 |
| 1 | % | 22,725 |
| 3 | % |
Greater China | 24,392 |
| 25,285 |
| 4 | % | 26,629 |
| 5 | % | 27,914 |
| 5 | % | 29,129 |
| 4 | % | 30,233 |
| 4 | % | 31,175 |
| 3 | % | 31,919 |
| 2 | % |
Japan/Korea | 12,942 |
| 12,628 |
| (2 | )% | 12,635 |
| — | % | 12,767 |
| 1 | % | 12,894 |
| 1 | % | 12,940 |
| — | % | 12,984 |
| — | % | 12,928 |
| — | % |
Middle East/Africa | 1,951 |
| 2,102 |
| 8 | % | 2,249 |
| 7 | % | 2,464 |
| 10 | % | 2,668 |
| 8 | % | 2,706 |
| 1 | % | 2,731 |
| 1 | % | 2,785 |
| 2 | % |
North America | 16,510 |
| 16,455 |
| — | % | 16,499 |
| — | % | 16,712 |
| 1 | % | 16,864 |
| 1 | % | 16,988 |
| 1 | % | 17,087 |
| 1 | % | 17,364 |
| 2 | % |
South America | 3,414 |
| 3,671 |
| 8 | % | 3,825 |
| 4 | % | 3,976 |
| 4 | % | 4,084 |
| 3 | % | 4,233 |
| 4 | % | 4,347 |
| 3 | % | 4,591 |
| 6 | % |
South Asia | 8,379 |
| 8,892 |
| 6 | % | 9,420 |
| 6 | % | 10,013 |
| 6 | % | 10,435 |
| 4 | % | 10,911 |
| 5 | % | 11,536 |
| 6 | % | 11,990 |
| 4 | % |
Grand Total | 88,277 |
| 90,277 |
| 2 | % | 92,766 |
| 3 | % | 95,589 |
| 3 | % | 97,992 |
| 3 | % | 100,028 |
| 2 | % | 102,011 |
| 2 | % | 104,302 |
| 2 | % |
| | | | | | | | | | | | | | | |
Market Automotive) (March 2021)
In addition to the low overall industry growth, we believe there are a variety of trends that continue to influence the future of the globalNorth American automotive market. We believe that we are well-positioned to benefit from an increasing number of trends driven by market forces such as:
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▪Fuel efficiency/vehicle light-weighting: Government mandates on fuel efficiency and emission reductions will continue to force the automotive industry to focus on improving the fuel economy of vehicles. This is one of the factors driving the trend of replacing heavier conventional materials in vehicle production with lighter weight components such as plastics and foams. ▪Interior comfort: Comfort of interiors consistently rank in the top three factors that consumers consider when purchasing a new vehicle and is a key area where vehicle manufactures can differentiate their vehicles. With the automotive industry to focus on improving the fuel economy of vehicles. This is one of the factors driving the trend of replacing heavier conventional materials in vehicle production with lighter weight components such as plastics and foams. |
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• | Interior comfort: Comfort of interiors consistently rank in the top three factors that consumers consider when purchasing a new vehicle and is a key area where vehicle manufactures can differentiate their vehicles. With the
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ongoing trend of electrification (no engine noise) and increasing demand for quieter vehicles, we expect the use of foam and acoustical insulation in vehicles to increase.
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• | ▪Telematics and Infotainment: The increasing use of telematics and infotainment requires increasingly quieter vehicles for the telematics systems to recognize voice commands and passengers to enjoy the infotainment options. Over the next few years, the vast majority of all new vehicles are expected to include voice recognition systems, increasing the need for quiet interiors. We believe the result will increase the use of acoustic insulation materials, more precise air seals and other noise, vibration, and harshness products in all vehicles. ▪Rapid pace of new vehicle launches: In order to meet consumers’ increasing demand for new products, the automotive market will see a significant number of new launches from vehicle manufacturers over the next few years. Each launch creates new product opportunities for us with the OEMs need for noise, vibration, and harshness (collectively “NVH”) and buzz, squeak, rattle (collectively “BSR”) solutions as they discover unplanned noise issues at the production launch for a new vehicle program. In many of these situations, we develop and begin supplying a solution within days, a level of responsiveness that avoids competitive requests for quotations and produces premium value for our customers. ▪: The increasing use of telematics and infotainment requires increasingly quieter vehicles for the telematics systems to recognize voice commands and passengers to enjoy the infotainment options. Over the next few years, the vast majority of all new vehicles are expected to include voice recognition systems, increasing the need for quiet interiors. We believe the result will increase the use of acoustic insulation materials, more precise air seals and other noise, vibration and harshness products in all vehicles. |
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• | Rapid pace of new vehicle launches: In order to meet consumers’ increasing demand for new products, the automotive market will see a significant number of new launches from vehicle manufacturers over the next few years. Each launch creates new product opportunities for us with the OEMs (Original Equipment Manufacturer) need for noise, vibration and harshness (NVH) and buzz, squeak, rattle (BSR) solutions as they discover unplanned noise issues at the production launch for a new vehicle program. In many of these situations, we develop and begin supplying a solution within days, a level of responsiveness that avoids competitive requests for quotations and produces premium value for our customers.
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• | Localization of production: Due to freight costs, currency fluctuations, logistic issues and protection of supply, many foreign vehicle manufacturers have increased their North American production volumes and are increasing local sourcing of vehicle components. This trend has been accelerated with the impacts of the various supply chain shocks seen over the last year. We believe that Unique Fabricating’s production facilities situated in geographic proximity to most North American vehicle assembly locations provide a competitive advantage. |
We believe these market trends create opportunities for us to achieve market share gains from increased content per vehicle, new solution-oriented products, geographic shifts in vehicle and component production, and evolving customer sourcing strategies. We continue to develop leading-edge solutions focused on addressing these trends, with products that enable our customers to produce distinctive market-leading products.
As an example of our innovative technical capabilities, we utilized our thermoforming process to develop and produce a line of lightweight flexible air duct systems for a leading OEM, providing an 80% weight reduction and enhanced functionality. This air duct system has developed into Unique Fabricating’s patent pending TwinShape® line of proprietary foam air ducts. Unique Fabricating has been awarded four additional production ordersalso leveraged our knowledge in our reaction injection molded (“RIM”) process and has begun to offer NVH and sealing products that meet or exceed stringent flammability requirements for all of the TwinShape line of ducts, adding three additional OEM customers since launching the product, and have secured development and prototyping contracts with four additional OEMs in the last few years for potential inclusion of this product in vehicle programs starting with model years 2019 and 2020 vehicles.
markets we serve.
Appliance HVAC, and Water Heater IndustriesMarket
We are a leading provider of fabricated, non-metallic components to a diverse group of OEMs and tiered suppliers in the appliance, HVAC, and water heater industries. These sales represented approximately 10%9% of our net sales for the year ended December 29, 2019.31, 2020. These components are primarily manufactured from foam, adhesives, fiberglass, rubber and board-back material. We have extensive materials, engineering and fabrication expertise and deliver custom-designed, innovative solutions for our customers. Our component solutions primarily consist of products used in gasketing, heat deflection, packaging, insulation, water seals, noise reduction and vibration control. Demand for these end-market products is largely driven by the replacement of older units and the broader health of the housing sector. According to the U.S. Census bureau, there were 1.6 millionthe seasonally adjusted annual rate for new housing starts in 2019 and the National AssociationFebruary 2021 was at 1.4 million. Existing home sales rose to a seasonally adjusted annual rate of Home Builders forecasts that there will be approximately another 1.46.7 million new housing starts in January 2021, up 23% from January 2020.
The United States major household appliance industry, which includes water heaters, is forecast to show growth during 2020,2021, as new and existing home sales, as well as home improvement spending, both of which have a direct impact on appliance industry sales, continue to show positive outlooks. According to an independent source published in December 2019, forecasted revenueRecent estimates for this industryannual growth rate have increased to between 1% to 2.5%. It is well documented that Covid-19 increased the amount of time individuals spend in the United Stateshousehold as well as the number of individuals working from home. This “home nesting” behavior will continue to drive consumer spending towards home improvements as indicated by the Leading Indicator for Remodeling Activity (“LIRA”) which is expectedprojected to grow at an annual rateincrease 8.5% from end of 0.5% from 20192020 to 2024 to reach approximately $21.1 billion in revenue in 2024. The United States HVAC industry is also poised to benefit from the positive outlook in the housing and home improvement markets. According to an independent source published in January 2020, forecasted revenue for this industry is expected to grow at an annual rate of 1.6% from 2019 to 2024 to reach approximately $48.9 billion in revenue in 2024.2021. We believe these benefits will increase the demand for our products from existing clients including GE, Whirlpool,AO Smith, and Rheem.
Carrier.
Medical Market
We are utilizing our North American based manufacturing to provide our existing and targeted customers faster delivery, increased reliability, and exceptional quality. The medical foam market is large, expanding, and diverse. Unique Fabricating targets specific segments within the medical market utilizing its access to specialized materials and adhesives joined with its design and manufacturing expertise and innovation to create value for its customers. The Company’s ability to leverage its buying power in the transportation market helps generate cost competitive solutions. The applications for Unique Fabricating’s products are numerous and include personal protection equipment, class 1 medical devices, orthopedics, patient positioning, and custom packaging.
Consumer Off-Road Market
With regard to the consumer off-road market, Unique Fabricating primarily targets power sports, marine, agricultural, and construction equipment manufacturers to address sealing, thermal management, weight reduction, and overall passenger comfort. Industry participants are making large investments in research and development activities to enhance vehicle performance through innovative solutions. There is a need to reduce noise and weight as they introduce electric drivetrains. As a lead supplier in the transportation market the Company is utilizing a diverse mix of common product solutions, material, and capacity for a vast array of applications in this growing market while providing cost saving opportunities to its customers.
Our Objectives
Our goals are to provide exceptional quality, reliable on-time delivery, competitive cost, and technical innovation with rapid engineering support. Our objective is to be the easiest full-service solution provider for our customers, while being a great place for our team members to work. We seek to execute a business model that generates sufficient sustainable free cash flow thereby providingto provide flexibility for capital allocation. We also strive to achieve growth at above industry levels through strong competitive capabilities in engineering, manufacturing, and program management that contribute to leading positions in cost and quality. In addition, the Company will continue to grow adjacent markets while selectively pursuing opportunistic acquisitions that provide additional products and processes, and entrance into new growth markets.
We work together with our customers in various stages of production, including initial concept and development, routine engineering problem resolution during their product launches and ongoing value engineering. In addition, we collaborate with our customers on component sourcing, quality assurance, manufacturing, and delivery in order to develop long-standing business relationships. We believe we are well-positioned to meet customer needs and have a strong, established reputation with customers for providing high-quality products at competitive prices with timely delivery and customer service. Given that both the automotivetransportation and appliance OEM business and the appliance/water heater OEM businessbusinesses involve long-term business awarded on a platform-by-platform basis, our intent is to leverage our strong technical expertise and customer relationships to obtain new platform awards.
Our Strengths
Our mission is to deliver innovative and timely customer solutions for NVH management, water and air sealing and other functional and decorative applications. We employ our extensive knowledge of raw materials and adhesives, our engineering and creativeinnovative resources and our rapid response capabilities to deliver technical innovation, exceptional quality, reliable on-time delivery, and competitive costs. We believe the key to our core competitive strengths are as follows:
Strong technical expertise. We have significant expertise and knowledge of materials, adhesives, and manufacturing processes. Our understanding of customers’ design and performance needs, and how our products interface with their applications allow us to engineer effective product solutions. We believe that our engineering talent, test facilities and rapid prototyping capabilities distinguish us from our competitors and enable us to rapidly innovate and develop products that resolve customers’ problems, often within 24 to 48 hours. By understanding our customers’ products and processes, when we are confronted with a customer engineering challenge, we can conceptualize a design concept that allows us to capitalize on the optimum combination of materials to solve a given problem.problem when we are confronted with a customer engineering challenge. We can create our own prototype tools in-house so that we go directly from concept to hardware and quickly present tangible product solutions for our customers to evaluate. Our ability to rapidly address customer challenges and provide prototype parts that include the use of new materials, products or processes is one of our key competitive strengths.
Operational Excellence. We are dedicated to maintaining a culture of continuous improvement. We utilize lean manufacturing techniques and statistical methods to drive productivity and quality improvement. We use quality, delivery, and speed-to-market as competitive advantages. Lean manufacturing improves overall costs, quality, and the speed of product velocity through themanufacturing. We believe that our manufacturing process leadingleads to better response time and greater flexibility in scheduling. Our reputation for high quality, innovative products is attributable to a constant emphasis on engineering, including materials engineering, product process, and sales engineering, coupled with our dedication to lean manufacturing to ensure effective execution.
Depth of customer relationships. We have developed long-term relationships with a customer base that we target deliberately. Each of our customers has substantial requirements for NVH management, water and air sealing, functional and decorative
components. Due to our technical sophistication, raw material and adhesive innovation and rapid responsiveness, we have a position with many of our key customers as a preferred supplier for our core products within the North American automotive and appliance markets. Our sales engineersand engineering teams have developed deep relationships with the technical teams of our key customers. The customers’ engineers leverage our materials knowledge and utilize us as a resource to help them solve problems and/or pursue product enhancements. This enables us to become involved early in the design/development stage of new vehicles or appliances, leading to opportunities for us to introduce new products. In certain situations, we can influence the customer design specifications from which new business is awarded.
Key relationships with suppliers. We have long relationships with over 150an extensive and comprehensive supply base for our raw materialmaterials and adhesive suppliers.adhesives. We track new developments in materials and pursue exclusive relationships with those suppliers that develop innovative raw materials and adhesives. OurCertain of our key suppliers partner with us to introduce their new products and technology to the marketplace and obtain the necessary customer approvals. This can lead to Unique being first to market with certain products or materials. For example, this has led to our having exclusive access for our types of products to the only source of recycled polyol for
polyurethane in the industry. While products incorporating these materials accounted for a small percentage of our net sales for the year ended December 29, 2019, we believe these recycled materials are creating opportunities for new product variations that other competitors cannot offer. We constantly collaborate with our suppliers to develop new materials and adhesive combinations that exhibit a cost, quality and/or performance enhancement for our customers.
Proximity to key customers. Our manufacturing facilities are strategically located to serve the North American automotivetransportation and appliance industries.markets. Our primary manufacturing centersfacilities are in the Midwestern and Southeastern regions of the United States, in North and Central Mexico, and Canada. We believe that our manufacturing facilities are within approximately 500 miles of over 80% of North American vehicle production and close to major appliance manufacturing locations. As our products are light in weight, transportation costs can be a significant portion of the delivered cost of products. This established manufacturing geography creates a competitive advantage.
Our Strategy
Our business strategy is to be a valued partner in our customers’ product development and production processes by producing exceptional quality with reliable on-time delivery, competitive costs, technical innovation, and rapid engineering support. We utilize our extensive knowledge of raw materials and adhesives coupled with our engineering development and rapid responsiveness to deliver innovative and timely customer solutions for NVH management, water and air sealing, decorative and other functional applications.
We attempt to align our internal human resources and technical capabilities to take advantage of industry mega trends, such as light weighting, telematics, and reduced energy consumption, which will contribute to profitable revenue growth opportunities from our existing operations. Our growth plans include initiatives to develop certain new products and to develop the medical, consumer, and off-road markets to provide incremental opportunities. We believe that significant opportunities exist to continue to grow our business and increase profitability by focusing on the following:
Further Penetrate Existing Markets with Existing Products and Processes. We believe we are positioned to gain share and grow in existing markets with our current products, processes, and geography capitalizing on the industry’s increasing demand for NVH management content and our capabilities including exclusive proprietary materials. As OEMs change materials to reduce weight, vehicles are utilizing more rubber and plastic components like those designed and supplied by Unique. In addition, the increasing use of telematics is driving a need for quieter interiors in vehicles at all levels resulting in an increase in the amount of acoustical insulation per vehicle. We intend to capitalize on our ability to service customers in different geographical locations through our manufacturing facilities in the Midwestern and Southeastern regions of the United States, North and Central Mexico, and Canada.
Develop New Products and Processes for Existing Markets. We have earned the reputation as a problem solver to our current customers. As a result, we are in the position to develop complementary products and processes that can be sold to the same purchasing and engineering groups with whom we already do business. By adding products and processes to our portfolio that broaden our scope within these groups, we offer one stop shopping allowing them to reduce their supply base and complexity and increasing sales opportunities for Unique. We work closely with raw material and adhesive suppliers to develop innovative solutions that offer cost and performance improvement. We constantly focus on finding new applications for molded products utilizing thermoforming or compression, reaction injection, and fusion molding. These activities frequently lead to the development of new or novel products not yet in common use. When this occurs, we actively explore the patentability of the product. Protection of our intellectual property is a conscious part of our strategy of using technology and innovation as a competitive advantage. An example of this is our patent pending for light weight TwinShapeTwinShape® foam air duct technology.
Expand into New Markets with Existing Products and Processes. While the specific products may vary, we have identified numerous opportunities to sell products fabricated using die cut and molding technology into the medical, consumer goods, industrial, heavy truck, and off-highway markets that we currently serve on a limited basis. We have demonstrated the ability to develop cost effective products utilizing various materials. Our acquisitions have provided the Company with access to a variety of new markets for our products. We are currently developing new products for the appliance water heater and HVAC industriesoff-road markets, utilizing our various molding technologies. We are also exploring increased opportunities for medical products. Raw material and adhesive suppliers rely on us to provide marketplace insight into
new or emerging customer challenges. We have the capability to combine new materials with new processes to create cost effective products in new markets.
Pursue Acquisitions. WeIn the mid-term, we expect to selectively pursue acquisitions that add new products and/or processes or geographic and market expansionaccess to further expand our portfolio of customer solutions. Since December 2013, management has completed four add-on acquisitions that added new markets, products, and additional manufacturing processes to our capabilities. We will
continue to use our relationship with Taglich Private Equity, LLC, which sponsored our formation, to identify evaluate and execute acquisition opportunities.
Products
Unique’s primary products, which are identified by manufacturing process, —are traditional die cut products, precision die cut products, thermoformed products, fusion molded products, and reaction injection molding (RIM)molding. Our products are utilized in multiple applications throughout the interior and exterior of the vehicle.automotive and heavy-duty vehicles. As customer demands continue to drive OEMs to make their products free from unwanted noise, we believe Unique is positioned well within the product family to address these increasing demands.
Automotive Product Applications
Unique’s rapid responsiveness and extensive product and process capabilities are valued by our customers. We believe Unique’s diverse product offerings, derived from a broad base of raw materials utilizing multiple manufacturing technologies, isare the most comprehensive of similar companies operating in this industry. Based on our knowledge of our competitors, we believe that the companies we compete with offer fewer material choices and/or possess fewer manufacturing process alternatives than Unique. Unique’s access to broad production capabilities enables it to work with over 1,000a wide variety of raw materials and dimensions to develop the optimum solution for a given application. Unique’s broad product offerings results in it being a single-source supplier to many customers, which creates a competitive advantage.
Die Cut Products
Unique is primarily a supplier of die cut non-metallic materials and components. Historically, this has been the Company’s core business, within all its markets, developed through its technical expertise, broad customer base, strategic manufacturing footprint, diverse material selection and strong quality and delivery performance. We believe that Unique can leverage its market position in die cutting by offering more highly engineered, higher value products and processes such as precision die cutting, thermoforming, fusion molding, and RIM molded polyurethane.
Thermoformed Molded Products
Unique's product offerings include thermoformed molded products. Unique has leveraged its position as a manufacturer of core die cut products to gain traction with customers who wanted a single-source solution for other related products, such as thermoformed fusion molded, and RIM polyurethane components.
Management seeks to continue the development of molded products that are complementary to the Company’s die cut products. These products have a higher engineering content and we believe provide increased sales and potential margin growth. These products also differentiate Unique, which we believe will makemakes us more valuable to our target customers. The Company’s development efforts in this area have led to innovative product solutions such as Unique’s existing patent pending thermoformed TwinShapeTwinShape® foam HVAC duct modules. The TwinShape line is currently in production at three vehicle OEMs, has been selected by an additional OEM, for a model year 2021 vehicle, and is being evaluated in development programs for multiple other OEMs.
Unique’s thermoformed products include HVACTwinShape® foam air ducts, door watershields,water shields, HVAC evaporator liners, console bin mats, and fender insulators, and molded seat undercovers, among others. Unique believes there is significant room to grow within each of its thermoformed molded product areas.
Fusion Molded Products
Unique provides fusion molding capability in-house. Fusion molding is an innovativea foam molding process used to manufacture precise three-dimensional components that are lightweight and provide excellent thermal and acoustic performance. Primarily used for NVH management and body sealing applications, the fusion molded products are complementary to Unique’s other product lines and give Unique additional options to provide light-weighting and NVH management solutions to its customers.
In Europe, the market for fusion molded products is developed; BMW, Mercedes and VW have integrated the technology in their vehicles for several years. The North American market for fusion molding is growing rapidly as European OEMs source more fusion molded products in their North American vehicles and the technology gains traction with domestic OEMs including Fiat Chrysler Automobiles ("FCA"),Stellantis, General Motors, and Ford. In addition, since there are a very limited number of North American suppliers with the engineering and manufacturing capabilities to produce fusion molded components, Unique is well positioned to capitalize on the anticipated growth in the North American market.
Unique’s fusion molded products include exterior mirror seals, cowl-to-hood seals, cowl-to-fender seals, and other NVH management and sealing applications like fillers, spacers and gaskets. The products have also been developed for medical packaging applications molding United States Food and Drug Administration (“FDA”) approved foam.
Reaction Injection Molded Products
Unique Fabricating's RIM technology offers the benefit of a three-dimensional part with superior temperature insulation, water sealing, and NVH performance. We offer multiple formulations to generate a material to meet part requirements. Systems include rigid foam, integral-skin, viscoelastic, energy absorbing, and high resilience. The product is capable of meeting VO flammability ratings and can be produced with a class “A” finish.
Unique’s reaction injection molded products can be utilized within all its markets and include under hood engine covers, compressor covers, NVH muckets, comfort padding, and body positioners.
Significant Customers
The Company’s customers are principally engaged in the North American automotivetransportation industry (approximately 85%88% of our net sales for the year ended December 29, 2019)31, 2020), and in the manufacture of durable residential housing and commercial products (approximately 10%9% of our net sales for the year ended December 29, 2019)31, 2020). In the automotivetransportation market, the Company’s sales are primarily to Tier 1 suppliers to the OEMs. Approximately 20%21% of our net sales for the year ended December 29, 201931, 2020 were directly to vehicle OEMs. Direct and indirect sales through Tier I suppliers, to General Motors, FCA, and Ford Motor Company represented approximately 51%, of our net sales for the year ended December 29, 2019. No single customer accounted for more than 10% of our net direct sales for the years ended December 29, 201931, 2020 and December 30, 2018,29, 2019, respectively. Please refer to Note 12 of our notes to the consolidated financial statements for further disclosure on net sales made directly to vehicle OEMs in 2020 and prior years as well as net sales for our foreign operations located in Mexico and Canada for 20192020 and prior years.
Competitive Environment
We believe that customers base their sourcing decisions on the responsiveness of a supplier and its ability to deliver innovative solutions, quality products and competitive pricing. Unique strives to develop mutually beneficial relationships with its customers through technical support and consistent/predictable performance. Unique differentiatesattempts to differentiate itself through innovation in materials, rapid responsiveness, and broad manufacturing capabilities.
capabilities in Canada, Mexico, and the United States.
There is not a dominant supplier within our core markets in autotransportation and appliance water heater, and HVAC.markets. There are significant barriers to entry into some of our markets and with some of our products and processes, including the complexities of managing the scale of production and the complex supply chain necessary to obtain customer acceptance.
Environmental Matters
Our facilities are subject to various environmental laws and regulations, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and occupational safety and health. Our operations and facilities have been, and in the future may become, the subject of enforcement actions or proceedings for non-compliance with such laws or for remediation of company-related releases of substances into the environment. Resolution of such matters with regulators can result in commitments to compliance abatement or remediation programs and, in some cases, the payment of penalties.
We believe that our facilities are in substantial compliance with applicable environmental laws and regulations. Our facilities have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with these laws and regulations. However, we currently do not anticipate that the future costs of environmental compliance will have a material adverse effect on our business, financial condition, cash flows, or results of operation.
Employees
As of December 31, 2020, we had 1,001 full-time and 50 contract workers. In the Auburn Hills, Michigan facility, 81 hourly workers are represented by a labor union and are covered by a collective bargaining agreement which is effective through August 2022. In the Louisville, Kentucky facility, 46 hourly workers are represented by a labor union and are covered by a collective bargaining agreement which is effective through February 1, 2023. We have never experienced a material work stoppage or disruption to our business relating to employee matters. We believe that our relationship with our employees is good.
Company's Website
We make available, free of charge, through our website(www.uniquefab.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. We also make available on our website our Code of Ethics and charters for the standing committees of our Board of Directors and other information related to the Company. We are not including the information contained on our website as part of, or incorporating by reference into this report. The Company'sSEC maintains a website is [www.uniquefab.com]
(www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.
ITEMItem 1A. RISK FACTORSRisk Factors
Set forthYou should carefully consider each of the risks described below, together with information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. The risks that are highlighted below are certainnot the only ones that we face. Some of our risks relate principally to our business and uncertaintiesthe industry in which we operate, while others relate to the securities markets in general and ownership of our common stock. Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Risks Related to Going Concern
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, as a result of violations by us of loan covenants in our senior secured credit facility which, to date, have not been amended or waived. This condition raises substantial doubt about the Company’s ability to continue as a going concern.
As of December 31, 2020, the Company was in violation of a number of its loan covenants. Absent an amendment and waiver, failure to be in compliance with the Company’s financial covenants would constitute a default when reported. Such a default, if not waived by our lenders, would allow the lenders to accelerate the maturity of the debt, making it due and payable at that time. If the maturity of the debt were accelerated, the Company would not have sufficient available liquidity to repay such debt within one year after the date that the financial statements are issued. This condition raises substantial doubt about the Company’s ability to continue as a going concern.
The Company has been actively discussing its 2020 results and the Company’s failure to meet its financial covenants with the Administrative Agent and has entered into a forbearance agreement, providing a period commencing on April 9, 2021 and through and including June 15, 2021, during which the Company will be able to borrow on its Revolver, subject to the terms and conditions to making a revolving credit advance, including availability, and the Lenders have agreed, subject to the terms of the forbearance agreement, to forbear from enforcing their rights or seeking to collect payment of the Company’s debt or disposing of the collateral securing the debt. However, entering into a forbearance agreement will not alleviate the substantial doubt about the Company’s ability to continue as a going concern. The Company intends to use the forbearance period to continue negotiations with the Lenders to enter into an amendment and waiver to cure the defaults. There can be no assurance that the Company will be able to enter into an amendment or waiver with the Lenders or if it enters into an amendment, what the terms, restrictions, and covenants of the amendment will contain. Without an amendment and waiver that cures the default, substantial doubt about the Company’s ability to continue as a going concern remains.
Risks Related to the Coronavirus
The coronavirus (COVID-19) pandemic has and will continue to materially and adversely affect our business, financial condition and results of operations.
The ongoing outbreak of COVID-19, and any other outbreaks of COVID-19, other contagious diseases or other adverse public health developments have had and could continue to have a material adverse effect on our business, financial condition and results of operations. In 2020, COVID-19 significantly impacted economic activity and markets worldwide, and it could continue to negatively affect our business in a number of ways. These effects include, but are not limited to:
▪Disruptions or restrictions on our employees’ ability to work effectively due to illness, travel bans, quarantines, shelter-in-place orders or other limitations.
▪Net sales to automotive customers, most of whom idled their manufacturing facilities as a result of the COVID-19 pandemic, were approximately 88%of the Company’s net sales during the fiscal year endedDecember 31, 2020. The closures of our customers’ operations from April through June had a substantial adverse effect on our results of operation and financial condition.
▪In an effort to increase the wider availability of needed medical and other supplies and products, we have elected and may further elect to, or governments may require us to, allocate manufacturing capacity in a way that could adversely affect our regular operations and that may adversely impact our customer and supplier relationships.
▪Costs incurred and revenues lost during and from the effects of the COVID-19 pandemic have not been and likely will not be recoverable.
▪The failure of third parties on which we rely, including our suppliers, customers, contractors, commercial banks and other business partners, to meet their respective obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties.
▪The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global credit and financial markets, which increases the cost of capital and adversely impacts access to capital for both the Company and our customers and suppliers.
The extent to which the COVID-19 pandemic, or other outbreaks of disease or similar public health threats, materially and adversely impacts our business, financial condition and results of operations or financial conditionis highly uncertain and cause our actual results to differ materially from those expressed in forward-looking statements made bywill depend on future developments. Such developments may include the Company. Also refer to the Special Note Regarding Forward-Looking Statements in Item 1 of this Annual Report on Form 10-K.
Coronavirus
Due to the ongoing COVID-19 outbreak with its uncertain near, mid,geographic spread and longer-term impacts on the Company, our customers, our suppliers, and the industries we serve, we are executing a comprehensive set of actions to prudently manage our resources while keeping our customers supplied with the products they continue to require.
While demand in the automotive segment has been reduced for an indeterminate period, we continue to have customer orders across our various markets and in all our plants. Currently, we are operating our facilities.
We are following the guidelines provided by the various governmental entities in the jurisdictions where we operate and are taking additional measures to protect our employees.
Considering the current decline in demand, we are modifying our shift schedules and plant employee counts, limiting our raw material ordering, and restricting all discretionary spending.
As our supply base is almost exclusively North American, we have not yet seen disruptions in our supply chain.
Due to the inherent uncertainty of the unprecedented and rapidly evolving situation including the duration of the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the various customersoutbreak. In addition, how quickly, and governments, we are unable to determinewhat extent, normal economic and operating conditions can resume cannot be predicted, and the full impactresumption of normal business operations may be delayed or constrained by lingering effects of the COVID-19 situationpandemic on our future operations.suppliers, third-party service providers, and/or customers.
RISKS RELATED TO OUR BUSINESS
Risks Related to Our Debt
We have substantial debt and if we were to default on paying our debt or failhave failed to comply with certain of the covenants in our secured credit agreement, which allows our lenders couldto take action that would likely cause our stockholders to lose their entire investment in us.
As of December 29, 2019,31, 2020, we had approximately $47.5$44.4 million of debt outstanding under our senior secured credit facility. Substantially all our assets are pledged to the lenders to secure this outstanding debt. In the event that we are unableAs a result of our failure to make principal, interest or other payments due or we do not comply with thefinancial and other covenants contained in the senior secured credit facility, the lenders could declarehave declared an event of default, accelerate allalthough they have not accelerated the amounts outstanding and seekor sought to foreclose on the collateral securing such indebtedness. We have entered into a forbearance agreement during which our Lenders have agreed, among other things, during the period commencing on April 9,2021 through and including June 15, 2021, to forbear from enforcing their rights or seeking to collect payment of the Company’s debt or disposing of collateral securing the debt. There can be no assurance that the Company, during the forbearance period, will be able to enter into an amendment or waiver curing the defaults. If the Company does not obtain an amendment or waiver of the defaults or if the lenders take the position that the Company has not complied with the terms of the forbearance agreement, there can be no assurance that the lenders will not take action to collect payment of our debt or dispose of collateral securing the debt. In such event, we could be forced to file for bankruptcy protection and stockholders would likely lose their entire investment in us.
The agreement governing our senior secured credit facility contains financial covenants and other covenants that may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions. If we are unableOur inability to comply with these covenants, would materially and adversely affect our business, results of operations and liquidity could be materially and adversely affected.liquidity.
As of December 31, 2020 the Company was in violation of its loan covenants. The Company has requested certain amendments to these covenants but its lenders have not agreed to such amendments. Our ability to comply with the covenants in the senior secured credit facility agreement even if they are amended may be affected by economic or business conditions beyond our control. If we are not able to comply with these covenants when required and we are unable to obtain necessary waivers or amendments from the lenders, we would be precluded from borrowing under the credit facility. If we are unable to borrow under the credit facility, we will need to meet our liquidity requirements using other sources. AlternativeBased on our recent results, we cannot be assured that alternative sources of liquidity may notwill be available on acceptable terms, if at all.available. In addition, if we do not comply with the financial or other covenants in the credit facility when required, the lenders could declare an event of default under the credit facility, and our indebtedness thereunder could be declared immediately due and payable. The lenders would also have the right in these circumstances to terminate any commitments they have to provide further borrowings. Any of these events would have a material adverse effect on our business, financial condition and liquidity.
In addition, the senior secured credit facility contains covenants that, among other things, restrict our ability to:
▪incur liens;
▪incur or assume additional debt or guarantees;
pay dividends, or make redemptions and repurchases, with respect to capital stock;
▪make loans and investments;
▪make capital expenditures;
▪engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates; and
▪change the business conducted by us or our subsidiaries.
The operating and financial restrictions and covenants in this debt agreement and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Our substantial amount of indebtedness may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness.
Our substantial level of indebtedness increases the possibility that we may be unable to generate sufficient cash to pay, when due, the principal of, interest on or other amounts due with respect to our indebtedness. The level of our indebtedness could have other important consequences to you as a stockholder. For example, it could:
▪make it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations under our credit facility, including financial and other restrictive covenants, could result in an event of default under the senior secured credit facility;
▪make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation;
▪require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions, pay dividends and other general corporate purposes;
▪limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
▪place us at a competitive disadvantage compared to our competitors that have less debt; and
▪limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.
Any of the above listed factors could materially adversely affect our business, financial condition and results of operations.
The senior secured credit facility contains restrictive covenants that may limit our ability to engage in activities that are in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our debt.
The Company received funding under the Coronavirus Aid, Relief and Economic Security (CARES) Act and there is no guarantee that the Company will be able to attain loan forgiveness, in whole or in part.
On April 24, 2020, the Company executed a promissory note in favor of Citizens Bank, National Association, evidencing an unsecured loan in the aggregate principal amount of approximately $6 million, which was made pursuant to the Paycheck Protection Program, or the PPP. The PPP was established under the CARES Act, which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration, or the SBA. The Company has used proceeds from the loan for payroll, benefits, rental and utility payments.
Under the terms of the CARES Act, loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the lender, Citizens Bank, and determined, subject to limitations, based on factors set forth in the CARES Act and other guidance from the SBA., including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the loan, or any portion thereof, is forgiven, the amount forgiven will reduce or eliminate outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The SBA has stated, to help ensure PPP loans are limited to eligible borrowers in need, that it will review all loans in excess of $2 million. If the loan is not forgiven, the Company will be required to repay the outstanding principal, along with accrued interest. The Company has and will continue to carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will ultimately obtain forgiveness of the PPP loan in whole or in part. The Company applied for forgiveness of the PPP loan during the fourth quarter of 2020.
The PPP loan application required the Company to certify, among other things, that the current economic uncertainty made the PPP loan request necessary to support our ongoing operations. In 2020, the SBA, in consultation with the Department of Treasury, issued new guidance requiring borrowers to consider their ability to access other sources of liquidity before certifying in their loan applications that current economic uncertainty makes this loan request necessary to support the ongoing operations. The SBA further stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The Company made the certification in good faith after analyzing its financial situation and access to capital and believes that it has satisfied all eligibility criteria for the PPP loan, but the SBA guidance and criteria is subject to interpretation and if the Company is found to be ineligible, the Company could be subject to significant penalties and required to repay the loan. If the Company becomes subject to penalties or is not able to attain loan forgiveness, it could result in harm to its business, results of operation and financial condition.
The Total Leverage Ratio in our senior secured credit facility excludes from the calculation of Total Debt the PPP Loan until a determination of forgiveness is made. If the PPP Loan is not forgiven and the principal amount of the loan is included in the
calculation of the ratio, there cannot be assurance that we will be able to comply with such ratio or any other covenant based on Total Debt, which would result in an event of default.
The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may have an adverse effect on our business.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established or if alternative rates or benchmarks will be adopted. Our senior bank facility has utilized LIBOR as a benchmark for calculating the applicable interest rate. Changes in the method of calculating LIBOR, the elimination of LIBOR or the replacement of LIBOR with an alternative rate or benchmark may adversely affect interest rates and result in higher borrowing costs for us. This could materially and adversely affect our results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to or elimination of LIBOR or the establishment and use of alternative rates or benchmarks and the corresponding effects on our cost of capital.
Risks Related to Our Internal Controls and Accounting
We have identified a material weakness in ourinadequate internal controlcontrols over financial reporting [andwhich led to material weaknesses. We may identify additional material weaknesses in the future]future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate our material weakness or if we fail to establish and maintain an effective system of internal control over financial reporting, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our business and our ability to comply with the requirements of our senior credit facility or other financing agreements and adversely impact the trading price of our securities.
Our management is responsible for establishing and maintaining internal controls over financial reporting, disclosure controls, and complying with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC thereunder. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
In connection with the preparation of our 20192020 financial statements, we identified a material weakness,weaknesses, primarily related to ineffective controls over the financial close process, which resulted from limited staffing levels that arewere not commensurate with the Company’s complexity and its financial accounting and reporting requirements. This resulted from turnover of key management positions during 2019, including the Company’s Chief Financial Officer, IT Manager and Controller. While we are working to remediate the material weaknessweaknesses as quickly and efficiently as possible and expect to have remediated the material weaknessweaknesses during the year ending December 31, 2020,2021, these remediation measures may
be time consuming, costly, and might place significant demands on our financial and operational resources. If we are unable to successfully remediate this material weakness,weaknesses, and if we are unable to produce accurate and timely financial statements, our financial statements and other disclosures could contain material misstatements or omissions that, when discovered in the future, could cause us to fail to meet our future reporting obligations and cause the price of our shares to decline or otherwise materially adversely affect our financial results or condition.
Our goodwill has been subject to impairment and may continue to be subject to impairment in the future.
The Company had $22.1 million of goodwill on our balance sheet as of December 31, 2020. Under U.S. GAAP, goodwill is required to be reviewed for impairment at least annually, or more frequently if potential interim indicators exist. Impairment may result from various factors, including adverse changes in assumptions used for valuation purposes, such as actual or projected revenue growth rates, profitability or discount rates. If the testing indicates that an impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill and the fair value of the goodwill. Events and conditions that could result in impairment include a prolonged period of global economic weakness, a decline in economic conditions, or a slow economic recovery, adverse changes in the market share of our products, or other factors which could result in reductions in our sales or profitability over an extended period. We cannot predict the amount and timing of any future impairments, if any. We have experienced impairment charges with respect to goodwill, and we may experience such charges in the future, particularly if our business performance declines or expected growth is not realized. For the fiscal year ended December 31, 2020, we incurred no goodwill impairment charges. It is possible that material changes in our business, market conditions, or assumptions about our market share or position could occur over time. Any future impairment of our goodwill or other intangible assets could have a material adverse effect on our financial condition and results of operations, as well as the trading price of our securities.
Risks Related to Our Operations
We would be adversely affected by the loss of key personnel.
Our success is dependent upon the continued services of our senior management team and other key employees. Although certain key members of our senior management have employment agreements for their continued services, there is no guaranty that each such person will choose to remain with us. The loss of any key employees (including such members of our senior management team) could materially adversely affect our business, results of operations and financial condition.
In addition, our success depends in part on our ability to attract, hire, train and retain qualified managerial, engineering, sales and marketing personnel. The forbearance agreement into which we entered with our lenders prohibits, during the forbearance period ending on June 15, 2021, our making any payments out of the ordinary course of business, including salary or compensation or distributions for the benefit of any member, owner or director other than normal and customary employment salaries which do not exceed sums paid for similar positions in the Company’s marketplace. These restrictions, together with our financial condition and any new restrictions our lenders may impose, could impair our ability to attract, hire and retain qualified personnel. We face significant competition for these types of employees in our industry. We may be unsuccessful in attracting and retaining the personnel we require to conduct our operations successfully. The loss of any member of our senior management team or other key employees could impair our ability to execute our business plans and strategic initiatives, cause us to lose customers and experience reduced net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event, our financial condition, results of operations, internal control over financial reporting, or cash flows could be adversely affected.
Our major customers may exert significant influence over us.
The vehicle component supply industry has traditionally been highly fragmented and serves a limited number of large OEMs. As a result, OEMs have historically had a significant amount of leverage over their outside suppliers. Our arrangements with major OEM and Tier 1 customers frequently provide for an annual productivity cost reduction. Historically, cost reductions through product design changes, increased productivity and efficiency, and cost reduction programs with our suppliers have generally offset these customer-imposed cost down requirements. However, if we are unable to generate sufficient production cost savings in the future to offset price reductions, our gross margin and profitability would be adversely affected. In addition, changes in our customers’ purchasing policies or payment practices could have an adverse effect on our business.
The loss or insolvency of any of our major customers would adversely affect our future results.
Our three largest direct customers, in the aggregate, accounted for approximately 21% of our direct net sales for the year ended December 29, 2019.31, 2020. Predominantly, we enter into purchase order commitments with our customers, based on their current or projected needs. We have in the past lost, and may in the future, lose customers due to the highly competitive conditions in the industries we serve. A decision by any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to materially decrease the amount of products purchased from us, to change their manner of doing business with us or to stop doing business with us altogether could have a material adverse effect on our business, financial condition and results of operations.
Margin compression from changing sales &and raw material prices.
We generally commit to end-product pricing for a specified quantity of product for the duration of a vehicle’s production, generally five to seven years. In the past, we successfully mitigated price volatility though aggressive supplier management and alternative material substitution strategies. Typically, our products are refreshed during a vehicle’s production life creating opportunities to modify pricing if material costs have risen. However, there can be no assurance that we will be able to implement or sustain such strategies in the future or modify pricing to pass potential increases in material costs to customers. Our inability to do so could materially adversely affect our business, financial condition and results of operations.
We rely on raw materials suppliers in our business and significant shortages, supplier capacity constraints or supplier production disruptions could adversely affect our financial condition and operating results.
Our reliance on suppliers to secure raw materials exposes us to volatility in the prices and availability of our raw materials and components. A disruption in deliveries from suppliers could have a material adverse effect on our ability to meet our commitments to customers or could increase our operating costs. Moreover, the cost of raw materials used in the production of our products, represents a significant portion of our direct manufacturing costs. The number of customers to which we are not able to pass on such price increases may increase in the future. We believe that our supply management and production
practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, price increases, supplier capacity constraints, supplier production disruptions or the unavailability of some raw materials may have a material adverse effect on our cash flows, competitive position, financial condition or results of operations. If we are not able to buy raw materials at fixed prices or pass on price increases to our customers, we may lose orders or enter into orders with less
favorable terms, any of which could have a material adverse effect on our business, financial condition and results of operations.
We conduct certain of our manufacturing in Mexico and Canada, therefore, are subject to risks associated with doing business outside the United States, including the possible effects of currency exchange rate fluctuations.
We have two manufacturing facilities in Mexico and one in Canada. There are several risks associated with doing business in Mexico and Canada, including, exposure to local economic and political conditions, export and import restrictions, tariffs, and the potential for shortages of trained labor. Our sales are primarily denominated in U.S. dollars. Because a portion of our manufacturing costs are incurred in Mexican pesos and Canadian dollars, fluctuations in the U.S. dollar/Mexican peso and U.S dollar/Canadian dollar exchange rates may have a material effect on our profitability, cash flows, financial position, and may significantly affect the comparability of our results between financial periods. Any depreciation in the value of the U.S. dollar in relation to the value of the Mexican peso or Canadian dollar will adversely affect the cost of our Mexican and Canadian operations when remeasured into U.S. dollars. Similarly, any appreciation in the value of the U.S. dollar in relation to the value of the Mexican peso or Canadian dollar will decrease the cost of our Mexican and Canadian operations when remeasured into U.S. dollars. These risks may materially adversely impact our business, results of operations and financial condition.
Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international relations, could adversely affect our financial performance.
As a result of changes to U.S. administrative policy, among other possible changes, there may be (i) changes in policies pertaining to the environment; (ii) changes to existing trade agreements; (iii) greater restrictions on free trade generally; and (iv) significant increases in customs duties and tariffs on goods imported into the United States. The United States, Mexico and Canada signed a new trade agreement, the United States-Mexico-Canada Agreement ("USMCA"), which serves as the successor agreement to the North American Free Trade Agreement ("NAFTA"). The USMCA became effective on July 1, 2020. There can be no assurance that the ongoing transition from NAFTA to USMCA will not adversely affect our business. It remains unclear what specific actions the new U.S. administration may take to resolve trade-related issues. A trade war, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the countries where we currently manufacture and sell products or any resulting negative sentiments towards the United States could adversely affect our business, financial condition, operating results and cash flows.
Our business is cyclical in nature and downturns in the automotive industry could reduce the sales and profitability of our business.
The demand for our products is largely dependent on the North American production of automobiles. The markets for our products have been cyclical, because new vehicle demand is dependent on, among other things, consumer spending and is tied closely to the overall strength of the economy. Because our products are used principally in the production of vehicles for the automotive market, our net sales, and therefore results of operations, are significantly dependent on the general state of the economy and other factors which affect these markets. A decline in vehicle production would adversely impact our results of operations and financial condition. The forecast over the next several years is for North American vehicle production in 2021 and 2022 includes an increase over the low levels in 2020. However, after 2022 the forecasts calls for little to remain relatively flat compared to 2019.no growth. We cannot provide any assurance as to the level of growth in our markets. If the market suffers an extended downturn, it could materially affect our business, financial condition and results of operations.
We may pursue acquisitions that involve inherent risks, any of which may cause us to not realize anticipated benefits.
Our business strategy includes the potential acquisition of businesses that we expect will complement and expand our existing business. During the last six fiscal years, we acquired the businesses and substantially all the assets of PTI, Chardan, Great Lakes, and Intasco. We may not be able to successfully identify suitable acquisition opportunities or complete any specific acquisition, combination or other transaction on acceptable terms. Our identification of suitable acquisition candidates involves risks inherent in assessing the values, strengths, weaknesses, risks and profitability of these opportunities, including their effects on our business, diversion of our management’s attention and risks associated with unanticipated problems or unforeseen liabilities. If we are successful in pursuing future acquisitions, we may be required to expend significant funds, incur additional debt, or issue additional shares of common stock, which may materially and adversely affect our results of operations and be dilutive to our stockholders. If we spend significant funds or incur additional debt, our ability to obtain financing for working capital or other purposes could decline and we may be more vulnerable to economic downturns and competitive pressures. In addition, we cannot guarantee that we will be able to finance additional acquisitions or that we will realize any anticipated benefits from acquisitions that we complete. Should we successfully acquire other businesses, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing business. Our failure to identify suitable acquisition opportunities may restrict our ability to grow our business.
We may experience increased costs and other disruptions to our business associated with labor unions.
As of December 29, 2019,31, 2020, we had 9881,001 full-time and 7550 contract workers. We renewed a collective bargaining agreement covering hourly workers at our Auburn Hills, Michigan facility in August 2019 with an expiration date in August 2022. We renewed our Louisville collective bargaining agreement in August 2020 going into effect February 2020 with an expiration in February 2023. Hourly employees in our Bryan, Ohio facility voted to unionize in October 2019, with a formal contract negotiation unnecessary based upon our closing this facility in March 2020. Many of our customers and their suppliers also have unionized work forces. Work stoppages or slow-downs experienced by us, customers or their other suppliers could result in
slow-downs or closures of assembly plants where our products are included in assembled commercial vehicles. Any work stoppage or other labor disruption involving our employees, employees of our customers, or employees of our suppliers could have a material adverse effect on our business, financial condition or results of operations by disrupting our ability to manufacture our products or reducing the demand for our products.
Our results of operations may be negatively impacted by product liability lawsuits and claims.
Our automotive products expose us to potential product liability risks that are inherent in the design, manufacture, sale and use of our products. While we currently maintain what we believe to be suitable product liability insurance, we cannot assure you that we will be able to maintain this insurance on acceptable terms, that this insurance will provide adequate protection against potential liabilities or that our insurance providers will remain financially viable. One or more successful claims against us could materially adversely affect our reputation and our business, financial condition, results of operations and cash flows.
Regulatory Risks
Our businesses are subject to statutory environmental and safety regulations in multiple jurisdictions, and the impact of any changes in regulation and/or the violation of any applicable laws and regulations by our businesses could result in a material adverse effect on our business, financial condition and results of operations.
We are subject to foreign, federal, state, and local laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating: air emissions; wastewater discharges; the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the soil, ground or air; and the health and safety of our employees. We are also required to obtain permits from governmental authorities for certain of our operations. We cannot assure you that we are, or have been, in complete compliance with such environmental and safety laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. In some instances, such a fine or sanction could have a material and adverse effect on us. The environmental laws to which we are subject have become more stringent over time, and we could incur material expenses in the future to comply with environmental laws. We are also subject to laws imposing liability for the cleanup of contaminated property. Under these laws, we could be held liable for costs and damages relating to contamination at our past or present facilities and at third party sites to which we sent waste containing hazardous substances. The amount of such liability could be material.
Certain of our operations generate hazardous substances and wastes. If a release of such substances or wastes occurs at or from our properties, or at or from any offsite disposal location to which substances or wastes from our current or former operations were taken, or if contamination is discovered at any of our current or former properties, we may be held liable for the costs of cleanup and for any other claim by governmental authorities or private parties, together with any associated fines, penalties or damages. In most jurisdictions, this liability would arise even if we had complied with environmental laws governing the handling of hazardous substances or wastes.
New laws or regulations or changes in existing laws or regulations could adversely affect our financial performance.
We and the automotive industry are subject to a variety of federal, state, local and foreign laws and regulations, including those related to health, safety and environmental matters. Governmental regulations also affect taxes and levies, capital markets, healthcare costs, energy usage, data privacy, international trade and immigration and other labor issues, all of which may have a direct or indirect effect on our business and the businesses of our customers and suppliers. We cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof. The introduction of new laws or regulations or changes in existing laws or regulations, or the interpretation thereof, could increase the costs of doing business for us or our customers or suppliers or restrict our actions and adversely affect our financial condition, operating results and cash flows.
We may be adversely affected by the impact of government regulations on our customers.
Although the products we manufacture and supply to vehicle customers are not subject to significant government regulation, our business is indirectly impacted by the extensive governmental regulation applicable to our automotive customers. These regulations primarily relate to emissions and noise standards imposed by the Environmental Protection Agency, or EPA, state regulatory agencies, such as the California Air Resources Board, or CARB, and other regulatory agencies around the world. Vehicle customers are also subject to the National Traffic and Motor Vehicle Safety Act and Federal Motor Vehicle Safety Standards promulgated by the National Highway Traffic Safety Administration. Changes in emission standards and other
proposed governmental regulations could impact the demand for vehicles and, as a result, indirectly impact our operations. To the extent that current or future governmental regulation has a negative impact on the demand for vehicles, our business, financial condition or results of operations could be adversely affected.
Risks Related to Our Intellectual Property Rights
We have only limited protection for our proprietary rights in our intellectual property, which makes it difficult to prevent third parties from infringing upon our rights.
We protect trade secrets, know-how and other confidential information against unauthorized use by others or disclosure by persons who have access to them, such as our employees, through contractual or other arrangements. These arrangements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, our revenues could be materially adversely affected.
RISKS RELATED TO OUR COMMON STOCK
Risks Relating to Ownership of Our Common Stock
We mayare not be able to pay dividends.
dividends and are unlikely to pay dividends in the future.
Our senior secured credit facility precludes the payments of dividends altogether while we are in default and any waiver of covenant violations or amendment likely will restrict or prohibit dividend payments in the future. In addition, our ability to pay dividends is affected by our results and our needs for funds for use in our operations and to expandfund our business. Our senior secured credit facility also contains covenants which restrict or limit the amounts that we can pay as dividends or preclude the payments of dividends altogether.
If our executive officers, directors and principal stockholders choose to act together, they will be able to exert significant influence over us and our significant corporate decisions and may act in a manner that advances their best interests and not necessarily those of other stockholders.
Our executive officers, directors, and certain of our large stockholders and their affiliates, to our knowledge, beneficially own approximately 27%22% of our outstanding common stock. As a result, these persons, if they were to act together, have the ability to significantly influence the outcome of all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets, and they could act in a manner that advances their best interests and not necessarily those of other stockholders, by among other things:
▪delaying, deferring or preventing a change in control of the Company;
▪entrenching our management and/or our board of directors;
▪impeding a merger, consolidation, takeover or other business combination involving the Company;
▪discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company; or
▪causing us to enter into transactions or agreements that are not in the best interests of all stockholders.
Securities analysts may not initiate or continue coverage of our common stock or may issue negative reports, which may have a negative impact on the market price of our common stock.
Since our initial public offering, thereThere has been limited coverage of our common stock by securities analysts. Securities analysts may elect not to provide research coverage of our common stock. If securities analysts do not cover our common stock,We believe that the lack of research coverage may causeadversely affect the market price of our common stock to decline, or adversely affect theand trading volume for our common stock. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more of the analysts who elect to cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and a global settlement among the Securities and Exchange Commission, or the SEC, other regulatory agencies and a number of investment banks, which was reached in 2003, many investment banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for a company such as ours, with a smaller market capitalization, to attract independent financial analysts that will cover our common stock. This likely has had and could have a negative effect on the market price of and trading volume for our stock.
Future sales of our common stock in the public market may cause our stock price to decline and impair our ability to raise future capital through the sale of our equity securities.
As of December 29, 2019,31, 2020, we had outstanding 9,779,147 shares of common stock, including 2,702,500 shares of our common stock issued in our initial public offering and 6,919,528 shares of common stock owned by non-affiliates and issued in private placements, in each case more than one year ago.prior to our initial public offering. The shares owned by non-affiliates can be traded without restriction under Rule 144 or otherwise at this time. In addition, 2,729,068 shares of common stock are owned by affiliates but can be traded subject to restrictions under Rule 144. In addition, we have registered all shares that may be issued pursuant to our 2013 Stock Incentive
Plan and the 2014 Omnibus Performance Award Plan. Sales of a large number of these securities on the public market or the perception that a large number of shares may be sold could reduce the market price of our common stock or impair our ability to raise capital.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our restated certificate of incorporation and restated bylaws contain provisions that could discourage, delay or prevent a merger, acquisition or other change in control of our company or changes in our board of directors that our stockholders might consider favorable, including transactions in which you might receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove management. These provisions:
▪allow the authorized number of directors to be changed only by resolution of our board of directors;
▪provide for a classified board of directors, such that not all members of our board will be elected at one time;
▪prohibit our stockholders from filling board vacancies, limit who may call stockholder meetings, and prohibit the taking of stockholder action by written consent; and
▪require advance written notice of stockholder proposals that can be acted upon at stockholder's meetings and of director nominations to our board of directors.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. Any delay or prevention of a change in control transaction or changes in our board of directors could cause the market price of our common stock to decline.
RISKS RELATED TO PUBLIC COMPANIES
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups (JOBS) Act of 2012 and the reduced disclosure requirements applicableRisks Related to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to delay such adoption of new or revised accounting standards to the relevant dates on which adoption of such standards is required for private companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies that comply with all public company accounting standards.
We may take advantage of these exemptions until we are no longer an emerging growth company. Under the JOBS Act, we are able to maintain emerging growth company status for up to five years following our initial public offering, or the first day of fiscal year 2020, absent of any circumstances that would cause us to lose that status earlier than such date, of which none have occurred.
Even after we no longer qualify as an emerging growth company, we may qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict whether investors will find our common stock less attractive because of our reliance on any of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
As our emerging growth status will expire on the first day of fiscal year 2020, we will no longer be able to take advantage of the exemptions noted above. As a smaller reporting company, we believe the Company will be in compliance with all the various reporting requirements that are applicable to other public companies that are not emerging growth companies on this date.
Regulations related to conflict minerals may force us to incur additional expenses and otherwise adversely impact our business.
The U.S. Securities and Exchange Commission, or the SEC, has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies. These rules require ongoing due diligence to determine whether such minerals originated from the Democratic Republic of Congo, or the DRC, or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. Reporting obligations are annual. There are some costs associated with complying with these disclosure requirements, including costs to determine the origin of potential conflict minerals in our product. The implementation of these rules and their effect on customer, supplier and/or consumer behavior could adversely affect the sourcing, supply and pricing of materials used in our products if we determine we are relying upon conflict minerals. As a result, we may also incur costs with respect to potential changes to products, processes or sources of supply. We may face disqualification as a supplier for customers and reputation challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals used in our products or to determine if such conflict minerals are conflict-free. Accordingly, the implementation of these rules could have a material adverse effect on our business, results of operations and/or financial condition.
Public Companies
We incur costs as a result of being a public company, and potentially will incur more after we are no longer a “smaller reporting company”. Our management devotes substantial time to public company compliance programs and will be required to continue to devote substantial time in the future.
As a public company, we incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff is required to perform additional tasks. We expect that these expenses will increase whenif we no longer qualify as an “emerging growth company” ora “smaller reporting company”. We have invested and intend to invest resources to comply with evolving laws, regulations and standards. This investment has resulted in increased general and administrative expenses and may divert management’s time and attention from product development and commercial activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed. In addition, if we are unable to continue to meet these requirements, we may not be able to maintain the listing of our common stock on the NYSE AMERICAN MKT which would likely have a material adverse effect on the trading price of our common stock.
In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit and compensation committees.
Our internal control over financial reporting as a public company now requires us to meet the standards required by Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act has and, in the future, could result in material misstatements of our annual or interim financial statements and have a material adverse effect on our business and share price.
We are now currently required to comply with the SEC’s rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. This requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. This assessment includes the disclosure of any material weaknesses or significant deficiencies in our internal control over financial reporting identified by our management or our independent registered public accounting firm. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of
our annual or interim financial statements will not be prevented or detected on a timely basis. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting, including the audit committee of the board of directors.
Finally, as a public company we believe that we will need to continue to expand our accounting resources, including the size and expertise of our internal accounting team, to, among other things, effectively execute a quarterly close process in an appropriate time frame for a public company. IfWe have experienced difficulties in maintaining such resources and we aremay be unsuccessful or unable to sufficiently expand these resources,resources. As a result, we may not be able to produce U.S. generally accepted accounting principles (GAAP) compliant financial statements in a time frame required to comply with our reporting requirements under the Exchange Act, and the financial statements we produce may contain material
misstatements. Either of these misstatements or omissions. This could cause investors to lose confidence in our financial reports and our financial reporting generally, which could lead to a decline in the trading price of our common stock.
We may pursue acquisitions that involve inherent risks related to potential internal control weaknesses and significant deficiencies which may be costly for us to remedy and could impact management assessment of internal control effectiveness.
Although our independent registered public accounting firm will not be required to formally attest to our internal control effectiveness while we are a smaller reporting company, management is still responsible for assessing internal control effectiveness at a consolidated level. AsIf we acquire companies and integrate acquired companiesthem into our business, the process of integrating our existing operations with entities that could potentially have material weaknesses and/or significant deficiencies may result in unforeseen operating difficulties and may require significant financial resources to remedy any material weaknesses or significant deficiencies that would otherwise be available for the ongoing development or expansion of our existing business. These potential material weaknesses and deficiencies may be costly for us to remedy and properly assess internal control effectiveness.
ITEMItem 1B. UNRESOLVED STAFF COMMENTSUnresolved Staff Comments
None.
None
ITEMItem 2. PROPERTIES
Properties
The following sets forth our facilities as of December 29, 2019.
|
| | | | | | | | | | | | | | | | | | | |
Principal Uses | | Location | | Approximate Square Footage
| | Owned or Leased |
Headquarters, Sales/ Sales, Engineering,
and Manufacturing | | Auburn Hills, Michigan | | 150,000 | | Leased |
Sales/Sales, Engineering,
and Manufacturing | | LaFayette, Georgia | | 177,000150,000 | | Owned/Leased (1)Owned |
Sales/Sales, Engineering,
and Manufacturing | | Monterrey, Mexico | | 91,000 | | Leased |
Manufacturing | | Queretaro,Querétaro, Mexico | | 74,000 | | Leased |
Sales, Engineering, and Manufacturing | | Bryan, OhioLouisville, Kentucky | | 42,00073,000 | | LeasedOwned |
Sales/Sales, Engineering,
and Manufacturing | | Louisville, KentuckyConcord, Michigan | | 73,00072,000 | | OwnedLeased |
Sales, Engineering, and Manufacturing | | Evansville, Indiana | | 200,000 | | Owned/Leased (2) |
Manufacturing | | Concord, Michigan | | 72,000 | | Leased |
Manufacturing | | London, Ontario | | 35,000 | | Leased |
(1) The Company leases warehouse space of approximately 30,000 square feet that it uses in connection with its operations at this property.
(2) The Company leases warehouse space of approximately 134,000 square feet that it uses in connection with its operations at this property.
Each of our owned properties has been mortgaged to our bank to secure our borrowings under our senior secured credit facility.
ITEMItem 3. LEGAL PROCEEDINGS
Legal Proceedings
Management is not aware of any legal proceedings contemplated, pending or threatened against us by any government authority or any other party involving our business. As of the date of this Annual Report on Form 10-K, no director, officer or affiliate is: (1) a party adverse to us in any legal proceeding, or (2) has an adverse interest to us in any legal proceeding.
ITEMItem 4. MINE SAFETY DISCLOSURESMine Safety Disclosures
Not applicable.
None
PART II
ITEM
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUESMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Performance Graph
The following graph compares the cumulative total stockholder return on ourOur common stock, withpar value $0.001, is listed for trading on the total cumulative return ofNYSE American stock exchange under the Russell 2000 Index and the S&P Auto Parts & Equipment Index during the period commencing on July 1, 2015 the initial trading day of our common stock and ending on December 29, 2019. The graph assumes that $100 was invested at the beginning of the period in our common stock and in each of the comparative indices and assumes the reinvestment of any dividends. Historical stock price performance should not be relied upon as an indication of future stock price performance.
Number of Stockholders
symbol “UFAB.” As of March 1, 2020, there were 2229, 2021, there were 16 holders of recordrecord of the Company's common stock. Because many shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of individual stockholders represented by these holders of record.
Dividends
We paid a dividend of $0.05 per share in the first quarter of 20192019. We do not intend to declare and of $0.15 per share in each quarter of 2018. Our payment ofpay any dividends on our common stock in the near future will be determinedand are restricted from doing so by our board of directors in its sole discretion and will depend on business conditions, our financial condition, earnings, liquidity,Credit Agreement, as amended, until January 1, 2022 and capital requirements. Our senior secured credit facility contains covenantsthen subject to certain restrictions which may restrict or limit the amounts that we can pay as dividends or preclude the paymentspayment of dividends altogether.
We also are prohibited by the forbearance agreement from making any payment, transfer, or distribution out of the ordinary course of business without the prior written consent of the Lenders during the forbearance periods which ends on June 15, 2021. We currently intend to use our future earnings, if any, to reduce our indebtedness, fund our growth and working capital needs, invest in developing our business and new markets, and for general corporate purposes. Any payment of dividends will be at the discretion of Unique’s board of directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that Unique’s board of directors may deem relevant.
Equity Compensation Plan Table
|
| | | | | | | | | | |
Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans |
Equity compensation plan approved by security holders (1) | | 945,000 |
| | $ | 7.25 |
| | 416,000 |
|
Equity compensation plans not approved by security holders | | — |
| | $ | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans |
Equity compensation plan approved by security holders (1) | | 726,500 | | | $ | 4.53 | | | 468,500 | |
Equity compensation plans not approved by security holders | | — | | | $ | — | | | — | |
(1) Includes options approved under the 2013 Stock Incentive Plan and 2014 Omnibus Performance Award Plan that were granted to employees of the Company and the board of directors and were registered on Form S-8 (333-206140) on August 6, 2015. Also includes additional shares under the 2014 Omnibus Performance Award Plan that were registered on Form S-8 (333-212193) on June 23, 2016.2016, as well as additional shares under the 2014 Omnibus Performance Award Plan that were registered on Form S-8 (333-248110) on August 18, 2020.
ITEMItem 6. SELECTED FINANCIAL DATASelected Financial Data
Not applicable.
The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated audited financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K. Our policy has been that fiscal years end on the Sunday closest to December 31st. The consolidated statements of operations data, cash flow data and the consolidated balance sheet data for the fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017 are derived from the audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data for the fiscal year ended January 3, 2016 has been derived from audited financial statements not included herein. Our historical results are not necessarily indicative of the results to be expected in the future.
|
| | | | | | | | | | | | | | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 | | Fifty-Two Weeks Ended January 1, 2017 | | Fifty-Two Weeks Ended January 3, 2016 |
| (In thousands, except share data) |
Statement of Operations Data: | | | | | | | | | |
Net Sales | $ | 152,489 |
| | $ | 174,910 |
| | $ | 175,288 |
| | $ | 170,463 |
| | $ | 143,309 |
|
Cost of Sales | 120,981 |
| | 135,575 |
| | 135,234 |
| | 130,919 |
| | 109,488 |
|
Gross Profit | 31,508 |
| | 39,335 |
| | 40,054 |
| | 39,544 |
| | 33,821 |
|
Selling, General, and Administrative Expenses | 26,751 |
| | 29,781 |
| | 29,767 |
| | 27,524 |
| | 23,372 |
|
Impairment of Goodwill | 6,760 |
| | — |
| | — |
| | — |
| | — |
|
Restructuring Expenses | 2,752 |
| | 1,156 |
| | — |
| | 35 |
| | 374 |
|
Operating (Expense) Income | (4,755 | ) | | 8,398 |
| | 10,287 |
| | 11,985 |
| | 10,075 |
|
Non-operating Income (Expense) | | | | | | | |
| | |
|
Other Income (Expense) | 11 |
| | (59 | ) | | 79 |
| | 92 |
| | 23 |
|
Interest Expense | (4,287 | ) | | (3,778 | ) | | (2,746 | ) | | (2,135 | ) | | (2,755 | ) |
Total Non-Operating Expense | (4,276 | ) | | (3,837 | ) | | (2,667 | ) | | (2,043 | ) | | (2,732 | ) |
(Loss) Income – Before Income Taxes | (9,031 | ) | | 4,561 |
| | 7,620 |
| | 9,942 |
| | 7,343 |
|
Income Tax Expense | 37 |
| | 862 |
| | 1,133 |
| | 3,258 |
| | 2,314 |
|
Net (Loss) Income | $ | (9,068 | ) | | $ | 3,699 |
| | $ | 6,487 |
| | $ | 6,684 |
| | $ | 5,029 |
|
Net (Loss) Income Per Share | | | | | | | |
| | |
|
Basic | $ | (0.93 | ) | | $ | 0.38 |
| | $ | 0.67 |
| | $ | 0.69 |
| | $ | 0.62 |
|
Diluted | $ | (0.93 | ) | | $ | 0.37 |
| | $ | 0.66 |
| | $ | 0.68 |
| | $ | 0.60 |
|
Cash Dividends Per Share | $ | 0.05 |
| | $ | 0.60 |
| | $ | 0.60 |
| | $ | 0.60 |
| | $ | 0.30 |
|
Weighted Average Shares Outstanding | | | | | | | | | |
Basic | 9,779,147 |
| | 9,770,011 |
| | 9,750,948 |
| | 9,678,316 |
| | 8,174,418 |
|
Diluted | 9,779,147 |
| | 9,908,698 |
| | 9,899,418 |
| | 9,896,283 |
| | 8,426,937 |
|
Statement of Cash Flow Data | | | | | | | | | |
Cash Flow Provided By (Used In): | | | | | | | | | |
Operating Activities | $ | 12,021 |
| | $ | 9,430 |
| | $ | 7,809 |
| | $ | 7,761 |
| | $ | 5,081 |
|
Investing Activities | (2,640 | ) | | (4,489 | ) | | (4,088 | ) | | (21,993 | ) | | (15,439 | ) |
Financing Activities | (10,141 | ) | | (4,962 | ) | | (2,995 | ) | | 14,210 |
| | 10,329 |
|
Other Financial Data | | | | | | | | | |
Adjusted EBITDA (1) | $ | 13,177 |
| | $ | 17,123 |
| | $ | 18,032 |
| | $ | 18,991 |
| | $ | 15,590 |
|
(1) See details concerning Adjusted EBITDA, which is a non-GAAP measure, including the definition and calculation of amounts presented here in this document in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations".
|
| | | | | | | | | | | | | | | | | | | |
| As of December 29, 2019 | | As of December 30, 2018 | | As of December 31, 2017 | | As of January 1, 2017 | | As of January 3, 2016 |
| (In thousands) |
Selected Balance Sheet Data: | | | | | | | | | |
Working capital (1) | $ | 27,184 |
| | $ | 32,885 |
| | $ | 29,847 |
| | $ | 26,758 |
| | $ | 23,047 |
|
Net property, plant and equipment (2) | 23,415 |
| | 25,078 |
| | 22,975 |
| | 21,198 |
| | 18,761 |
|
Total assets | 101,668 |
| | 123,287 |
| | 122,805 |
| | 122,537 |
| | 99,921 |
|
Total debt (3) | 47,485 |
| | 55,923 |
| | 53,565 |
| | 50,611 |
| | 31,213 |
|
Total stockholders' equity | 39,460 |
| | 48,888 |
| | 50,882 |
| | 50,059 |
| | 48,013 |
|
(1) Represents current assets less current liabilities
(2) Excludes assets held for sale of $1.0 million as of December 29, 2019 and $2,033 as of January 3, 2016.
(3) Amount is net of debt issuance costs which are further discussed in note 1 to our consolidated financial statements.
ITEMItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations
This Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operation is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the accompanying consolidated financial statements and the related notes to consolidated financial statements for the fifty-two weekstwelve months ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 201729, 2019 included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis include forward-looking statements. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below as well as in other sections of this Annual Report on Form 10-K, particularly in “Business,” “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” We make no guarantees regarding outcomes and assume no obligation to update the forward-looking statements herein, except as may be required by law.
Basis of Presentation
The Company’s policy hashad been that fiscal years end on the Sunday closest to the end of the calendar year end. Our 2019 fiscal year ended on December 29, 2019, the 2018 fiscal year ended on December 30, 2018, and our 20172020 fiscal year ended on December 31, 2017.2020, the 2019 fiscal year end ended on December 29, 2019. Beginning within 2020, the Company will begin
began to report on a calendar quarter end and calendar year end basis meaning that March 31, 2020 will be the next quarter end and December 31, 2020 will be the next fiscal year end.basis. Results for December 30 and December 31, 2019 will beare included in the 2020 fiscal year results. This change had an immaterial impact on our 2020 result of operations. All year and twelve month references prior to 2020 relate to the Company’s fiscal year, unless otherwise stated. For ease of presentation, year and twelve months ended is contingent upon receiving Bank approval. used throughout this Annual Report on Form 10-K to represent both the current year calendar periods and the prior year fiscal year periods.
The Company’s operations are classified in one reportable business segment. Although we have expanded the products that we manufacture and sell to include components used in the appliance, HVACmedical and water heater industries,consumer off-road markets, products for these industries are manufactured at facilities that also manufacture or are capable of manufacturing products for the automotive industries. Our manufacturing locations have capabilities to produce diverse products utilizing multiple processes to serve various markets. The manufacturing operations for our automotive,transportation, appliance, HVACmedical and water heaterconsumer off-road products share management and labor forces and use common personnel and strategies for new product development, marketing and the sourcing of raw materials.
We qualify as an “emerging growth company” under the JOBS Act. Asare a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth“smaller reporting company, we will not be required to:
have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency”; and
disclose certain executive compensation and related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected” which allows us to take advantage of the benefitsSEC’s scaled disclosure requirements for smaller reporting companies. As a smaller reporting company, we have not disclosed selected financial data, unaudited quarterly financial information, contractual obligations, or qualitative and quantitative information about market risk. We also have included only two years of this extended transition period. Ourconsolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
Our emerging growth status will expirein this Annual Report on Form 10-K, which is permitted under the first day of fiscal year 2020, and as such at that timescaled disclosure requirements for smaller reporting companies. As a smaller reporting company, we will no longer be able to takealso are exempt from certain other disclosure requirements, which we have taken advantage of, the exemptions noted above. Even after we no longer qualify as an emerging growth company, we may qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from the disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
Overview
Unique Fabricating, is engagedInc. (the “Company” or “Unique”) engineers and manufactures components for customers in the engineeringtransportation, appliance, medical, and manufactureconsumer markets. The Company’s solutions are comprised of multi-material foam, rubber, and plastic components and utilized in noise, vibration and harshness,NVH management, acoustical management, water and air sealing, decorative and other functional applications. Unique leverages proprietary manufacturing processes, including die cutting, thermoforming, compression molding, fusion molding, and reaction injection molding to manufacture a wide range of products including air management products, HVAC, seals, fender stuffers, air ducts, acoustical insulation, door water shields, gas tank pads, light gaskets, topper pads, mirror gaskets, glove box liners personal protection equipment, and packaging. The Company combines a long history of organic growth with strategic acquisitions to diversify both product capabilities and markets served.
is headquartered in Auburn Hills, Michigan.
Unique Fabricating serves the North AmericaAmerican transportation market, which includes automotive and heavy-duty trucks, as well as the appliance, medical, and consumer markets. Sales are conducted directly to major automotive and heavy-duty truck, plus the appliance, water heater and HVAC aerospace, and medical markets. Sales are conducted directly with majormanufacturers, referred throughout this report as OEMs, in these markets or indirectly through the Tier 1 suppliers of these OEMs. The Company has its principal executive offices in Auburn Hills, Michigan and has sales, engineering and production facilities in Auburn Hills, Michigan,Michigan; Concord, Michigan,Michigan; LaFayette, Georgia,Georgia; Louisville, Kentucky, Bryan, Ohio,Kentucky; Monterrey, Mexico, Queretaro, MexicoMexico; Querétaro, Mexico; and London, Ontario. The Company also has an independent client sales representative who maintains offices in Baldham, Germany.
Unique Fabricating derives the majoritymost of its net sales from the sales of foam, rubber plastic, and tape adhesive related automotive products. We produce theseThese products withare produced by a variety of manufacturing processes including traditional die cutting, precision die cutting,compression molding, thermoforming, reaction injection molding (RIM) and fusion molding. We believe Unique Fabricating has a broader array of processes and materials utilized than any of its direct competitors.competitors, based on our product offerings. By sealing out air, noise and water intrusion, and by providing sound absorption and blocking, Unique Fabricating’s products improve the interior comfort of a vehicle, increasing perceived vehicle quality and the overall experience of its passengers. Unique Fabricating’s products perform similar functions for appliances water heatersmedical and HVACconsumer off-road systems, improving thermal characteristics, reducing noise and prolonging equipment life. We primarily operate within the highly competitive and cyclical automotive parts industry.
Recent Developments
Coronavirus
Fourth Quarter
Fourth quarter of 2019The Company’s results sawfor the positive impacts fromtwelve months ended December 31, 2020 were adversely affected by the wide ranging operational and cost improvement activities that acceleratedCOVID-19 pandemic, which resulted in the fourth quarteridling of most of our automotive customers’ facilities beginning in mid-March 2020 and for which we will see additional benefit incontinuing until June. In response to the first quarter of 2020. These benefits reducedunprecedented uncertainty related to the impact the COVID-19 pandemic is having on the global automotive industry, the Company has taken actions to reduce costs and increase financial flexibility. These actions include actively managing costs, capital expenditures, and working capital. Additionally, the Company received a loan of lower year over year sales fromapproximately $6.0 million pursuant to the lossU.S. Small Business Administration Paycheck Protection Program under Title I of business due
the Coronavirus Aid, Relief, and Economic Security Act. Refer to our Ft. Smith, Arkansas and Evansville, Indiana plant closures,Note 8, in Part II, Item 8 of this Annual Report on Form 10-K for more information on the end of life of specific programs that were not adequately replaced, and other commercial challenges. We were not impacted in any meaningful way from the GM strike which occurred during the fourth quarter of 2019.
Coronavirus
Paycheck Protection Program loan.
Due to the ongoing COVID-19 outbreak with its uncertain near, mid, and longer-term impacts on the Company, our customers, our suppliers, and the industries we serve, we are executing a comprehensive set of actions to prudently manage our resources while keeping our customers supplied with the products they continue to require.
While demand inThe Company continues to follow guidelines with respect to operating during the automotive segment has been reduced for an indeterminate period, we continue to have customer orders across our various markets and in all our plants. Currently, we are operating our facilities.
We are following the guidelinesCOVID-19 pandemic provided by the various governmental entities in the jurisdictions where we operate and areis taking additional measures to protect our employees.
ConsideringOur supply chain has been adversely affected by the current decline inCOVID-19 outbreak. Throughout 2020 we worked with our supply chain to minimize the impact to our customers by improving our suppliers’ visibility of our future demand requirements, utilizing substitutions when possible, and incurring additional freight costs to expedite the delivery of materials from supplier and product to our customers. These additional costs cannot always be passed to our customers and when we are modifyingable to pass them to our shift schedulescustomers the cost is sometimes delayed due to competitive pressures. Supply chain disruptions have continued into 2021 and plant employee counts, limiting our raw material ordering, and restricting all discretionary spending.
As our supply base is almost exclusivelythey have impacted the entire North American we have not yet seen disruptions in our supply chain.transportation market as well as the other markets.
Due to the inherent uncertainty of the unprecedented and rapidly evolving situation including the duration of the actions taken by theour various customers and governments, we are unable to determine the full impact of the COVID-19 situationpandemic on our future operations.
Organizational Changes
On April 2, 2020, the Company named a new Chief Financial Officer (“CFO”) of the Company. The Company’s previous CFO resigned effective October 11, 2019.
During January 2020, we hired new Directors of HRHuman Resources and Purchasing as we continue to strengthen our management team to enable the achievement of our growth and operational targets.
On September 17, 2019, the Company named a new President and CEOChief Executive Officer (“CEO”) of the Company, who began employment with the Company on September 30, 2019.
The Company did not incur any restructuring costs in connection with this appointment.
On September 30, 2019, our Chief Financial Officer (CFO) announced his resignation, effective October 11, 2019. The Company's new President and Chief Executive Officer (CEO) will serve as the Interim CFO until such a time that a permanent CFO is named. The Company did not incur restructuring costs in connection with this resignation. Our permanent CFO search activities continue.
On July 30, 2019, our former President and Chief Executive Officer of the Company (CEO), resigned as a member of the board of directors. The Company did not incur any additional restructuring costs in connection with his resignation from the board of directors.
On May 6, 2019, our formerCompany’s previous President and CEO resigned by mutual agreement with the Company on May 6, 2019 and subsequently resigned as a member of both parties.the Company’s board of directors on July 30, 2019. The Company incurred one-time restructuring costs of $0.7 million during the 52 weekstwelve months ended December 29, 2019 in connection with histhe former CEO’s resignation.
Salaried Restructuring
On May 15, 2019 and February 1, 2019, the Company announced that in order to reduce fixed costs it would be eliminating several salaried positions. The Company provided the affected employees severance pay, health benefits continuation and job search assistance. This reduction took place and the Company incurred restructuring costs of $0.3 million in the 52 weekstwelve months ended December 29, 2019.
During the fourth quarter of 2019, the Company made additional net reductions of 12 salaried positions as part of a streamlining of the company to improve efficiency and better align the organization to its new structure, targets, and vision. There was an immaterial impact on 2019 costs and there will be no impact in 2020.costs. Some of the resulting cost savings have been and will be used to add specific capabilities in Engineering, Finance, Human Resources, and Purchasing.
Bryan Facility Closure
On November 7, 2019, the Company made the decision to close its manufacturing facility in Bryan, Ohio. The Company expects to cease operations at the Bryan facility by the endApproximately 43 positions were eliminated as a result of the first quarter of 2020.closure. The Company'sCompany’s decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in our other of our facilities.
The Company will move existing Bryan production to its manufacturing facilities in Queretaro, Mexico and LaFayette, GA. The Company will provide the affected employees severance pay, health benefits continuation, and job search assistance. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that the closing did not meet the definition as it did not represent a strategic shift in the Company's operations and the Company will have continuing cash flows from the production being moved to other facilities within the Company.
The Company incurred one-time severance costs as a result of this plant closure of approximately $0.3 million during the fourth quarter of 2019. The Company expects that the amount of other costs incurred associated with this plant closure, which will primarily consist of preparing and moving existing production equipment and inventory at Bryan to other facilities, will be approximately $0.6 million through April of 2020.
Evansville Facility Closure
On July 16, 2019, the Company made the decision to close its manufacturing facility in Evansville, Indiana. The Company ceased operations at the Evansville facility in December 2019. The Company's decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in other of our facilities.
The Company moved existing EvansvilleBryan, Ohio production to its existing manufacturing facilities in Querétaro, Mexico and LaFayette, GA, Auburn Hills, MI, and Louisville, KY. The Company provided the affected employees severance pay, health benefits continuation, and job search assistance. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that
the closing did not meet the definition as it did not represent a strategic shift in the Company's operations and the Company will have continuing cash flows from the production being moved to other facilities within the Company.
As the Company is actively marketing its leased no longer in use Evansville facility for a sub-lease and based upon the applicable generally accepted accounting principles, the Company performed an analysis to determine the appropriate accounting. This resulted in recording a charge of $0.4 million to restructuring expense in the fourth quarter ended December 29, 2019. The Company is obligated for the remaining payments of $1.1 million for the leased facility.
The Company is also actively pursuing the sale of its owned Evansville facility with a December 29, 2019 book value of $1.0 million. As such, this asset has been classified as an asset held for sale on the consolidated balance sheet.
The Company incurred one-time severance costs as a result of this plant closure of $0.3 million during the fourth quarter ended December 29, 2019.
The amount of other costs incurred associated with this plant closure, which primarily consisted of preparing and moving existing production equipment and inventory at Evansville to other facilities was $0.3 million in the fourth quarter and $0.8 million for the 52 weeks ended December 29, 2019.
The table below summarizes the restructuring activity during the 52 weeks ended December 29, 2019.
|
| | | | |
| | Fifty-Two weeks Ended December 29, 2019 |
| | (In thousands) |
Former CEO severance salary | | $ | 721 |
|
Salaried workforce reduction | | 245 |
|
Evansville severance | | 331 |
|
Evansville other | | 692 |
|
Evansville lease | | 385 |
|
Bryan severance | | 378 |
|
Accrual balance at December 29, 2019 | | $ | 2,752 |
|
Fort Smith Facility Closure
On February 13, 2018, the Company made the decision to close its manufacturing facility in Fort Smith, Arkansas. The Company ceased operations at the Fort Smith facility in July of 2018, and approximately 20 positions were eliminated as a result of the closure. The Company's decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in other of our facilities. The Company moved existing Fort Smith production to its manufacturing facilities in Evansville, Indiana and Monterrey, Mexico.Georgia. The Company provided the affected employees severance pay, health benefits continuation, and job search assistance. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that the closing did not meet the definition as it did not represent a strategic shift in the Company's operations and the Company will havehas continuing cash flows from the production beingthat was moved to other facilities within the Company.
The Company incurred one-time severance costs as a result of this plant closure of $0.2approximately $0.3 million induring the 52 weeks ended December 30, 2018.fourth quarter of 2019. The amount of other costs incurred associated with this plant closure, which primarily consistedconsist of preparing and moving existing production equipment and inventory at Fort SmithBryan to other facilities and accelerated depreciation of the building right-of-use lease asset, was approximately $0.6 million induring the 52 weekstwelve months ended December 30, 2018. All these costs were recorded to the restructuring expense line in continuing operations in the Company's consolidated statement31, 2020.
On October 18, 2018, the Company sold the building it owned in Fort Smith, which had a net book value of $0.73 million, for cash proceeds of $0.88 million resulting in a gain on the sale of $0.14 million. Through the date of the sale the building qualified as being held for sale, and therefore was presented as such in the consolidated balance sheet in our historical financial statements.
Port HuronEvansville Facility Closure
On February 1, 2018,July 16, 2019, the Company made the decision to close its manufacturing facility in Port Huron, Michigan.Evansville, Indiana. The Company ceased operations at the Port HuronEvansville facility in Juneduring the fourth quarter of 2018 and seven2019, an approximately 47 positions were eliminated as a result of the closure. The Company's decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in our other of its facilities. As such, the
The Company moved existing Port HuronEvansville production to ourits manufacturing facilities in London, Ontario,LaFayette, Georgia, Auburn Hills, Michigan, and Louisville, Kentucky. The Company provided the affected employees severance pay, health benefits continuation, and job search assistance. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that the closing did not meet the definition as it did not represent a strategic shift in the Company's operations and the Company will havehas continuing cash flows from the production beingthat was moved to other facilities within the Company.
The Company incurred one-time severance costs as a result of this plant closure of $0.1$0.6 million induring the 52 weekstwelve months ended December 30, 2018. The amount31, 2020, which consisted primarily of other costs incurred associated with this plant closure, which primarily consistedthe relocation of preparing and moving existing productionequipment, the disposal of equipment and inventory, at Port Huronand the impairment of the ROU asset for the leased warehouse. Also included in this amount is a non-cash loss related to other facilities was $0.3 million in the 52 weeks ended December 30, 2018.loss on the sale of the Evansville building. All of these costs were recorded to the restructuring expense line in continuing operations in the Company'sCompany’s consolidated statementstatements of operations.
The Company had $0.7 million and $1.1 million of remaining lease payments for a warehouse near the Evansville, Indiana facility as of December 31, 2020 and December 29, 2019, respectively. The Company has secured a sublease of roughly 11% of the facility.
Impairment of The table below summarizes the restructuring activity during the twelve months ended December 31, 2020 and December 29, 2019:
| | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
| | (In thousands) |
Former CEO severance salary | | $ | — | | | $ | 721 | |
Salaried workforce reduction | | — | | | 245 | |
Evansville severance | | — | | | 331 | |
Evansville other | | 469 | | | 692 | |
Lease related expenses | | 225 | | | 385 | |
Bryan severance | | — | | | 378 | |
Bryan other | | 536 | | | — | |
Total restructuring expense | | $ | 1,230 | | | $ | 2,752 | |
Goodwill
The Company performed the annual quantitative assessment as of December 31, 2020, utilizing a combination of the income and market approaches. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value by approximately 70.0%. Key assumptions used in the analysis were a discount rate of 13.0%, EBITDA margin of 8% in 2021 and at least 9.5% thereafter and a terminal growth rate of 2.5%. Future events and changing market conditions may, however, lead the Company to reevaluate the assumptions that have been used to test for goodwill impairment, including key assumptions used in the expected EBITDA margins, cash flows and discount rates, as well as other assumptions with respect to matters out of the Company’s control, such as discount rates and market multiples of comparable companies.
During the second quarter of 2019, the Company experienced a decline in market capitalization, which under applicable accounting standards, is a potential indicator of impairment. As a result, the Company performed an interim quantitative assessment as of June 30, 2019, utilizing a combination of the income and market approaches, which were weighted evenly. The results of the quantitative analysis performed indicated the carrying value of the Company exceeded the fair value of the Company by $6.8 million and, accordingly, an impairment was recorded during the second quarter of 2019. Key assumptions used in the analysis were a discount rate of 12.5%, EBITDA margin of 5.7% for the last seven months of 2019, 9.25% EBITDA margin for 2020 increasing to10.0%to 10.0% for 2023, and a terminal growth rate of 2.0%. Future events and changing market conditions may, however, lead us to reevaluate the assumptions we have used to test for goodwill impairment, including key assumptions used in our expected EBITDA margins and cash flows, as well as other key assumptions with respect to matters out of our control, such as discount rates and market multiple comparables. Based on the results of the quantitative test, we
performed sensitivity analysis around the key assumptions used in the analysis, the results of which were a 50 basis point decline in EBITDA margin used to determine expected future cash flows would have resulted in an additional impairment of approximately $12.3 million. No such further indicators of impairment were identified during the remaining two quarters of the year ended December 29, 2019.
Comparison of Results of Operations for the Twelve Months Ended December 31, 2020 and December 29, 2019
Net Sales
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
| (In thousands) |
Net Sales | $ | 120,214 | | | $ | 152,489 | |
Net sales for the twelve months ended December 31, 2020 were approximately $120.2 million compared to $152.5 million for the twelve months ended December 29, 2019, representing a decrease of 21.2%. The decrease in net sales in 2020 was primarily caused by the COVID-19 pandemic, which idled our automotive customers’ facilities for several months. Also contributing to the decrease in net sales was the end of certain transportation customer programs, and lost sales from facility closures.
Cost of Sales
The major components of cost of sales are raw materials purchased from third parties, direct labor and benefits, and manufacturing overhead, including facility costs, utilities, supplies, repairs and maintenance, insurance, freight costs of products shipped to customers and depreciation.
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
| (In thousands) |
Materials | $ | 63,034 | | | $ | 78,826 | |
Direct labor and benefits | 19,092 | | | 22,916 | |
Manufacturing overhead | 14,929 | | | 16,601 | |
Sub-total | 97,055 | | | 118,343 | |
Depreciation | 2,488 | | | 2,638 | |
Cost of sales | 99,543 | | | 120,981 | |
Gross Profit | $ | 20,671 | | | $ | 31,508 | |
Cost of Sales as a Percent of Net Sales
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
Materials | 52.4 | % | | 51.7 | % |
Direct labor and benefits | 15.9 | % | | 15.0 | % |
Manufacturing overhead | 12.4 | % | | 10.9 | % |
Sub-total | 80.7 | % | | 77.6 | % |
Depreciation | 2.1 | % | | 1.7 | % |
Cost of Sales | 82.8 | % | | 79.3 | % |
Gross Profit | 17.2 | % | | 20.7 | % |
The increase in cost of sales as a percentage of net sales in 2020 was attributable to lower sales, resulting in an under absorption of manufacturing overhead. The increase in direct labor and benefits as a percent of net sales during 2020 is mainly driven by labor premiums throughout the year. The Company continued to provide health and other employee benefits during the COVID-19 related shut downs, without employee contributions, also contributed to the increase. Material cost as a percentage of net sales increased due to lower material utilization related to production moves from previously completed facility closures.
Selling, General and Administrative Expenses (“SG&A”)
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
| (In thousands, except percentages) |
SG&A, exclusive of depreciation and amortization | $ | 20,887 | | | $ | 22,349 | |
Depreciation and amortization | 4,597 | | | 4,402 | |
SG&A | $ | 25,484 | | | $ | 26,751 | |
SG&A as a % of net sales | 21.2 | % | | 17.5 | % |
Selling, general, and administrative expenses for the twelve months ended December 31, 2020 decreased $1.3 million to $25.5 million, compared to $26.8 million for the twelve months ended December 29, 2019. The decrease was driven by cost reduction activities including plant closures, reduced management and commission expenses, and lower health care costs. Partially offsetting these cost savings were increased professional fees primarily related to the finance and information technology support.
Operating Loss
Operating loss for the twelve months ended December 31, 2020 was $6.0 million compared to an operating loss of $4.8 million for the twelve months ended December 29, 2019. The increased operating loss in 2020 was primarily a result of $10.8 million lower gross profit. Offsetting the reduced gross profit was $1.5 million less restructuring expenses in 2020 and the $6.8 million goodwill impairment charge during 2019 that did not reoccur.
Non-Operating Expense
Non-operating expense for the twelve months ended December 31, 2020 was $3.5 million compared to $4.3 million for the twelve months ended December 29, 2019. The change in non-operating expense was primarily driven by interest expense. Interest expense was approximately $3.6 million for the twelve months ended December 31, 2020, compared to 4.3 million for the twelve months ended December 29, 2019. The decrease in interest expense is primarily driven by the lower interest rate composition of our debt compared to last year.
Income before Income Taxes
As a result of the foregoing factors, loss before income taxes for the twelve months ended December 31, 2020 was $9.5 million, compared to a loss of $9.0 million for the twelve months ended December 29, 2019.
Income Tax Provision
For the twelve months ended December 31, 2020, income tax benefit was $3.8 million, and the effective income tax rate was 40%. The effective tax rate was higher than the statutory rate of 21.0% primarily due to the impact of net operating loss carry backs from 2020 and 2019. For the twelve months ended December 29, 2019, income tax expense was less than $0.1 million, and the effective income tax rate was 0%. The effective tax rate was lower than the statutory rate of 21.0% primarily due to earnings generated in Mexico and Canada, which both have higher statutory income tax rates than the U.S., and the U.S.
taxation of foreign earnings under the Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cut and Jobs Act, partially offset by tax credits.
Net Loss
Net loss for the twelve months ended December 31, 2020 was $5.7 million compared to net loss of $9.1 million during the twelve months ended December 29, 2019. The decrease in net loss was primarily driven by increased income tax benefit in 2020, goodwill impairment charges in 2019 not recurring, and lower restructuring and interest expenses. These impacts offset the $10.8 million reduction of gross profit, which was driven by the effects of the COVID-19 pandemic on sales and production costs.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow from operations and borrowings under our Amended and Restated Credit Agreement (Amendments)from our senior lenders. Our primary uses of cash are payment of vendors, payroll, operating costs, capital expenditures and debt service.
On AprilAs of December 31, 2020 and December 29, 2016, Unique Fabricating NA, Inc. (the “US Borrower”)2019, we had a cash balance of $0.8 million and Unique-Intasco Canada, Inc. (the “CA Borrower”)$0.7 million, respectively. Our excess cash balance is swept daily and Citizens Bank, National Association (“Citizens”), acting as lender and Administrative Agent and the other lenders, entered into a Credit Agreement (the “Credit Agreement”) providing forapplied to reduce borrowings of up to the aggregate principal amount of $62.0 million. The Credit Agreement was a senior secured credit facility and consisted of aunder our revolving line of credit, of upwhich remains available for re-borrowing, as needed, subject to $30.0 million (the “Revolver”) tocompliance with the US Borrower, a $17.0 million principal amount Term Loan (the “US Term Loan”) to the US Borrower, and a $15.0 million principal amount Term Loan (the “CA Term Loan”) to the CA Borrower.
On August 18, 2017, the US Borrower and the CA Borrower entered into the Second Amendment (the “Amendment”) to the Credit Agreement, with Citizens, acting as syndication agent, and the other lenders. The Amendment converted $4.0 million of outstanding borrowings under the Revolver into an additional $4.0 million term loan to the US Borrower (the “US Term Loan II”). The conversion of a portionterms of the outstanding borrowingsfacility. As of December 31, 2020 and December 29, 2019, we had $5.7 million and $6.8 million, respectively, available for borrowing under our amended and restated credit facility, subject, in each case, to borrowing base restrictions, compliance with the Revolver into the US Term Loan II did not reduce the aggregate amount available to be borrowed under it.
On August 8, 2018, the US Borrower and the CA Borrower entered into the Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement. The Fourth Amendment required the Company to use the net proceeds from the saleterms of the Ft. Smith, Arkansas buildingfacility and outstanding letters of credit. Assuming that we are able to reduce the outstanding borrowings under the Revolver. The applicationagree on a waiver of the net proceeds did not permanently reduce the amounts that could be borrowed under the Revolver. The Fourth Amendment also eased, for the fiscal quarter ended September 30, 2018, the financial covenant ratio which determines the Company's abilitydefaults by our lenders and an amendment to pay dividends. The Fourth Amendment provided for the discharge and release of the mortgage on the Ft. Smith, Arkansas facility subject to the application of the net proceeds of the sale of the property as required by the amendment.
On September 20, 2018, the US Borrower and the CA Borrower entered into the Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement, with Citizens, acting as syndication agent, and the other lenders. The Fifth Amendment temporarily increased the maximum amount that could be borrowed under the Revolver to $32.5 million from its then maximum of $30.0 million. This increase implemented by the Fifth Amendment was effective until October 31, 2018, at which point the maximum amount could be borrowed under the Revolver reverted to $30.0 million.
our Amended and Restated Credit AgreementFacility which do not restrict borrowings, we believe that our sources of liquidity, including cash flow from operations, existing cash and our revolving credit facility are sufficient to meet our projected cash requirements for at least the next twelve months.
In 2021, we plan to commit to approximately $4.0 million in capital expenditures, primarily to add new production equipment as we expand and automate our production capabilities, upgrade existing equipment and facilities, and improve our information technology software and hardware throughout our locations. The forbearance agreement, during the forbearance period prohibits any payment to acquire illiquid assets other than ordinary course capital expenditures.
We may elect to pursue additional growth opportunities that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected.
Dividends
Our payment of dividends on our common stock in the future will be determined by our board of directors in its sole discretion and will depend on business conditions, our financial condition, earnings, liquidity and capital requirements. Our Amended Credit Agreement contains financial covenants which may have the effect of precluding or limiting the amounts that we can pay as dividends.
Cash Flow Data
The following table presents cash flow data for the periods indicated.
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
| (In thousands) |
Cash flow data | | | |
Cash flow provided by (used in): | | | |
Operating activities | $ | (1,370) | | | $ | 12,020 | |
Investing activities | $ | (1,536) | | | $ | (2,640) | |
Financing activities | $ | 3,016 | | | $ | (10,141) | |
Operating Activities
Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization; amortization of debt issuance costs; gain or loss on sale of assets; gain or loss on extinguishment of debt; gain or loss on derivative instruments; bad debt adjustments; stock option expense; changes in deferred income taxes; accrued and other liabilities; prepaid expenses and other assets; and the effect of working capital changes. The primary drivers of the impact COVID-19 pandemic on the Company’s operating results.
During the twelve months ended December 31, 2020, net cash used in operating activities was $1.4 million, compared to cash provided by operating activities of $12.0 million for the twelve months ended December 29, 2019.
Net cash used by operating activities for the twelve months ended December 31, 2020 was adversely impacted by increases in prepaid expenses and refundable taxes. Overall operating cash flows decreased as a result of the impact of COVID-19 pandemic on the business.
The net cash provided by operating activities for the twelve months ended December 29, 2019 was positively impacted by decreases in inventory and accounts receivable representing a renewed focus on the management of those two areas.
Investing Activities
Cash used in investing activities consists principally of purchases of property, plant and equipment. In the twelve months ended December 31, 2020, we made capital expenditures of $2.4 million. In the twelve months ended December 29, 2019, we made capital expenditures of $2.8 million.
Financing Activities
Cash flows (used in) provided by financing activities consisted primarily of borrowings and payments under our senior credit facilities, and payment of debt issuance costs.
In the twelve months ended December 31, 2020, we had inflows of $3.0 million primarily due to $6.0 million of the disbursement of the PPP loan. This inflow was primarily offset by $3.2 million in payments on our term loans and capital expenditure line, as further discussed in Note 8 to our consolidated financial statements. As of December 31, 2020, $11.7 million was outstanding under the revolving credit facility, gross of debt issuance costs. Borrowings under the revolving credit facility are subject to a borrowing base which is reduced to the extent of letters of credit issued under the senior credit facility. The maximum amount available was further subject to borrowing base restrictions, resulting in a net availability of $5.7 million at December 31, 2020, which includes a reduction for a $0.1 million letter of credit issued for the benefit of the landlord of one of the Company’s leased facilities. Amounts repaid under the revolving credit facility will be available to be re-borrowed, subject to borrowing base restrictions and compliance with the terms of the facility.
As of December 29, 2019, $11.7 million was outstanding under the revolving credit facility, gross of debt issuance costs. Borrowings under the revolving credit facility are subject to a borrowing base which is reduced to the extent of letters of credit issued under the new senior credit facility. As of December 29, 2019, the maximum additional available borrowings under the revolving credit facility was $11.3 million, which is further subject to borrowing base restrictions.
Our Debt
On November 8, 2018, subsequent to the end of the third quarter, the US Borrower and the CA Borrower, entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), which amended and restated the existing Credit Agreement, with Citizens, acting as Administrative Agent, and the other lenders. The Amended and Restated Credit Agreement, among other things increasesprovided for borrowings under the principal amount ofRevolver up to $30.0 million, the US Term Loan borrowingsup to $26.0 million, createsthe CA Term Loan up to $12.0 million, created a two year line to fund capital expenditures of up to $2.5 million through November 8, 2019 and $5.0 million thereafter through November 8, 2020, and extendsextended the maturity dates of all borrowings from April 28, 2021 to November 7, 2023. The Amended and Restated Credit Agreement provides for borrowings of up to $30.0 million under the Revolver, subject to availability, and left the principal amount on the CA Term Loan the same at September 30, 2018, approximately $12.0 million, and the same as it was under the previous Credit Agreement. The Amended and Restated Credit Agreement combined the previous US Term Loan and US Term Loan II (the “New US Term Loan”) into one term loan and increases the aggregate principal amount to $26.0 million dollars from $15.9 million. The increase in the principal amount effected by the New U.S. Term Loan replaced and termed-out outstanding borrowings under the Revolver. The Amended and Restated Credit Agreement changes therequired quarterly principal payments of the New US Term Loan to $337,500of $0.3 million through September 30, 2020, $575,000$0.6 million thereafter through September 30, 2021, and $812,500$0.8 million thereafter though maturity. The CA Term Loan requires quarterly principal payments in the amount of $0.4 million, with a lump sum due at maturity. Finally, the agreement made certain changes to the Company's covenants and financial covenant ratios.
Covenant Compliance
and Amendments to the Amended and Restated Credit Agreement
As of March 31, 2019, the Company was not in compliance with the total leverage ratio financial covenant. As a result of this non-compliance, on May 7, 2019, the US Borrower and the CA Borrower entered into the waiver and First Amendment (the “First Amendment”) to the Amended and Restated Credit Agreement, with Citizens, acting as Administrative Agent, and the other lenders. The First Amendment temporarily waived the default on the March 31, 2019 covenant violation until the earlier of June 15, 2019 and the execution and delivery of a further amendment revising the calculation of the total leverage ratio and such other financial covenants as are necessary, taking into account the Borrowers current and future financial condition.
On June 14, 2019, the Company entered into the Second Amendment (the “Second Amendment”) to the Amended and Restated Credit Agreement, with Citizens, acting as Administrative Agent, and the other lenders. The Second Amendment revised the waiver period as defined with respect to the March 31, 2019 covenant violation and resulting default until the earlier of June 30, 2019 (which was June 15, 2019 under the First Amendment to the Amended and Restated Credit Agreement) and the execution and delivery of a further amendment revising the calculation of the total leverage ratio and such other financial covenants as are necessary taking into account the Borrowers, then current and future financial condition.
On June 28, 2019, the Company entered into the Third Amendment (the “Third Amendment”) to the Amended and Restated Credit Agreement, with Citizens, acting as Administrative Agent, and the other lenders. The Third Amendment revised the waiver period as defined with respect to the March 31, 2019 covenant violation and resulting default until the earlier of July 22, 2019 (which was June 30, 2019 under the Second Amendment to the Amended and Restated Credit Agreement) and the execution and delivery of a further amendment revising the calculation of the total leverage ratio and such other financial covenants as are necessary taking into account the Borrowers current and future financial condition.
On July 16, 2019, the Company entered into the Waiver and Fourth Amendment (the “Fourth Amendment”) to the Amended and Restated Credit Agreement, with Citizens, acting as Administrative Agent, and the other lenders. The Fourth Amendment provided a permanent waiver by the Lenders and Agent with respect to the Borrower's non-compliance with the total leverage ratio financial covenant, as defined, as of March 31, 2019. The Fourth Amendment also revised the definition of consolidated EBITDA and certain financial covenants, including the maximum total leverage ratio and the minimum debt service coverage ratio, as well as adding the requirement that the Company maintain minimum liquidity and minimum unadjusted consolidated EBITDA, each as defined. The Fourth Amendment permitspermitted distributions as long as the Borrower is in compliance with specified conditions, including that the Borrower's liquidity, as defined, is not less than $5 million after giving effect to the distributions,, total leverage ratio is not more than 2.00 to 1.00, post distribution debt service coverage ratio
("DSCR"), as defined, is not greater than 1.10 to 1.00, and Borrower is in compliance with financial covenants, before and after giving effect to the distributions.
On August 7, 2019, the Company entered into the Fifth Amendment to the Amended and Restated Credit Agreement and Loan Documents (The "Fifth Amendment"). The Fifth Amendment amended the definition of unadjusted consolidated EBITDA to include consolidated net income plus the sum of interest expense, tax expense, depreciation and amortization expense, and non-cash impairment charges of goodwill. The Company is compliant with the covenants set forth in the Waiver and Amendments as of December 29, 2019. The Company did not pay a dividend duringdividends following the remainder of 2019.Fifth Amendment.
Comparison of Results of Operations for the Fifty-Two Weeks Ended December 29, 2019 and the Fifty-Two Weeks Ended December 30, 2018
Fifty-Two Weeks Ended December 29, 2019 and the Fifty-Two Weeks Ended December 30, 2018
|
| | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 |
| (In thousands) |
| $ | 152,489 |
| | $ | 174,910 |
|
The decline in net sales for the fifty-two weeks ended December 29, 2019 was primarily driven by the loss of business associated with the prior year's Ft. Smith, Arkansas and current year Evansville, Indiana plant closures, the program end for several substantial programs where we did not win the successor business or the customer made a change eliminating our product on the platform, the overall decrease in North American auto production year over year, and certain other commercial losses during the year. As part of our improvement activities, we have reorganized and refocused our commercial organization to win new business by leveraging our competitive advantages.
Cost of Sales
The major components of cost of sales are raw materials purchased from third parties, direct labor and benefits, and manufacturing overhead, including facility costs, utilities, supplies, repairs and maintenance, insurance, freight costs of products shipped to customers and depreciation.
|
| | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 |
| (In thousands) |
Materials | $ | 78,826 |
| | $ | 88,285 |
|
Direct labor and benefits | 22,916 |
| | 27,232 |
|
Manufacturing overhead | 16,601 |
| | 17,796 |
|
Sub-total | 118,343 |
| | 133,313 |
|
Depreciation | 2,638 |
| | 2,262 |
|
Cost of sales | 120,981 |
| | 135,575 |
|
Gross Profit | $ | 31,508 |
| | $ | 39,335 |
|
Cost of Sales as a Percent of Net Sales
|
| | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 |
Materials | 51.7 | % | | 50.5 | % |
Direct labor and benefits | 15.0 | % | | 15.6 | % |
Manufacturing overhead | 10.9 | % | | 10.1 | % |
Sub-total | 77.6 | % | | 76.1 | % |
Depreciation | 1.7 | % | | 1.3 | % |
Cost of Sales | 79.3 | % | | 77.4 | % |
Gross Profit | 20.7 | % | | 22.5 | % |
The increase in cost of sales as a percentage of net sales was attributable to lower sales resulting in an under absorption of manufacturing overhead and depreciation of 2.9% plus an increase to the inventory allowance in the third quarter of $1.7 million or a 1.1% increase to material costs for 2019. This allowance increase was due to the loss of business from the end of life of certain programs coupled with the on-going implementation of the Company's new Enterprise Resource Planning (ERP) system providing more detailed information forOn April 3, 2020, the Company to review estimated future demand inentered into the next twelve months. As noted elsewhere, the benefits from the closures of the Evansville and Bryan facilities will be more fully realized in 2020 and beyond.
The lower direct labor and benefit percentage resulted from changes in product mix and manufacturing location to lower labor content production plus lower health insurance claims incurred under our self-insured health and welfare benefit plans.
Selling, General and Administrative Expenses (“SG&A”)
|
| | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 |
| (In thousands, except SG&A as a % of net sales) |
SG&A, exclusive of line items below | $ | 22,349 |
| | $ | 25,387 |
|
Transaction expenses | — |
| | 27 |
|
Subtotal | 22,349 |
| | 25,414 |
|
Depreciation and amortization | 4,402 |
| | 4,367 |
|
SG&A | $ | 26,751 |
| | $ | 29,781 |
|
SG&A as a % of net sales | 17.5 | % | | 17.0 | % |
While SG&A, (excluding depreciation and amortization) as a percentage of nets sales remained substantially the same in 2019, we reduced SG&A (excluding depreciation and amortization) by $3.1 million year over year. This is a result of a combination of the plant closure activities, the salaried workforce reductions, other activities to lower these primarily fixed costs, and, various balance sheet adjustments. Several other initiatives have been undertaken including a realignment of the management organization to ensure we have a cost-effective method of meeting our objectives. These will have a further benefit in 2020 and beyond.
Operating Loss and Income
As a result of the foregoing factors, as well as restructuring expense of $2.8 million for the fifty-two weeks ended December 29, 2019 compared to restructuring expense of $1.2 million for the fifty-two weeks ended December 30, 2018, impairment to goodwill of $6.8 million and $0 for the fifty-two weeks ended December 29, 2019 and December 30, 2018, operating loss for the fifty-two weeks ended December 29, 2019 was $4.8 million compared to operating income of $8.4 million for the fifty-two weeks ended December 30, 2018.
Non-Operating Expense
Non-operating expense for the fifty-two weeks ended December 29, 2019 was $4.3 million compared to $3.8 million for the fifty-two weeks ended December 30, 2018. The change in non-operating expense was primarily driven by interest expense. Interest expense was approximately $4.3 million for the fifty-two weeks ended December 29, 2019, compared to $3.8 million for the fifty-two weeks ended December 30, 2018. The increase in interest expense is primarily due to higher interest rates and an $0.6 million unfavorable mark-to-market on a new interest rate swap.
Income before Income Taxes
As a result of the foregoing factors, loss before income taxes for the fifty-two weeks ended December 29, 2019 was $9.0 million, compared income of $4.6 million for the fifty-two weeks ended December 30, 2018.
Income Tax Provision
For the fifty-two weeks ended December 29, 2019, income tax expense was less than $0.1 million, and the effective income tax rate was 0%. The differences between the effective tax rate and the statutory rate of 21.0% are primarily due to
earnings generated in Mexico and Canada, which both have higher statutory income tax rates than the U.S., and the U.S. taxation of foreign earnings under the Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cut and Jobs Act, partially offset by tax credits. These adjustments are further explained in Note 10. For the fifty-two weeks ended December 30, 2018, income tax expense was $0.9 million, and the effective income tax rate was 18.9%. The effective tax rate was lower than the statutory rate of 21.0% primarily due to research and development credits in the U.S., partially offset by earnings generated in Mexico and Canada, which both have higher statutory income tax rates than the U.S. and by U.S. taxation on foreign earnings under the GILTI provisions of the Tax Cuts on Jobs Act. These adjustments are further explained in Note 10.
Net (loss) income
As a result of the lower net sales and changes in expenses discussed above, net loss for the fifty-two weeks ended December 29, 2019 was ($9.1) million compared to net income of $3.7 million during the fifty-two weeks ended December 30, 2018.
Comparison of Results of Operations for the Fifty-Two Weeks Ended December 30, 2018 and the Fifty-Two Weeks Ended December 31, 2017
Fifty-Two Weeks Ended December 30, 2018and Fifty-Two Weeks Ended December 31, 2017
|
| | | | | | | |
| Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
| (In thousands) |
| $ | 174,910 |
| | $ | 175,288 |
|
The relatively flat net sales for the fifty-two weeks ended December 30, 2018 is in alignment with North American vehicle production which slightly decreased during the fifty-two weeks ended December 30, 2018 period from production during the fifty-two weeks ended December 31, 2017.
Cost of Sales
The major components of cost of sales are raw materials purchased from third parties, direct labor and benefits, and manufacturing overhead, including facility costs, utilities, supplies, repairs and maintenance, insurance, freight costs of products shipped to customers and depreciation.
|
| | | | | | | |
| Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
| (In thousands) |
Materials | $ | 88,285 |
| | $ | 88,303 |
|
Direct labor and benefits | 27,232 |
| | 26,729 |
|
Manufacturing overhead | 17,796 |
| | 18,288 |
|
Sub-total | 133,313 |
| | 133,320 |
|
Depreciation | 2,262 |
| | 1,914 |
|
Cost of sales | 135,575 |
| | 135,234 |
|
Gross Profit | $ | 39,335 |
| | $ | 40,054 |
|
Cost of Sales as a Percent of Net Sales
|
| | | | | |
| Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
Materials | 50.5 | % | | 50.4 | % |
Direct labor and benefits | 15.6 | % | | 15.3 | % |
Manufacturing overhead | 10.1 | % | | 10.4 | % |
Sub-total | 76.2 | % | | 76.1 | % |
Depreciation | 1.3 | % | | 1.1 | % |
Cost of Sales | 77.5 | % | | 77.2 | % |
Gross Profit | 22.5 | % | | 22.8 | % |
Material costs for the fifty-two weeks ended December 30, 2018 as a percentage of net sales were higher comparedSixth Amendment to the fifty-two weeks ended December 31, 2017 primarily due to higher freight costs in the fifty two weeks ended , partially offset by favorable product mix shift to more molded products, which are typically lower in material content. Direct labor and benefit costs as a percentage of net sales was 15.6% for the fifty-two weeks ended December 30, 2018 compared to 15.3% for the fifty-two weeks ended December 31, 2017. Direct labor costs were negatively impacted by the product mix shift to more molded products described above, which while lower in material content as a percentage of sales, are typically higher in labor content, a temporary equipment capacity issue at one of our facilities during the first quarter of 2018, that resulted in higher overtime costs during the fifty-two weeks ended December 30, 2018, as well as short term inefficiencies experienced from moving the manufacturing of products previously produced in the Ft. Smith, Arkansas facility to other manufacturing facilities of the Company.
Manufacturing overhead as a percentage of net sales in the fifty-two weeks ended December 30, 2018 were lower due primarily to lower repair and maintenance costs on our machines, tools, and buildings as we have invested heavily in the last few years in new production equipment. Depreciation costs as a percentage of net sales in the fifty-two weeks ended December 30, 2018 were also higher than the fifty-two weeks ended December 31, 2017 as we added machine capacity, to meet expected future demand, and to increase capabilities in certain of our facilities.
Selling, General and Administrative Expenses (“SG&A”)
|
| | | | | | | |
| Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
| (In thousands, except SG&A as a % of net sales) |
SG&A, exclusive of line items below | $ | 25,387 |
| | $ | 25,338 |
|
Transaction expenses | 27 |
| | 23 |
|
Subtotal | 25,414 |
| | 25,361 |
|
Depreciation and amortization | 4,367 |
| | 4,406 |
|
SG&A | $ | 29,781 |
| | $ | 29,767 |
|
SG&A as a % of net sales | 17.0 | % | | 17.0 | % |
Operating Income
As a result of the foregoing factors, as well as restructuring expense of $1.2 million for the fifty-two weeks ended December 30, 2018 compared to no restructuring expense for the fifty-two weeks ended December 31, 2017, operating income for the fifty-two weeks ended December 30, 2018 was $8.4 million compared to operating income of $10.3 million for the fifty-two weeks ended December 31, 2017.
Non-Operating Expense
Non-operating expense for the fifty-two weeks ended December 30, 2018 was $3.8 million compared to $2.7 million for the fifty-two weeks ended December 31, 2017. The change in non-operating expense was primarily driven by interest expense. Interest expense was approximately $3.8 million for the fifty-two weeks ended December 30, 2018, compared to $2.7 million
for the fifty-two weeks ended December 31, 2017. The increase in interest expense is primarily due to higher interest rates and a higher average outstanding debt balance in the fifty-two weeks ended December 30, 2018, the write-off of certain deferred financing costs associated with our old Credit Agreement, and an unfavorable mark-to-market on a new interest rate swap.
Income before Income Taxes
As a result of the foregoing factors, income before income taxes for the fifty-two weeks ended December 30, 2018 was $4.6 million, compared to $7.6 million for the fifty-two weeks ended December 31, 2017.
Income Tax Provision
For the fifty-two weeks ended December 30, 2018, income tax expense was $0.9 million, and the effective income tax rate was 18.9%. The effective tax rate was lower than the statutory rate of 21.0% primarily due to research and development credits in the U.S., partially offset by earnings generated in Mexico and Canada, which both have higher statutory income tax rates than the U.S. and by U.S. taxation on foreign earnings under the GILTI provisions of the Tax Cuts on Jobs Act. These adjustments are further explained in Note 10.
For the fifty-two weeks ended December 31, 2017, income tax expense was $1.1 million, and the effective income tax rate was 14.9%. The difference between the actual effective rate and the statutory rate of 34.0% was mainly a result of the enactment of the Tax Cuts on Jobs Act on December 22, 2017, and research and development credits. These adjustments are further explained in Note 10.
Net income
As a result of the increased net sales and changes in expenses discussed above, net income for the fifty-two weeks ended December 31, 2017 was $6.5 million compared to $6.7 million during the fifty-two weeks ended January 1, 2017.
Non-GAAP Financial Measures
Adjusted EBITDA
We present Adjusted EBITDA (defined below), a measure that is not in accordance with generally accepted accounting principles in the United States of America (non-GAAP), in this document to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and it is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for company management. In addition, the financial covenants in our new credit facility are based on Adjusted EBITDA, subject to dollar limitations on certain adjustments.
We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, non-cash stock awards, non-recurring integration expense, non-cash stock awards, , transaction fees related to our acquisitions, restructuring expenses, a one-time gain on the sale of a building, and one-time consulting and licensing ERP system implementation costs as we implement a new ERP system at all locations. We believe omitting these items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are
excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include that: (1) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) it does not reflect changes in, or cash requirements for, our working capital needs; (3) it does not reflect income tax payments we may be required to make; and (4) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness.
To properly and prudently evaluate our business, we encourage you to review our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All the items included in the reconciliation from net income to Adjusted EBITDA are either (1) non-cash items or (2) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.
|
| | | | | | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
| (In thousands) |
Net (loss) income | $ | (9,068 | ) | | $ | 3,699 |
| | $ | 6,487 |
|
Plus: Interest expense, net | 4,286 |
| | 3,778 |
| | 2,746 |
|
Plus: Income tax expense | 37 |
| | 862 |
| | 1,133 |
|
Plus: Depreciation and amortization | 7,041 |
| | 6,630 |
| | 6,320 |
|
Plus: Non-cash stock award | 129 |
| | 131 |
| | 150 |
|
Plus: Non-recurring expenses | 83 |
| | 200 |
| | 158 |
|
Plus: Goodwill impairment | 6,760 |
| | — |
| | — |
|
Plus: Transaction fees | — |
| | 27 |
| | 23 |
|
Plus: Management fees | 225 |
| | — |
| | — |
|
Plus: Restructuring expenses | 2,752 |
| | 1,156 |
| | — |
|
Plus: One-time consulting and licensing ERP system implementation costs | 932 |
| | 724 |
| | 1,015 |
|
Plus: Debt extinguishment costs | — |
| | 59 |
| | — |
|
Less: Gain on sale of building | — |
| | (143 | ) | | — |
|
Adjusted EBITDA | $ | 13,177 |
| | $ | 17,123 |
| | $ | 18,032 |
|
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow from operations and borrowings under our Amended and Restated Credit Agreement and Loan Documents (The “Sixth Amendment”). The Sixth Amendment amended the definition of Consolidated EBITDA to include, as an addition to consolidated net income, solely for the purposes of (i) calculating Total Leverage Ratio under Section 7.1(a) of the Credit Agreement for the first and second quarters of the 2020 fiscal year, an amount equal to $0.6 million resulting from a non-cash inventory write-off taken during the third fiscal quarter in fiscal 2019, (ii) amended the definition of “fiscal year” to reflect that we changed our senior lenders. Our primary uses of cash arefiscal year to end on December 31, commencing with the 2020 fiscal year, (iii) eliminated the requirement for a monthly Covenant Compliance Report and (iv) provided for payment of vendors, payroll, operating costs, capital expenditures and debt service.
As of December 29, 2019, December 30, 2018 andthe Capex Loan principal installment that was due December 31, 2017, we had a cash balance2019.
Due to the impact of $0.7 million, $1.4 millionthe COVID-19 pandemic on the Company and $1.4 million, respectively. Our excess cash balance is swept dailythe global automotive industry, the Company anticipated that it was likely that the EBITDA for the twelve months ended June 30, 2020 would not be sufficient to comply with financial covenants. In response to the anticipated impact of COVID-19, on April 23, 2020, the Borrowers entered into the Seventh Amendment (the “Seventh Amendment”) to the Amended and appliedRestated Credit Agreement. The Seventh Amendment, among other things, (i) permitted additional indebtedness in the form of unsecured loans authorized pursuant to reduce borrowings under our revolving line of credit, which remains available for re-borrowing, as needed, subject toand in compliance with the termsCARES Act under the Paycheck Protection Program of the facility. As of December 29, 2019, DecemberU.S. Small Business Administration, in an aggregate amount not to exceed $6.0 million; (ii) deferred the June 30, 20182020 principal payments on the US Term Loan, CA Term Loan, and December 31, 2017, we had $10.4 million, $11.6 million and $7.2 million, respectively, available for borrowing under our amended and restated credit facility, subject, in each case, to borrowing base restrictions, complianceCapital Expenditure Line, with the terms ofdeferred principal amounts payable at the facilityexisting maturity dates; (iii) waived the requirement to test Maximum Total Leverage Ratio, Minimum Debt Service Coverage Ratio and outstanding letters of credit. At each such date, we were in compliance with all debt covenants under such facilities. We believe that our sources of liquidity, including cash flow from operations, existing cash and our revolving credit facility are sufficient to meet our projected cash requirements for at least the next fifty-two weeks.
In 2020, we plan to commit to approximately $4.0 million in capital expenditures, primarily to add new production equipment as we expand and automate our production capabilities, upgrade existing equipment and facilities, and improve our information technology software and hardware throughout our locations.
While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and planned capital expenditures, we may elect to pursue additional growth opportunities that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected.
Dividends
Our payment of dividends on our common stock in the future will be determined by our board of directors in its sole discretion and will depend on business conditions, our financial condition, earnings, liquidity and capital requirements. Our New Credit Agreement contains financial covenants which may have the effect of precluding or limiting the amounts that we can pay as dividends.
The following table presents cash flow data for the periods indicated.
|
| | | | | | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
| (In thousands) |
Cash flow data | | | | | |
Cash flow provided by (used in): | | | | | |
Operating activities | $ | 12,021 |
| | $ | 9,430 |
| | $ | 7,809 |
|
Investing activities | (2,640 | ) | | (4,489 | ) | | (4,088 | ) |
Financing activities | (10,141 | ) | | (4,962 | ) | | (2,995 | ) |
Operating Activities
Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization; amortization of debt issuance costs; gain or loss on sale of assets; gain or loss on extinguishment of debt; gain or loss on derivative instruments; bad debt adjustments; stock option expense; changes in deferred income taxes; accrued and other liabilities; prepaid expenses and other assets; and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, inventory, prepaid expenses and other assets, accounts payable and accrued interest.
During the fifty-two weeks ended December 29, 2019, net cash provided by operating activities was $12.0 million, compared to cash provided by operating activities of $9.4 million and $7.8 million for the fifty-two weeks ended December 30, 2018 and January 1, 2017, respectively.
Net cash provided by operating activities for the fifty-two weeks ended December 29, 2019 was positively impacted by decreases in inventory and accounts receivable representing a renewed focus on the management of these two areas.
Net cash provided by operating activities for the fifty-two weeks ended December 30, 2018 was positively impacted by decreases in working capital, primarily in prepaid expenses, accounts payable and accrued expenses.
The net cash provided by operating activities for the fifty-two weeks ended December 31, 2017 was impacted by net income excluding depreciation and amortization partially offset by working capital changes.
Investing Activities
Cash used in investing activities consists principally of purchases of property, plant and equipment.
In the fifty-two weeks ended December 29, 2019, we made capital expenditures of $2.6 million
In the fifty-two weeks ended December 30, 2018, we made capital expenditures of $5.4 million partially offset by proceeds of $0.9 million primarily from the sale of the Ft. Smith building further described in Note 8 to our consolidated financial statements.
In the fifty-two weeks ended December 31, 2017, we made capital expenditures of $4.1 million.
Financing Activities
Cash flows (used in) provided by financing activities consisted primarily of borrowings and payments under our new and old senior credit facilities, payment of debt issuance costs, and distribution of cash dividends.
In the fifty-two weeks ended December 29, 2019, we had outflows of $10.1 million primarily due to $3.4 million of mandatory pay-off of the principal amount of our term loans under our credit facility, and $0.5 million for payments of cash dividends, and $6.6 million outflow of net proceeds from borrowings under our revolving line of credit. These outflows were partially offset by $1.3 million proceeds of debt on our new capital expenditure term loan as further discussed in Note 6 to our consolidated financial statements.
As of December 29, 2019, $11.7 million was outstanding under the revolving credit facility, gross of debt issuance costs. Borrowings under the revolving credit facility are subject to a borrowing base which is reduced to the extent of letters of credit issued under the new senior credit facility. As of December 29, 2019, the maximum additional available borrowings under the revolving credit facility was $10.4 million, which is further subject to borrowing base restrictions. Amounts repaid under the revolving credit facility will be available to be re-borrowed, subject to borrowing base restrictions and compliance with the terms of the facility.
As of December 30, 2018, $18.3 million was outstanding under the revolving credit facility, gross of debt issuance costs. Borrowings under the revolving credit facility are subject to a borrowing base which is reduced to the extent of letters of credit issued under the new senior credit facility. As of December 30, 2018, the maximum additional available borrowings under the revolving credit facility was $11.6 million, which is further subject to borrowing base restrictions.
In the fifty-two weeks ended December 31, 2017, we had outflows of $3.0 million primarily due to $3.4 million of mandatory pay-off of the principal amount of our term loans under our new senior credit facility, and $5.8 million for payments of cash dividends. These outflows were partially offset by $6.2 million net proceeds from borrowings under our revolving line of credit under our new senior secured credit facility.
Credit Agreement
On April 29, 2016, the US Borrower and the CA Borrower and Citizens, acting as lender and Administrative Agent and the other lenders, entered into the Credit Agreement providing for borrowings of up to the aggregate principal amount of $62.0 million. The Credit Agreement was a senior secured credit facility and consisted of a revolving line of credit (the “Revolver”) of up to $30.0 million to the US Borrower, a $17.0 million principal amount term loan to the US Borrower, (the “US Term Loan” and a $15.0 million term loan to the CA Borrower.
On August 18, 2017, the US Borrower and the CA Borrower entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement, with Citizens, acting as Administrative Agent, and other lenders. The Second Amendment converted $4.0 million of outstanding borrowings under the revolving line of credit under the Credit Agreement into an additional $4.0 million term loan to the US Borrower (the “US Term Loan II”). The conversion of a portion of the outstanding borrowings under the revolving line of credit did not reduce the aggregate amount available to be borrowed under it.
On August 8, 2018 the US Borrower and the CA Borrower entered into the Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement, with Citizens acting as Administrative Agent, and the other lenders. The Fourth Amendment required the Company to use the net proceeds from the anticipated sale of the Ft. Smith, Arkansas building to reduce the outstanding borrowings under the Revolver. The application of the net proceeds did not permanently reduce the amounts that may be borrowed under the Revolver. The Fourth Amendment also made less restrictive,Minimum Unadjusted Consolidated EBITDA for the fiscal quarter ended June 30, 2020; (iv) allowed the release of the lien on the Evansville, Indiana property and for the net cash proceeds from its sale to be applied against any outstanding balance on the Revolver, without permanently reducing the Revolving Credit Aggregate Commitment; (v) added a weekly requirement for the Borrowers to deliver a 13-week cash flow forecast until September 30, 2018, the financial covenant ratio which determines the Company's ability to pay dividends.
2020; and (vi) added a 1.0% LIBOR Floor and 2.0% Base Rate Floor.
On September 20, 2018,August 7, 2020, the US Borrower and the CA BorrowerCompany entered into the FifthEighth Amendment (the “Fifth“Eighth Amendment”) to the Credit Agreement, with Citizens acting as Administrative Agent, and the other lenders. The Fifth Amendment temporarily increased the maximum amount that may be borrowed under the Revolver to $32.5 million from the
current maximum of $30.0 million. This increase implemented by the Fifth Amendment was effective until October 31, 2018, at which point the maximum amount that could be borrowed under the Revolver reverted to $30.0 million.
Amended and Restated Credit Agreement
On November 8, 2018, subsequent to the end of the third quarter, the US Borrower and the CA Borrower, entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), whichLoan Documents. The Eighth Amendment, among other things, amended the definition of Consolidated EBITDA and restatedmade changes to the existing Credit Agreement,calculations of financial covenants. The definition of Consolidated EBITDA has been amended to include as an addition to Consolidated Net Income (i) costs and expenses incurred in connection with Citizens, actingthe Eighth Amendment not to exceed $175,000, (ii) restructuring expenses not to exceed $500,000 in any 12 month period, (iii) costs incurred with respect to the purchase and implementation of the ERP system not to exceed (A) $200,000 during each fiscal quarter in 2020 and (B) $100,000 during each fiscal quarter in 2021, and (iv) to the extent added in calculating Consolidated Net Income any portion of the PPP loan that has been forgiven and cancelled. The Eighth Amendment also amended the calculation of certain financial covenants based upon 12 month results to effectively exclude results of the quarter ended June 30, 2020. The calculation of Maximum Total Leverage Ratio has been amended, commencing with the quarter ending September 30, 2020 and through and including the quarter ending March 31, 2021, to annualize Consolidated EBITDA for the periods beginning July 1, 2020 through the date of calculation The calculation of Minimum Debt Service Coverage Ratio for the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021 are based upon results for one, two and three quarters, respectively. The Eighth Amendment further adds a Minimum Liquidity requirement to be calculated monthly through
June 30, 2021 and Minimum Consolidated EBITDA for each measurement period, as Administrative Agent,defined, through June 30, 2021. The Eighth Amendment permits distributions by US Borrower to the Parent to be declared and made only after December 31, 2021 provided certain conditions are satisfied.
The Company’s financial results for the other lenders. Thesix months ended December 31, 2020 have resulted in violations of the following financial covenants: (1) Maximum Total Leverage Ratio; (2) Minimum Debt Service Coverage Ratio; and (3) Minimum Consolidated EBITDA; as defined in the Company’s Amended and Restated Credit Agreement, among other things increasedAgreement. The Company has entered into a forbearance agreement, providing a period commencing on April 9, 2021 and through and including June 15, 2021, during which the principal amount of US Term Loan borrowingsCompany will be able to $26.0 million, created a two year line to fund capital expenditures of up to $2.5 million through November 8, 2019 and $5.0 million thereafter through November 8, 2020, and extended the maturity dates of all borrowings from April 28, 2021 to November 7, 2023. The Amended and Restated Credit Agreement provides for borrowings of up to $30.0 million under theborrow on its Revolver, subject to the terms and conditions to making a revolving credit advance, including availability, and left the principal amount onLenders have agreed, subject to the CA Term Loan at approximately $12.0 million on September 30, 2018,terms of the forbearance agreement, to forbear from enforcing their rights or seeking to collect payment of the Company’s debt or disposing of the collateral securing the debt. However, entering into a forbearance agreement will not alleviate the substantial doubt about the Company’s ability to continue as a going concern. The Company intends to use the forbearance period to continue negotiations with the Lenders to enter into an amendment and waiver to cure the same as it was underdefaults. During the previousforbearance period, the Company may not make any payment, transfer, or distribution out of the ordinary course of business or payments, including salary or compensation or distributions to or for the benefit of any member, owner, or director other than normal and customary employment salaries which do not exceed sums paid for similar positions in the Company’s marketplace.
The Credit Agreement, as of the end of the third quarter. The Amended and Restated Credit Agreement combined the previous US Term Loan and US Term Loan II (the “New US Term Loan”) and increased the aggregate principal amount to $26.0 million dollars from $15.9 million. The increase in the principal amount effected by the New U.S. Term Loan replaced and termed-out outstanding borrowings under the Revolver. The Amended and Restated Credit Agreement changed the quarterly principal payments of the New US Term Loan to $337,500 through September 30, 2020, $575,000 thereafter through September 30, 2021, and $812,500 thereafter though maturity. Finally, the agreement made certain changes to the Company's covenants and financial covenant ratios.
The Revolver, New US Term Loan, and CA Term Loan all mature on November 7, 2023 and bearamended, bears interest at the Company'sCompany’s election of either (i) the greater of the Prime Rate or the Federal Funds Effective Rate (the “Base Rate”) or (ii) the LIBOR rate, plus an applicable margin ranging from 1.75% to 2.75%3.25% per annum in the case of the Base Rate and 2.75% to 3.75%4.25% per annum in the case of the LIBOR rate, in each case, based on senior leverage ratio thresholds, measured quarterly. The effective interest ratequarterly, as of December 29, 2019 was 6.0388%.
In addition,increased by the Waiver and Fourth Amendment to the Amended and Restated Credit Agreement. As stated above, the Seventh Amendment added a 1.0% LIBOR Floor and 2.0% Base Rate Floor.
Reconciliation of Net Income to Consolidated EBITDA
The following is a reconciliation of net income, as reported, which is a U.S. GAAP measure of our operating results, to Consolidated EBITDA, as defined in our Credit Agreement, allows for increasesa non-GAAP measure:
| | | | | | | | |
| | Six Months Ended December 31, 2020 |
| | (In thousands) |
Net income | | $ | 914 | |
Plus: | | |
Interest expense, net | | 1,319 | |
Income tax expense (benefit) | | (2,125) | |
Depreciation and amortization | | 3,627 | |
Management fees | | 112 | |
Non-cash stock awards | | 60 | |
Non-recurring expenses (a) | | 69 | |
Goodwill impairment | | — | |
Restructuring expenses (b) | | — | |
ERP system implementation consulting and licensing costs (c) | | 114 | |
Financing expenses (d) | | — | |
Consolidated EBITDA, as defined | | $ | 4,090 | |
| | |
Total Consolidated Indebtedness, as defined (e) | | $ | 44,359 | |
Consolidated EBITDA, as defined | | $ | 4,090 | |
Total leverage ratio (f) | | 5.4 | |
Covenant requirement | | 3.5 | |
(a) Represents any other non-recurring, non-cash gains during such period, including without limitation, (i) gains from the sale or exchange of assets other than in the principalordinary course of business, and (ii) gains from early extinguishment of Indebtedness or Hedging Agreements
(b) Represents restructuring costs and expenses incurred from time to time at various locations, in an aggregate amount ofunder the Revolver and New US and CA Term Loansdefinition, during any twelve-month period, not to exceed $10.0 million, in the aggregate, provided that before and after giving effect to any proposed increase (and any transactions to be consummated using proceeds of the increase), the total leverage and debt service coverage ratios do not exceed specified amounts. The Amended and Restated Credit Agreement also provides for the issuance of letters of credit with a face amount of up to $2.0 million, in the aggregate, provided that any letter of credit issued will reduce availability under the Revolver.$500,000
We are permitted to prepay in part or in full the amounts due under the Amended and Restated Credit Agreement without penalty, provided that(c) Represents cost incurred with respect to prepaymentthe purchase and implementation of the Revolver at least $0.1 million remains outstanding. Our obligationsCompany’s enterprise resource planning system, in an aggregate amount under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default, which include customary events for a financing arrangement of this type, including, without limitation, payment defaults, defaults in the performance of affirmative or negative covenants (including financial ratio maintenance requirements), bankruptcy or related defaults, defaults on certain other indebtedness, the material inaccuracy of representations or warranties, material adverse changes, and changes relateddefinition, not to ownershipexceed (i) $200,000 during each of the U.S. Borrower or Unique Fabricating, Inc. In the event of an event of default, the interest rate on the Revolver and New US Term Loan and CA Term Loan will increase to the then applicable rate. The Amended and Restated Credit Agreement requires that,Company’s fiscal quarters in addition to scheduled principal payments, we repay both the New US Term Loan and CA Term Loan principal annually in an amount equal to (a) 50% of excess cash flow, as defined, if the total leverage ratio, as defined, as calculated as2020, (ii) $100,000 during each of the end of such year is greater than or equalCompany’s fiscal quarters in 2021, and (iii) $0 with respect to 2.75 to 1.00, or (b) 25% of excess cash flow calculated as ofany calculation thereafter
(d) Represents costs and expenses incurred in connection with the end of any fiscal year that out total leverage ratio is greater than or equal to 2.00 to 1.00 but less than 2.75 to 1.00.
The US Borrower's obligations under the Amended and Restated Credit Agreement are guaranteed by each of its United States subsidiaries and by Unique Fabricating, Inc. and secured by a first priority security interest in all tangible and intangible assets, including a pledge of capital stock of the United States subsidiaries of the US Borrower and of 65% of the capital stock of the CA Borrower, and by mortgages on our facilities in LaFayette, Georgia, Louisville, Kentucky, and Evansville, Indiana. The US borrower guarantees all the obligations and liabilities of the CA Borrower. Unique Fabricating, Inc. also pledged all the capital stock of the US Borrower. The FourthEighth Amendment provided for the discharge and release of the mortgage on the Ft. Smith, Arkansas facility subject to the application of the net proceeds of its sale to reduce borrowings under the Revolver.
Effective June 30, 2016, as required under the Credit Agreement, the Company purchased a derivative financial instrument, in the form of an interest rate swap, for the purpose of hedging certain identifiable transactions in order to mitigate risks related to cash flow variability caused by interest rate fluctuations. The Company elected not to apply hedge accounting
for financial reporting purposes. The interest rate swap requires the Company to pay a fixed rate of 1.055% while receiving a variable rate of one-month LIBOR. The notional amount at the effective date began at $16.7 million and decreased by $0.3 million each quarter until June 30, 2017, decreased by $0.4 million per quarter until June 29, 2018, when it began decreasing by $0.5 million until it expires on June 28, 2019. The interest rate swap was recognized at its fair value. Monthly settlement payments due on the interest rate swap and changes in its fair value are recognized as interest expense in the period incurred. Please see Note 7 of our consolidated financial statements for further information.
Effective October 2, 2017, as required under the Second Amendment to the Credit Agreement, as discussed in Note 7 of our consolidated financial statements, the Company entered into an interest rate swap which requires the Company to pay a fixed rate of 1.093% percent per annum while receiving a variable interest rate per annum based on one month LIBOR for a net monthly settlement based on half of the notional amount beginning immediately. The notional amount at the effective date was $1.9 million and decreases by $0.1 million each quarter until it expires on September 30, 2020. The interest rate swap is recognized at its fair value, and monthly settlement payments due on the interest rate swap and changes in its fair value are recognized as interest expense in the period incurred.
Effective November 30, 2018, as required under the Amended and Restated Credit Agreement, the Company entered into another interest rate swap that requires the Company to pay a fixed rate of 3.075% per annum while receiving a variable interest rate per annum based on the one month LIBOR for a net monthly settlement based on the notional amount in effect. The notional amount at the effective date was $5.04 million which increased by $0.38 million each quarter until June 28, 2019 when the notional amount increased to $17.54 million due to the interest rate swap from 2016 above expiring. The notional amount then decreases each quarter by $0.15 million until September 30, 2020 when the notional amount increases to $17.48 million due to the interest rate swap from 2017 above expiring. The notional amount then decreases each quarter by $0.43 million until December 31, 2021, then decreases each subsequent quarter by $0.61 million until it expires on November 8, 2023.The Company has elected not to apply hedge accounting for financial reporting purposes on all its swaps.
We must comply with a minimum debt service financial covenant and a senior funded indebtedness to EBITDA covenant, as revised under the Waiver and Fourth Amendment (the “Fourth Amendment”) to the Amended and Restated Credit Agreement, with Citizens, actingin an aggregate amount not to exceed $175,000
(e) Total Consolidated Indebtedness, as Administrative Agent, anddefined, excludes the other lenders. The Fourth Amendment provided a permanent waiver$6.0 million PPP loan for covenant purposes until final determination by the LendersSBA and Agent with respect toLender on whether the Borrower's failure to maintain a total leverage ratio,PPP loan will be forgiven
(f) Ratio of Total Consolidated Indebtedness, as defined, not in excess of 3.50 to 1.00divided by Consolidated EBITDA, as of Marchdefined. To calculate the Total Leverage Ratio at December 31, 2019. The Fourth Amendment also revised2020, the definition of consolidatedConsolidated EBITDA and certain financial covenants, includingfor the maximum total leverage ratio and the minimum debt service coverage ratio, as well as added the requirement that the Company maintain minimum liquidity and minimum unadjusted consolidated EBITDA, each as defined.six months ended December 30, 2020 is annualized by multiplying it by 2
The Amended and Restated Credit Agreement also contains customary affirmative covenants, including: (1) maintenance of legal existence and compliance with laws and regulations; (2) delivery of consolidated financial statements and other information; (3) maintenance of properties in good working order; (4) payment of taxes; (5) delivery of notices of defaults, litigation, ERISA events and material adverse changes; (6) maintenance of adequate insurance; and (7) inspection of books and records.
The Amended and Restated Credit Agreement contains customary negative covenants, including restrictions on: (1) the incurrence of additional debt; (2) liens and sale-leaseback transactions; (3) loans and investments; (4) guarantees and hedging agreements; (5) the sale, transfer or disposition of assets and businesses; (6) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the issuer by its subsidiaries; (7) transactions with affiliates; (8) changes in the business conducted by us; (9) payment or amendment of subordinated debt and organizational documents; and (10) maximum capital expenditures. The Amended and Restated Credit Agreement prohibits the payment of any dividend, redemption or other payment or distribution by the Borrowers other than distributions to the US Borrower by its subsidiaries, unless after giving effect to the dividend or other distribution, the post distribution DSCR, as defined, is greater than 1.1 to 1.0, and the US Borrower's liquidity, as defined is no less than $5.0 million, plus Borrowers remain in compliance with the other financial covenants.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
Indemnification Agreements
In the normal course of business, we provide customers with indemnification provisions of varying scope against claims of intellectual property infringement by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ equity or consolidated cash flows.
Contractual Obligations and Commitments
The following table summarizes our future minimum payments under contractual commitments as of December 29, 2019:
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
Contractual Obligations | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| (In thousands) |
Operating leases | $ | 15,063 |
| | $ | 2,332 |
| | $ | 3,965 |
| | $ | 2,309 |
| | $ | 6,457 |
|
Long-term debt (1) | $ | 57,719 |
| | $ | 6,002 |
| | $ | 13,987 |
| | $ | 37,730 |
| | $ | — |
|
Management services agreement (2) | $ | 900 |
| | $ | 225 |
| | $ | 450 |
| | $ | 225 |
| | $ | — |
|
(1) The total interest reported includes $2.7 million of variable rate interest on our revolving line of credit and $6.8 million of variable rate interest on our term loans.
(2) Assumes the extension of the management services agreement which renews automatically each year for additional one-year terms.
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect amounts reported in those statements. We have made our best estimates of certain amounts contained in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. These form the basis for making judgments about the carrying value of assets and liabilities. However, actual results could differ materially from these estimates that are based upon the exercise of judgment and use of assumptions as to future uncertainties. Management believes that the estimates, assumptions, and judgments involved in the accounting policies described below have the most significant impact on our consolidated financial statements.
Acquisitions
Acquisitions. In accordance with accounting guidance for the provisions in Financial Accounting Standards Board Accounting Standards Codification 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analysis. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Other estimates used in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Revenue Recognition
Recognition. Revenue is recognized by the Company once all performance obligations under the terms of a contract with the Company's customers are satisfied. Generally, this occurs with the transfer of control of its automotive, HVAC, and other products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products. The Company’s payment terms vary by the type and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.
In general, for sales arrangements, the Company deems control to transfer at a single point in time and recognizes revenue when it ships products from its manufacturing facilities to its customers. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to transfer upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, and the customer has significant risks and rewards of ownership of the asset. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
Stock Based Compensation
Compensation. The Company accounts for its stock-based compensation using the fair value of the award estimated at the grant date of the award. The Company estimates the fair value of awards, consisting of stock options, using the Black Scholes option pricing model. Compensation expense is recognized in earnings using the straight-line method over the vesting period, which represents the requisite service period.
Accounts Receivable Allowance
Allowance. Establishing valuation allowances for doubtful accounts requires the use of estimates and judgment regarding the risks associated with ultimate realization. We establish the allowance for doubtful accounts based upon an analysis of the aging of receivables at the end of each period with consideration given to specific customer credit issues. Changes to our assumptions could materially affect our recorded allowance. The Company has a large and diverse customer base with no customer greater than 10% of the total receivables at any point of time. A general economic downturn or other significant economic factor could result in higher than expected defaults resulting in the need to revise the allowance.
Inventory
Inventories. Inventories are valued at lower of cost or market,net realizable value, using the first-in, first-out (FIFO) method. Inventory includes the cost of materials, labor, and overhead. Abnormal amounts of idle facility expense, freight in, handling costs and spoilage are recognized as current period charges. Overhead is allocated to inventory based upon normal capacity at the production facility.
During the third quarter of 2019, the Company increased the inventory allowance by $1.7 million which is included in cost of sales in the consolidated statement of operations. See Note 3 to our consolidated financial statements for further information.
Goodwill
We review our goodwill for impairment annually as part of our year-end procedures, or whenever adverse events or changes in circumstances indicate a possible impairment. If it is determined that it is more likely than not that the fair value is greater than the carrying value of a reporting unit then a qualitative assessment may be used for the annual impairment test. Otherwise, a one-step process is used which requires estimating the fair value of each reporting unit compared to the carrying value. If the carrying value exceeds the estimated fair value, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
The determination of the fair value of the reporting unit and corresponding goodwill require us to make significant judgments and estimates and are subject to a considerable degree of uncertainty. We believe that the assumptions and estimates in our review of goodwill for impairment are reasonable. However, different assumptions could materially affect our conclusions on this matter. Currently, the reporting unit is not at risk of impairment.
The Company performed the annual quantitative assessment as of December 29, 2019,31, 2020, utilizing a combination of the income and market approaches. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value by approximately 40.0%70.0%. Key assumptions used in the analysis were a discount rate of 14.0%13.0%, EBITDA margin of 11%8% in 20202021 and 12%at least 9.5% thereafter and a terminal growth rate of 2.0%2.5%. Future events and changing market conditions may, however, lead the Company to reevaluate the assumptions that have been used to test for goodwill impairment, including key assumptions used in the expected EBITDA margins, cash flows and discount rates, as well as other assumptions with respect to matters out of the Company’s control, such as discount rates and market multiples of comparable companies. A sensitivity analysis around
There are many uncertainties regarding the key assumptions showedCOVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows. As a 170 basis point decline in EBITDA margin for 2021and forward would have resulted inresult, if there is an adverse change to the Company’s projected financial information, due to business performance or market conditions, this may be indicative that the fair value of theits reporting unit approximatingunits and indefinite-lived intangible assets have declined below their carrying value andvalues, which may result in non-cash goodwill or intangible asset impairment charges in a 260 basis point increase in the discount rate would have resulted in the fair value of the reporting unit approximating the carrying value.future period.
Impairment and Amortization of Long-Lived and Intangible Assets
Assets. Our identifiable intangible assets are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible is realized, over its estimated useful life. The remaining useful lives of intangible assets are reviewed annually to determine whether events and circumstances warrant a revision to the remaining period of amortization. Our long-lived assets and intangible assets subject to amortization are reviewed for impairment whenever adverse events or changes in circumstances indicate that the related carrying amount may be impaired. An impairment loss is recognized when the carrying value of a long-lived asset exceeds its fair value. Significant judgments and estimates are used by management when evaluating long-lived assets for impairment. If
management used different estimates and assumptions in its impairment tests, then the Company could recognize different amounts of expense over future periods.
Income Taxes
Taxes. Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
When establishing a valuation allowance, we consider future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry-forwards” and “tax planning strategies.” A tax planning strategy is defined as “an action that: is prudent and feasible; an enterprise ordinarily might not take but would take to prevent an operating loss or tax credit carry-forward from expiring unused; and would result in realization of deferred tax assets.” In the event we determine it is more likely than not that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. The valuation of deferred tax assets requires judgment and accounting for the deferred tax effect of events that have been recorded in the financial statements or in tax returns and our future projected profitability. Changes in our estimates, due to unforeseen events or otherwise, could have a material impact on our financial condition and results of operations.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. The amount of income taxes we pay is subject to audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and
circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense. We do not believe there is a reasonable likelihood that there will be a material change in the tax related balances or valuation allowance balances. However, due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate.
Recently Issued Accounting Pronouncements
Refer to Note 13 to the consolidated financial statements in Part II Item 88. of this Annual Report on Form 10-K.
ITEMItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have United States, MexicoQuantitative and Canada operations and are exposed to market interest rate and foreign exchange risks in the ordinary course of our business.
Interest Rate FluctuationQualitative Disclosures About Market Risk
Not applicable.
Our borrowings under our Credit Agreement bear interest at fluctuating rates. In order to mitigate, the potential effects of the fluctuating rates, effective June 30, 2016, we entered into a interest rate swap with a notional amount initially of $16.7 million, which decreased by $0.3 million each quarter until June 30, 2017, and began decreasing by $0.4 million each quarter until June 29, 2018, when it began decreasing by $0.5 million per quarter until the swap terminated on June 28, 2019. The interest rate swap required the Company to pay a fixed rate of 1.055 percent per annum while receiving a variable rate per annum based upon the one-month LIBOR rate for a net monthly settlement based on the notional amount in effect. This swap terminated an old swap that we entered into on January 17, 2014 under our old senior credit facility. See Note 7 of our consolidated financial statements for further information.
Effective October 2, 2017, as required under the Second Amendment to the Credit Agreement, as discussed in Note 7 of our consolidated financial statements, the Company entered into another interest rate swap that requires the Company to pay a fixed rate of 1.093% percent per annum while receiving a variable interest rate per annum based on one month LIBOR for a net monthly settlement based on the notional amount in effect. The notional amount at the effective date was $1.90 million which decreases by $0.10 million each quarter until it expires on September 30, 2020.
Effective November 30, 2018, as required under the Amended and Restated Credit Agreement, the Company entered into another interest rate swap that requires the Company to pay a fixed rate of 3.075 per annum which receiving a variable interest rate per annum based on the one month LIBOR for a net monthly settlement based on the notional amount in effect. The notional amount at the effective date was $5,037,500 which increased by $378,125 each quarter until June 29, 2018 when the notional amount increased to $17,540,625 due to the interest rate swap from 2016 above expired. The notional amount then decreased each quarter by $153,125 until September 30, 2020 when the notional amount increased to $17,475,000 due to the interest rate swap from 2017 above expired. The notional amount then decreased each quarter by $431,250 until December 31, 2021, then decreased each subsequent quarter by $609,375 until it expires on November 8, 2023.
The Company received $34,067, in the aggregate, in net monthly settlements with respect to the interest rate swaps for the 52 weeks ended December 29, 2019.The Company paid $(113,025), in the aggregate, in net monthly settlements with respect to the interest rate swap above for the 52 weeks ended December 30, 2018
We do not believe that an increase or decrease in interest rates of 100 basis points related to our swaps would have a material effect on our operating results or financial condition.
ITEMItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Unique Fabricating, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Unique Fabricating, Inc. and subsidiaries (the "Company"“Company”) as of December 29, 201931, 2020 and December 30, 2018,29, 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the fifty-two week periodsfiscal years ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 201729, 2019, and the related notes (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 201931, 2020 and December 30, 2018,29, 2019, and the results of its operations and its cash flows for each of the fifty-two week periodsfiscal years ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 2017,29, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is not in compliance with certain covenants of its long-term credit agreement and does not have sufficient liquidity to repay the debt, which is now currently due, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Cash and Inventory – Refer to Notes 2 and 5 to the financial statements and Management’s Report on Internal Control Over Financial Reporting
Critical Audit Matter Description
In connection with preparing its financial statements for the year ended December 31, 2020, the Company identified errors that were not detected timely as a result of material weaknesses within certain controls. As discussed in Management’s Report on Internal Control Over Financial Reporting, the Company did not maintain effective internal control over financial reporting and identified material weaknesses related to its control environment, risk assessment, monitoring, and control activities, including ineffective controls over (1) the review and approval of manual journal entries and (2) cash and inventory account reconciliation processes.
We identified a critical audit matter related to cash and inventory as a result of the errors and material weaknesses, which required us to modify the nature and extent of audit effort as it relates to these accounts, including the use of more experienced engagement team members and the extent of direction and supervision of engagement team members.
How the Critical Audit Matter Was Addressed in the Audit
Our response to the critical audit matter identified above was to use more experienced engagement team members in conducting our audit procedures, increase the direction and supervision of engagement team members, increase the extent of testing, and modify the nature of audit procedures performed.
/s/ Deloitte & Touche LLP
Detroit, Michigan
March 26, 2020April 15, 2021
We have served as the Company'sCompany’s auditor since 2016
UNIQUE FABRICATING, INC.
Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS
(InDollars in thousands)
| | | | | | | | | | | |
| December 31, 2020 | | December 29, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 760 | | | $ | 650 | |
Accounts receivable, net | 23,759 | | | 24,701 | |
Inventories, net | 11,951 | | | 13,047 | |
Prepaid expenses and other current assets: | | | |
Prepaid expenses and other | 5,643 | | | 2,108 | |
Refundable taxes | 4,027 | | | 1,049 | |
Assets held for sale | 0 | | | 1,003 | |
Total current assets | 46,140 | | | 42,558 | |
Property, plant, and equipment, net | 22,383 | | | 23,415 | |
Goodwill | 22,111 | | | 22,111 | |
Intangible assets | 7,605 | | | 11,625 | |
Other assets: | | | |
Operating leases | 10,415 | | | 0 | |
Investments, at cost | 1,054 | | | 1,054 | |
Deposits and other assets | 579 | | | 226 | |
Deferred tax asset | 893 | | | 679 | |
Total assets | $ | 111,180 | | | $ | 101,668 | |
Liabilities and Stockholders’ Equity | | | |
Current Liabilities: | | | |
Accounts payable | $ | 10,892 | | | $ | 9,324 | |
Current maturities of long-term debt | 35,864 | | | 2,847 | |
Income taxes payable | 204 | | | 0 | |
Revolver, current maturities | 11,494 | | | 0 | |
Accrued compensation | 792 | | | 1,225 | |
Other accrued liabilities | 4,551 | | | 1,979 | |
| | | |
Total current liabilities | 63,797 | | | 15,375 | |
Long-term debt, net of current portion | 2,999 | | | 33,220 | |
Revolver | 0 | | | 11,418 | |
Other long-term liabilities: | | | |
Deferred tax liability | 0 | | | 1,324 | |
Other long term liabilities | 10,519 | | | 871 | |
Total liabilities | 77,315 | | | 62,208 | |
Stockholders’ Equity: | | | |
Common stock, $0.001 par value – 15,000,000 shares authorized and 9,779,147 and 9,779,147 issued and outstanding at December 31, 2020 and December 29, 2019, respectively | 10 | | | 10 | |
Additional paid-in-capital | 46,126 | | | 46,011 | |
Accumulated deficit | (12,271) | | | (6,561) | |
Total stockholders’ equity | 33,865 | | | 39,460 | |
Total liabilities and stockholders’ equity | $ | 111,180 | | | $ | 101,668 | |
The accompanying notes are an integral part of these Consolidated Statements.
UNIQUE FABRICATING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
Net Sales | $ | 120,214 | | | $ | 152,489 | |
Cost of Sales | 99,543 | | | 120,981 | |
Gross Profit | 20,671 | | | 31,508 | |
Selling, general, and administrative expenses | 25,484 | | | 26,751 | |
Impairment | 0 | | | 6,760 | |
Restructuring expenses | 1,230 | | | 2,752 | |
Operating loss | (6,043) | | | (4,755) | |
Other income (expense) | | | |
| | | |
Other, net | 157 | | | 11 | |
Interest expense | (3,608) | | | (4,287) | |
Other expense, net | (3,451) | | | (4,276) | |
Loss before income tax (benefit) | (9,494) | | | (9,031) | |
Income tax expense (benefit) | (3,784) | | | 37 | |
Net loss | $ | (5,710) | | | $ | (9,068) | |
Net loss per share | | | |
Basic | $ | (0.58) | | | $ | (0.93) | |
Diluted | $ | (0.58) | | | $ | (0.93) | |
Dividends declared per share | $ | 0 | | | $ | 0.05 | |
The accompanying notes are an integral part of these Consolidated Statements.
|
| | | | | | | |
| December 29, 2019 | | December 30, 2018 |
Assets | |
| | |
Current Assets | |
| | |
Cash and cash equivalents | $ | 650 |
| | $ | 1,410 |
|
Accounts receivable – net | 24,701 |
| | 30,831 |
|
Inventory – net | 13,047 |
| | 16,286 |
|
Prepaid expenses and other current assets: | |
| | |
Prepaid expenses and other | 2,108 |
| | 2,511 |
|
Refundable taxes | 1,049 |
| | 983 |
|
Assets held for sale | 1,003 |
| | — |
|
Total current assets | 42,558 |
| | 52,021 |
|
Property, Plant, and Equipment – Net | 23,415 |
| | 25,078 |
|
Goodwill | 22,111 |
| | 28,871 |
|
Intangible Assets | 11,625 |
| | 15,568 |
|
Other assets | | | |
Investments – at cost | 1,054 |
| | 1,054 |
|
Deposits and other assets | 226 |
| | 199 |
|
Deferred tax asset | 679 |
| | 496 |
|
Total assets | $ | 101,668 |
| | $ | 123,287 |
|
Liabilities and Stockholders’ Equity | |
| | |
Current Liabilities | |
| | |
Accounts payable | $ | 9,324 |
| | $ | 11,465 |
|
Current maturities of long-term debt | 2,847 |
| | 3,350 |
|
Income taxes payable | — |
| | 41 |
|
Accrued compensation | 1,225 |
| | 2,848 |
|
Other accrued liabilities | 1,979 |
| | 1,432 |
|
Total current liabilities | 15,375 |
| | 19,136 |
|
Long-term debt – net of current portion | 33,220 |
| | 34,668 |
|
Line of credit - net | 11,418 |
| | 17,905 |
|
Other long-term liabilities | 871 |
| | 395 |
|
Deferred tax liability | 1,324 |
| | 2,295 |
|
Total liabilities | 62,208 |
| | 74,399 |
|
Stockholders’ Equity | | | |
Common stock, $0.001 par value – 15,000,000 shares authorized and 9,779,147 and 9,779,147 issued and outstanding at December 29, 2019 and December 30, 2018, respectively | 10 |
| | 10 |
|
Additional paid-in-capital | 46,011 |
| | 45,881 |
|
Retained earnings (accumulated deficit) | (6,561 | ) | | 2,997 |
|
Total stockholders’ equity | 39,460 |
| | 48,888 |
|
Total liabilities and stockholders’ equity | $ | 101,668 |
| | $ | 123,287 |
|
See Notes to Consolidated Financial Statements.
UNIQUE FABRICATING, INC.
Consolidated Statements of OperationsCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
|
| | | | | | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
Net sales | $ | 152,489 |
| | $ | 174,910 |
| | $ | 175,288 |
|
Cost of sales | 120,981 |
| | 135,575 |
| | 135,234 |
|
Gross profit | 31,508 |
| | 39,335 |
| | 40,054 |
|
Selling, general, and administrative expenses | 26,751 |
| | 29,781 |
| | 29,767 |
|
Impairment of goodwill | 6,760 |
| | — |
| | — |
|
Restructuring expenses | 2,752 |
| | 1,156 |
| | — |
|
Operating (loss) income | (4,755 | ) | | 8,398 |
| | 10,287 |
|
Non-operating Income (Expense) | |
| | | | |
Other income (expense) | 11 |
| | (59 | ) | | 79 |
|
Interest expense | (4,287 | ) | | (3,778 | ) | | (2,746 | ) |
Total non-operating expense | (4,276 | ) | | (3,837 | ) | | (2,667 | ) |
(Loss) income – before income taxes | (9,031 | ) | | 4,561 |
| | 7,620 |
|
Income tax expense | 37 |
| | 862 |
| | 1,133 |
|
Net (loss) income | $ | (9,068 | ) | | $ | 3,699 |
| | $ | 6,487 |
|
Net (loss) income per share | |
| | | | |
Basic | $ | (0.93 | ) | | $ | 0.38 |
| | $ | 0.67 |
|
Diluted | $ | (0.93 | ) | | $ | 0.37 |
| | $ | 0.66 |
|
Cash dividends per share | $ | 0.05 |
| | $ | 0.60 |
| | $ | 0.60 |
|
See Notes to Consolidated Financial Statements.
UNIQUE FABRICATING, INC.
Consolidated Statements of Stockholders’ Equity
(InDollars in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity |
Balance - December 31, 2018 | 9,779,147 | | | $ | 10 | | | $ | 45,881 | | | $ | 2,997 | | | $ | 48,888 | |
Net loss | — | | | — | | | — | | | (9,068) | | | (9,068) | |
Stock option expense | — | | | — | | | 130 | | | — | | | 130 | |
| | | | | | | | | |
Cash dividends paid | — | | | — | | | — | | | (490) | | | (490) | |
Balance - December 29, 2019 | 9,779,147 | | | $ | 10 | | | $ | 46,011 | | | $ | (6,561) | | | $ | 39,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity |
Balance - December 29, 2019 | 9,779,147 | | | $ | 10 | | | $ | 46,011 | | | $ | (6,561) | | | $ | 39,460 | |
Net loss | — | | | — | | | — | | | (5,710) | | | (5,710) | |
Stock option expense | — | | | — | | | 115 | | | — | | | 115 | |
| | | | | | | | | |
| | | | | | | | | |
Balance - December 31, 2020 | 9,779,147 | | | $ | 10 | | | $ | 46,126 | | | $ | (12,271) | | | $ | 33,865 | |
The accompanying notes are an integral part of these Consolidated Statements.
|
| | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity |
Balance - January 2, 2017 | 9,719,772 |
| | $ | 10 |
| | $ | 45,525 |
| | $ | 4,524 |
| | $ | 50,059 |
|
Net income | — |
| | — |
| | — |
| | 6,487 |
| | 6,487 |
|
Stock option expense | — |
| | — |
| | 150 |
| | — |
| | 150 |
|
Exercise of warrants and options for common stock | 37,791 |
| | — |
| | 37 |
| | — |
| | 37 |
|
Cash dividends paid | — |
| | — |
| | — |
| | (5,851 | ) | | (5,851 | ) |
Balance - December 31, 2017 | 9,757,563 |
| | $ | 10 |
| | $ | 45,712 |
| | $ | 5,160 |
| | $ | 50,882 |
|
|
| | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity |
Balance - January 1, 2018 | 9,757,563 |
| | $ | 10 |
| | $ | 45,712 |
| | $ | 5,160 |
| | $ | 50,882 |
|
Net income | — |
| | — |
| | — |
| | 3,699 |
| | 3,699 |
|
Stock option expense | — |
| | — |
| | 131 |
| | — |
| | 131 |
|
Exercise of warrants and options for common stock | 21,584 |
| | — |
| | 38 |
| | — |
| | 38 |
|
Cash dividends paid | — |
| | — |
| | — |
| | (5,862 | ) | | (5,862 | ) |
Balance - December 30, 2018 | 9,779,147 |
| | $ | 10 |
| | $ | 45,881 |
| | $ | 2,997 |
| | $ | 48,888 |
|
|
| | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity |
Balance - December 31, 2018 | 9,779,147 |
| | $ | 10 |
| | $ | 45,881 |
| | $ | 2,997 |
| | $ | 48,888 |
|
Net loss | — |
| | — |
| | — |
| | (9,068 | ) | | (9,068 | ) |
Stock option expense | — |
| | — |
| | 130 |
| | — |
| | 130 |
|
Cash dividends paid | — |
| | — |
| | — |
| | (490 | ) | | (490 | ) |
Balance - December 29, 2019 | 9,779,147 |
| | $ | 10 |
| | $ | 46,011 |
| | $ | (6,561 | ) | | $ | 39,460 |
|
See Notes to Consolidated Financial Statements.
UNIQUE FABRICATING, INC.
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
(InDollars in thousands)
|
| | | | | | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
Cash Flows from Operating Activities | |
| | |
| | |
Net (loss) income | $ | (9,068 | ) | | $ | 3,699 |
| | $ | 6,487 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
|
Impairment of goodwill | 6,760 |
| | — |
| | — |
|
Inventory adjustment | 1,742 |
| | — |
| | — |
|
Depreciation and amortization | 6,863 |
| | 6,630 |
| | 6,320 |
|
Amortization of debt issuance costs | 177 |
| | 147 |
| | 149 |
|
Loss (gain) on sale of assets | 68 |
| | (138 | ) | | 63 |
|
Loss on extinguishment of debt | — |
| | 59 |
| | — |
|
Bad debt adjustment | 243 |
| | 13 |
| | 128 |
|
Loss (gain) on derivative instruments | 578 |
| | 452 |
| | (228 | ) |
Stock option expense | 130 |
| | 131 |
| | 150 |
|
Deferred income taxes | (1,132 | ) | | (291 | ) | | (1,553 | ) |
Changes in operating assets and liabilities that provided (used) cash: | |
| | |
| | |
|
Accounts receivable | 5,888 |
| | (3,641 | ) | | (444 | ) |
Inventory | 2,584 |
| | 45 |
| | 402 |
|
Prepaid expenses and other assets | (570 | ) | | 1,212 |
| | (1,766 | ) |
Accounts payable | (1,104 | ) | | 1,008 |
| | (1,706 | ) |
Accrued and other liabilities | (1,138 | ) | | 104 |
| | (194 | ) |
Net cash provided by operating activities | 12,021 |
| | 9,430 |
| | 7,808 |
|
Cash Flows from Investing Activities | |
| | |
| | |
|
Purchases of property and equipment | (2,759 | ) | | (5,393 | ) | | (4,140 | ) |
Proceeds from sale of property and equipment | 119 |
| | 904 |
| | 52 |
|
Net cash used in investing activities | (2,640 | ) | | (4,489 | ) | | (4,088 | ) |
Cash Flows from Financing Activities | |
| | |
| | |
|
Net change in bank overdraft | (1,036 | ) | | (1,251 | ) | | (38 | ) |
Proceeds from debt | 1,300 |
| | 10,132 |
| | — |
|
Payments on term loans | (3,350 | ) | | (2,963 | ) | | (3,375 | ) |
(Repayments on) proceeds from revolving credit facilities, net | (6,565 | ) | | (4,422 | ) | | 6,231 |
|
Debt issuance costs | — |
| | (634 | ) | | — |
|
Proceeds from exercise of stock options and warrants | — |
| | 38 |
| | 37 |
|
Distribution of cash dividends | (490 | ) | | (5,862 | ) | | (5,850 | ) |
Net cash used in financing activities | (10,141 | ) | | (4,962 | ) | | (2,995 | ) |
Net (Decrease) increase in Cash and Cash Equivalents | (760 | ) | | (21 | ) | | 725 |
|
Cash and Cash Equivalents – Beginning of period | 1,410 |
| | 1,431 |
| | 706 |
|
Cash and Cash Equivalents – End of period | $ | 650 |
| | $ | 1,410 |
| | $ | 1,431 |
|
Supplemental Disclosure of Cash Flow Information – Cash paid for | |
| | |
| | |
Interest | $ | 4,104 |
| | $ | 3,575 |
| | $ | 2,567 |
|
Income taxes | $ | 438 |
| | $ | 1,339 |
| | $ | 2,232 |
|
See Notes to | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
Cash Flows from Operating Activities: | | | | |
Net loss | | $ | (5,710) | | | $ | (9,068) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | |
Impairment of goodwill | | 0 | | | 6,760 | |
Inventory adjustment | | 0 | | | 1,742 | |
Depreciation and amortization | | 7,085 | | | 6,863 | |
Amortization of debt issuance costs | | 189 | | | 177 | |
Loss on sale of assets | | 464 | | | 68 | |
Bad debt adjustment | | 740 | | | 243 | |
Loss on derivative instrument | | 329 | | | 578 | |
Stock option expense | | 115 | | | 130 | |
Deferred income taxes | | (1,539) | | | (1,132) | |
| | | | |
Accounts receivable | | 202 | | | 5,888 | |
Inventory | | 1,096 | | | 2,584 | |
Prepaid expenses and other assets | | (6,864) | | | (570) | |
Accounts payable | | 1,236 | | | (1,104) | |
Accrued and other liabilities | | (830) | | | (1,138) | |
Other, net | | 2,117 | | | 0 | |
Net cash provided by (used in) operating activities | | (1,370) | | | 12,021 | |
Cash Flows from Investing Activities: | | | | |
Capital expenditures | | (2,425) | | | (2,759) | |
Proceeds from sale of property and equipment | | 889 | | | 119 | |
Net cash used in investing activities | | (1,536) | | | (2,640) | |
Cash Flows from Financing Activities: | | | | |
Net change in bank overdraft | | 332 | | | (1,036) | |
Proceeds from debt | | 0 | | | 1,300 | |
Payments on term loans and capital expenditure line | | (3,161) | | | (3,350) | |
Payments on revolving credit facilities | | (29,576) | | | (29,586) | |
Proceeds from revolving credit facilities | | 29,573 | | | 23,021 | |
Debt issuance costs | | (151) | | | 0 | |
Proceeds from PPP Note | | 5,999 | | | 0 | |
Proceeds from exercise of stock options and warrants | | 0 | | | 0 | |
Distribution of cash dividends | | 0 | | | (490) | |
Net cash provided by (used in) financing activities | | 3,016 | | | (10,141) | |
Cash and Cash Equivalents: | | | | |
Net increase (decrease) in cash and cash equivalents | | 110 | | | (760) | |
Cash and cash equivalents – beginning of period | | 650 | | | 1,410 | |
Cash and cash equivalents – end of period | | $ | 760 | | | $ | 650 | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest | | $ | 2,732 | | | $ | 4,104 | |
Cash paid for income taxes | | $ | 52 | | | $ | 438 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 —1. Nature of Business and Significant Accounting PoliciesBasis of Presentation
Nature of Business — UFI Acquisition, Inc. (“UFI”), a Delaware corporation, was formed on January 14, 2013, for the purpose of acquiring
Unique Fabricating, Inc. (the “Company”) engineers and its subsidiariesmanufactures components for customers in the transportation, appliance, medical, and consumer off-road markets. The Company’s solutions are comprised of multi-material foam, rubber, and plastic components and utilized in noise, vibration and harshness (“NVH”) management, acoustical management, water and air sealing, decorative and other functional applications. Unique Fabricating”leverages proprietary manufacturing processes, including die cutting, thermoforming, compression molding, fusion molding, and reaction injection molding to manufacture a wide range of products including air management products, heating ventilating and air conditioning (“HVAC”) (collectively, the “Company” or “Unique”) on March 18, 2013., seals, fender stuffers, air ducts, acoustical insulation, door water shields, gas tank pads, light gaskets, topper pads, mirror gaskets, glove box liners, personal protection equipment, and packaging. The Company operates as 1 operatingreportable segment and reporting segment to fabricate and broker foam and rubber products, which are primarily sold to original equipment manufacturers (“OEMs”) and tiered suppliersis headquartered in the automotive, appliance, water heater and heating, ventilation, and air conditioning (“HVAC”) industries. In September 2014, UFI changed its name to Unique Fabricating, Inc. which is now the parent company of the consolidated group. As a result of the name change, the subsidiary previously named Unique Fabricating, Inc. became Unique Fabricating NA, Inc.Auburn Hills, Michigan.
Basis of Presentation —
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Going Concern
The accompanyingCompany’s consolidated financial statements haveare prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company’s financial results for the six months ended December 31, 2020 resulted in a violation of certain of its financial covenants, as defined in the Company’s Credit Agreement (Note 8). As a result of the default, the lenders may accelerate the maturity of the debt and accordingly all debt subject to the Credit Agreement, totaling $44.4 million, has been prepared byclassified as current as of December 31, 2020. On April 9, 2021, the Company pursuantand its lenders entered into a 68-day forbearance agreement during which the Company will be able to borrow on its Revolver, subject to availability, and the Lenders will not accelerate the maturity of the Company’s debt. However, the Company does not have sufficient cash and cash equivalents on hand or available liquidity to repay outstanding debt under the Credit Agreement at expiration of the forbearance agreement. These events and conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year following the date that these financial statements are issued. In response to these conditions, the Company has been actively pursuing with Citizens Bank, National Association (“Citizens”), acting as lender and Administrative Agent, and other lenders (collectively, the “Lenders”) a waiver or amendment of its financial covenants prior to expiration of the forbearance agreement. However, these plans have not been finalized and are not within the Company’s control, and therefore cannot be deemed probable. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the rulesrecoverability and regulationsclassification of recorded asset amounts or the Securitiesamounts and Exchange Commission (the “SEC”).classification of liabilities that might result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Principles of ConsolidationConsolidation. —TheThe consolidated financial statements include the accounts of the Company and all subsidiaries over which the Company exercises control. All inter-company transactions and balances have been eliminated upon consolidation.
Fiscal YearsYear and Quarterly Periods. — TheHistorically the Company’s year-end and quarter-end periods endended on the Sunday closest to the end of the calendar year-end period.year and quarter-end periods. The 52-week fiscal year periods for 2019, 2018,2020 and 20172019 ended on December 31, 2020 and December 29, 2019, Decemberrespectively. For 2020, the quarters which were three months and year to date periods which were three, six, nine, and twelve months, respectively, ended on March 31, June 30, 2018,September 30, and December 31, 2017, respectively.2020. On March 13, 2020, the Company’s board of directors approved changing the Company’s year-end and quarter-end periods to match calendar year-end and quarter-end dates. The impact of this change on our 2020 result of operations is immaterial. All year, quarter, three month, and twelve month period references prior to 2020 relate to the Company’s fiscal year and fiscal quarters, as previously reported, unless otherwise stated. For ease of presentation, the Company refers to all annual periods
UNIQUE FABRICATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
presented in this Annual Report on Form 10-K as either the twelve months ended or year ended and all quarterly periods as the three months or quarter ended.
Cash and Cash EquivalentsEquivalents. — The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. The carrying value of cash and cash equivalents approximate fair value.
Accounts Receivable —. Accounts receivable are stated at the invoiced amount and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable collection in full of the existing accounts receivable. Management determines the allowance based on historical write off experience and an understanding of individual customer payment history and financial condition. Management reviews the allowance for doubtful accounts at regular intervals. Account balances are charged off against the allowance when management determines it is probable the receivable will not be recovered. The allowance for doubtful accounts was $0.9$1.2 million at December 31, 2020 and $0.7$0.9 million at December 29, 2019 and December 30, 2018, respectively.2019.
InventoryInventories. — Inventory isInventories are stated at the lower of cost or market,net realizable value, with cost determined on the first in, first out method (FIFO). Inventory acquired as partThe value of a business combinationinventories is recorded at itsreduced for excess and obsolescence based on management's review of on-hand inventories compared to historical and estimated fair value at the time of the business combination. The Company periodically evaluates inventory for obsolescence, excess quantities, slow moving goodsfuture sales and other impairments of value and establishes reserves for any identified impairments.usage. The allowance for inventory valuation was $1.0$0.4 million and $0.6$1.0 million at December 31, 2020 and December 29, 2019, and December 30, 2018 respectively.
Valuation of Long-Lived Assets —Assets. The carrying value of long-lived assets held for use is periodically evaluated when events or circumstances warrant such a review. The carrying value of a long-lived asset held for use is considered impaired when the anticipated separately identifiable undiscounted cash flows from the asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The Company determined that no impairment indicators were evident, and all originally assigned useful lives remained appropriate during the 52 weeksyears ended December 31, 2020 and December 29, 2019, December 30, 2018, and December 31, 2017, respectively.
Property, Plant, and EquipmentEquipment. — Property, plant, and equipment purchases are recorded at cost. Property, plant, and equipment acquired as part of a business combination are recorded at estimated fair value at the time of the business combination. Depreciation is calculated principally using the straight-line method over the estimated useful life of each asset. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the period of the related leases. Upon retirement or disposal, the initial cost or valuation and accumulated depreciation are removed from the accounts, and any gain or loss is included in net income. Repair and maintenance costs are expensed as incurred.the statement of operations.
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial Statements
Intangible Assets —. The Company does not hold any intangible assets with indefinite lives. Identifiable intangible assets recognized as part of a business combination are recorded at their estimated fair value at the time of the business combination. Amortizable intangible assets are reviewed for impairment whenever events or circumstances indicate that the related carrying amount may be impaired. The remaining useful lives of intangible assets are reviewed annually to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that no impairment indicators were evident, and all originally assigned useful lives remained appropriate during the 52 weeksyears ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 2017, respectively.29, 2019.
Goodwill —. Goodwill represents the excess of the acquisition cost of consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed from business combinations at the date of acquisition. Goodwill is not amortized, but rather is assessed at least on an annual basis for impairment. If it is determined that it is more likely than not that the fair value is greater than the carrying value of a reporting unit then a qualitative assessment may be used for the annual impairment test. Otherwise, a one-step process is used which requires estimating the fair value of each reporting unit compared to its carrying value. If the carrying value exceeds the estimated fair value, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company has 1 reporting and operating unit for goodwill testing purposes.
The Company performed the annual quantitative assessment as of December 31, 2020, utilizing a combination of the income and market approaches. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value by approximately 70.0%. Key assumptions used in the analysis were a discount rate of 13.0%, EBITDA margin of 8% in 2021 and at least 9.5% thereafter and a terminal growth rate of 2.5%.
During the second quarter of 2019, the Company experienced a decline in market capitalization, which is a potential indicator of impairment. As a result, the Company performed an interim quantitative assessment as of June 30, 2019, utilizing a combination of the income and market approaches, which were weighted evenly. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded the fair value of the reporting unit as of June 30, 2019. There was a $6.8 millionwere 0 impairment charges recognized during the 52 weeksyear ended December 31, 2020, however, $6.8 million of impairment charges were recognized during the year ended December 29, 2019 and $0 in December 30, 2018, and December 31, 2017, respectively.2019.
The Company performed the annual quantitative assessment as of December 29, 2019, utilizing a combination of the income and market approaches. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value by approximately 40.0%. Key assumptions used in the analysis were a discount rate of 14.0%, EBITDA margin of 11% in 2020 and 12% thereafter and a terminal growth rate of 2.0%.UNIQUE FABRICATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Issuance CostsCosts. — Debt issuance costs represent legal, consulting, and other financial costs associated with debt financing and are reported netted against the related debt instrument. Amounts paid to or on behalf of lenders are presented as debt discount, as a reduction of the noted debt instrument. Debt issuance costs on term debt are amortized using the straight linesstraight-line basis over the term of the related debt (which is immaterially different from the required effective interest method) while those related to revolving debt are amortized using a straight-line basis over the term of the related debt.
At December 29, 2019 and December 30, 2018, debt issuance costs were $0.3 million and $0.4 million, respectively, while amounts paid to or on behalf of lenders presented as debt discounts were $0.4 million and $0.5 million, respectively. On November 8, 2018, the Company amended its current Credit Agreement (the “Amended and Restated Credit Agreement”), which increased its term loan debt and is further described in Note 6. The Company reviewed this amendment for extinguishment accounting and concluded that there were 0 remaining debt issuance costs not amortizedInvestments. on the old revolving debt facility qualified for extinguishment accounting and were recognized as a loss on extinguishment immediately. The remaining unamortized debt issuance costs not extinguished on the old revolving debt facility and all the remaining unamortized debt issuance costs on the old term loans did not meet extinguishment accounting and therefore were carried forward to the new revolving debt facility and term loans.
Amortization expense has been recognized as a component of interest expense which includes both debt issuance costs and debt discounts in the amounts of $0.2 million for the 52 weeks ended December 29, 2019, $0.1 million for the 52 weeks ended December 30, 2018, and $0.1 million for the 52 weeks ended December 31, 2017, respectively.
Investments — FASBFinancial Accounting Standards Board (“FASB”) guidance requires certain equity securities to be measured at fair value, with changes in fair value recognized in earnings. For equity securities without readily determinable fair values, entities may elect to measure these securities at cost minus impairment, if any, adjusted for changes in observable prices. The Company does havehas a cost method investment in its consolidated financial statements, and there is not a readily determinable value for this investment. Impairment losses due to a decline in the value of the investment that is other than temporary are recognized when incurred. NaN impairment loss was recognized for the 52 weeksyears ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 2017, respectively.29, 2019.
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial Statements
Dividends received are included in income, except for those dividends received in excess of the Company’s proportionate share of accumulated earnings, which are applied as a reduction of the cost of the investment. Dividend income of less than $0.1 million and $0.1 million and $0 was recognized for the 52 weeksyears ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 2017,29, 2019, respectively. NaN impairment loss was recognized for the 52 weeksyears ended December 29, 2019, December 30, 2018,31, 2020 and December 31, 2017, respectively.
Accounts Payable — Under the Company’s cash management system, checks issued but not yet presented to the Company’s bank frequently result in overdraft balances for accounting purposes and are classified as accounts payable on the consolidated balance sheets. Accounts payable included $0.8 million and $1.8 million of checks issued in excess of available cash balances at December 29, 2019 and December 30, 2018, respectively.
2019.
Stock Based CompensationCompensation. — The Company accounts for its stock-based compensation using the fair value of the award estimated at the grant date of the award. The Company estimates the fair value of awards, consisting of stock options, using the Black Scholes option pricing model. Compensation expense is recognized in earnings using the straight-line method over the vesting period, which represents the requisite service period. The Company accounts for forfeitures as they occur.
Revenue RecognitionRecognition. —
The following table presents the Company's net sales disaggregated by major sales channel for the 52 weeks ended December 29, 2019 and December 30, 2018:
|
| | | | | | | | | | | |
| Fifty-Two Weeks Ended December 29, 2019 | | Fifty-Two Weeks Ended December 30, 2018 | | Fifty-Two Weeks Ended December 31, 2017 |
| (In thousands) |
Net Sales | | | | | |
Automotive | $ | 131,589 |
| | $ | 147,010 |
| | $ | 148,588 |
|
HVAC, water heater, and appliances | 13,600 |
| | 19,500 |
| | 19,200 |
|
Other | 7,300 |
| | 8,400 |
| | 7,500 |
|
Total | $ | 152,489 |
| | $ | 174,910 |
| | $ | 175,288 |
|
General Recognition Policy
Revenue is recognized by the Company once all performance obligations under the terms of a contract with the Company's customers are satisfied. Generally, this occurs with the transfer of control of its automotive, HVAC, and other products. Revenue is measured as the amount ofbased on consideration the Company expects to receivespecified in exchange for transferring its products. The Company’s payment terms vary by the type and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.
In general, for sales arrangements, the Company deems control to transfer at a single point in time and recognizes revenue when it ships products from its manufacturing facilities to its customers. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to transfer upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, and the customer has significant risks and rewards of ownership of the asset. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
Contract Balances
The timing of revenue recognition, billings and cash collections and payments results in billed accounts receivable. The Company does not have deferred revenue. Additionally, as noted above in the Accounts Receivable section, management reviews the allowance for doubtful accounts at regular intervals. Account balances are charged off against the allowance when management
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial Statements
determines it is probable the receivable will not be recovered. The allowance for doubtful account balances are noted above in the Accounts Receivable section.
Practical Expedients
The Company elects the practical expedient to expense costs incurred for costs to obtain a contract with a customer, when the amortization period would have been one year or less. These costs includeand excludes any sales commissions as the Company has determined annual compensation is commensurate with annual sales activities.
incentives and amounts collected on behalf of third parties. The Company electsrecognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
See Note 4, Revenues, for further information on the practical expedient that does not require the Company to adjust consideration for the effects of a significant financing component when the period between shipment of its products and customer’s payment is one year or less.
Company’s revenue recognition in accordance with Accounting Standards Codification (“ASC”) Topic 606.
Shipping and HandlingHandling. — Shipping and handling costs are included in cost of sales as they are incurred.
Income TaxesTaxes. — A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the period. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between financial reporting and tax accounting measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company also evaluates the need for valuation allowances to reduce the deferred tax assets to realizable amounts. Management evaluates all positive and negative evidence and uses judgment regarding past and future events, including operating results, to help determine when it is more likely than not that all or some portion of the deferred tax assets may not be realized. When appropriate, a valuation allowance is recorded against deferred tax assets to reserve for future tax benefits that may not be realized.
The Company recognizes the benefit of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Company assesses all tax positions for which the statute of limitations remains open. The Company had 0 unrecognized tax benefits as of December 31, 2020 or December 29, 2019, December 30, 2018, and December 31, 2017.2019. There were 0 penalties or interest recorded during the 52 weeksyears ended December 29, 2019, December 30, 2018,31, 2020 or December 31, 2017
29, 2019.
Foreign Currency AdjustmentsAdjustments. — The Company’s functional currency for all operations worldwide is the United States dollar. Nonmonetary assets and liabilities of foreign operations are remeasured at historical rates and monetary assets and liabilities are remeasured at exchange rates in effect at the end of each reporting period. Income statement accounts are remeasured at average exchange rates for the year. Gains and losses from translation of foreign currency financial statements into United States dollars are classified in other income in the consolidated statements of operations.
Concentration RisksRisks. — The Company is exposed to various significant concentration risks as follows:
Customer and Credit —
During the 52 weeksyears ended December 31, 2020 and December 29, 2019, December 30, 2018, and December 31, 2017, the Company’s sales were derived from customers principally engaged in the North American automotive industry. Company sales directly and indirectly to General Motors Company (“GM”), Fiat Chrysler Automobiles (“FCA”),Stellantis, and Ford Motor Company (“Ford”), as a percentage of total net sales were: 17, 16,9%, 6%, and 15 percent,6%, respectively, during the 52 weeksyear ended December 31, 2020; 9%, 5%, and 3%, respectively, during the year ended December 29, 2019; 15, 16, and 112019.
UNIQUE FABRICATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
None of the Company’s customers represented more than 10% percent respectively, duringof direct Company’s net sales for the 52 weeks ended December 30, 2018; and 14, 13, and 11 percent, respectively, during the 52 weeksyears ended December 31, 2017.
No Tier 1 suppliers represented more than 10 percent of direct Company sales for any period noted above.
2020 and December 29, 2019.
GM accounted for 87% and 14 percent8% of direct accounts receivable as of December 31, 2020 and December 29, 2019, and December 30, 2018, respectively.
Labor Markets —
At December 29, 2019, 65%31, 2020, 49% of our employees are working in the United States, 30%47% are working in Mexico, and 5%4% are working in Canada. 22% ofIn the United States, 37% of the hourly work force is covered under collective bargaining agreements that expire in August of 2022 and February of 2023.
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial Statements
Foreign Currency Exchange —
The expression of assets and liabilities in a currency other than the functional currency, which is the United States dollar, gives rise to exchange gains and losses when such assets and obligations are paid in another currency. Foreign currency exchange rate adjustments (i.e., differences between amounts recorded and actual amounts owed or paid) are reported in the consolidated statements of operations as the foreign currency fluctuations occur. Foreign currency exchange rate adjustments are reported in the consolidated statements of cash flowsoperations using the exchange rates in effect at the time of the cash flows.transaction. At December 29, 2019,31, 2020, the Company’s exposure to assets and liabilities denominated in another currency was not significant. To the extent there is a fluctuation in the exchange rates, the amount of local currency to be paid or received to satisfy foreign currency obligations in 20192021 may increase or decrease.
International Operations —
The Company manufactures and sells products outside of the United States primarily in Mexico and Canada. Foreign operations are subject to various political, economic and other risks and uncertainties inherent in foreign countries. Among other risks, the Company’s operations are subject to the risks of restrictions on transfers of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; political conditions; and governmental regulations. During the 52 weeksyears ended December 31, 2020 and December 29, 2019, December 30, 2018,22% and December 31, 2017, 18, 17, and 15 percent,18%, respectively, of the Company’s production occurred in Mexico. During the 52 weeksyears ended December 31, 2020 and December 29, 2019, December 30, 2018,9% and December 31, 2017, 8, 10, and 9 percent,8%, respectively, of the Company's production occurred in Canada. Sales derived from customers located in Mexico, Canada, and other foreign countries were 21, 10,14%, 6%, and 02% percent, respectively during the 52 weeksyear ended December 29, 2019, 17, 10,31, 2020, 21%, 10%, and 20% percent, respectively, during the 52 weeksyear ended December 30, 2018, and 15, 10, and 1 percent, respectively during the 52 weeks ended December 31, 2017, of the Company’s total sales.
29, 2019.
Derivative financial instrumentsinstruments. — All derivative instruments are required to be reported on the consolidated balance sheets at fair value unless the transactions qualify and are designated as normal purchases or sales. Changes in fair value are reported currently through earnings unless they meet hedge accounting criteria. See Note 79 for further information regarding the Company's derivative instrument makeup.
Use of EstimatesEstimates. — The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Examples include allowances for doubtful accounts and sales returns, allowances for inventory obsolescence, useful lives of depreciable assets, fixed asset and goodwill impairment analyses, valuation allowances for deferred tax assets, stock options, and financial instruments. Actual results could differ from those estimates.
Reclassifications.
Recently Issued Accounting Pronouncements — In May 2014,Certain prior period amounts have been reclassified to conform to the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes most of the existing guidance on revenue recognition in ASC Topic 605, Revenue Recognition, and establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligationscurrent year presentation in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer implementation of ASU 2014-09 by one year. The guidance is now currently effective for fiscal years beginning after December 15, 2018 and is to be applied retrospectively at the entity's election either to each prior reporting period presented or with the cumulative effect of application recognized at the date of initial application. The ASU allows for early adoption for fiscal years beginning after December 15, 2016, however, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments to all contracts using the modified retrospective method in its first quarter of 2019. To assess the impact of the new standard, the Company analyzed the standard's impact on customer contracts, comparing its historical accounting policies and practices to the requirements of the new standard, and identifying potential differences from application of the new standard's requirements. The Company reviewed material contracts and related agreements with customers and confirmed that the performance obligations do not change under ASC No. 606. In addition, the Company considered all relevant commercial variables to identify transaction consideration and has concluded there is not a material change in the determination of transaction pricing. Therefore, the Company has concluded that the adoption of the new revenue standards did not have a material impact on its consolidated financial statements as the method for recognizing revenue subsequent to the implementation of ASC No. 606 did not vary significantly from the revenue recognition practices under previous GAAP.
In January 2016, the FASB issued guidance, together with related, subsequently issued guidance, that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the guidance
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial Statements
requires certain equity securities to be measured at fair value, with changes in fair value recognized in earnings. For equity securities without readily determinable fair values, entities may elect to measure these securities at cost minus impairment, if any, adjusted for changes in observable prices. The guidance should be applied through a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption, except for equity securities without readily determinable fair values, to which the guidance should be applied prospectively. The Company adopted this guidance on January 1, 2018 and concluded this did not have a material effect on the consolidated financial statements. The Company does have a cost method investment in its consolidated financial statements and there is not a readily determinable value for this investment.the accompanying notes thereto. The Company’s consolidated statements of cash flows, presented above, has been recast to show the gross movements of payments on and proceeds from our revolving credit facility.
3. New Accounting Pronouncements
In February 2016, the FASB issued ASUAccounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), which will supersedesupersedes the current lease requirements in Topic 840.ASC 840, “Leases” (“ASC 840”). The ASU requires lessees to recognize a right of use (“ROU”) asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. The ASU is effective forCompany adopted the Companystandard as of January 1, 2020. Therefore, the company plans to implement this standard using2020, by applying the modified retrospective approach and,method without restatement of comparative periods’ financial information, as such, recognizepermitted by the effects of applying the new standard as a cumulative-effect adjustment to retained earnings as of January 1, 2019.transition guidance. The Company has identified our existing leases contracts and is in the process of completing the calculations of the ROU assets and related lease liability. The Company plans to electelected the practical expedients package
UNIQUE FABRICATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. The Company will not reassess whether any contracts entered prior to adoption are leases. The Company plans todid not separate non-lease components from the associated lease component and, instead, elected to account for those components as a single component in certain circumstances. The Company also expects to electelected the short-term lease recognition exemption for all leases that qualify, which means the Company willdid not recognize ROU assets or lease liabilities for short-term leases. Based onInstead, short term leases are expensed over the Company's lease portfolio,term. See Note 13, Leases for the company currently anticipates recognizing aimpact of the adoption which resulted in the recognition of ROU assetassets and relatedcorresponding lease liability on its balance sheet between $10 million and $13 million, with an immaterial impact on its income statement compared to the current lease accounting model.liabilities
In January 2017,June 2016, the FASB issued ASU 2017-4,No. 2016-13, IntangiblesFinancial Instruments - GoodwillCredit Losses. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and Other (Topic 350): Simplifying the Test for Goodwill Impairment, accounting guidance which removes Step 2reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the goodwill impairment test. Goodwill impairmentloss estimation techniques applied today will nowstill be permitted, although the amount by which a reporting unit’s carrying value exceeds its fair value, notinputs to exceedthose techniques will change to reflect the carryingfull amount of goodwill.expected credit losses. The ASU isamendment will be effective for annual or interim reporting periods beginning after December 15, 2021. Early adoption is permitted.the fiscal year 2023. The Company adopted the provisions related to this ASU during fiscal year 2017 andis currently assessing the impact was not material inof the year of adoption.changes on the financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The guidance eliminates, adds and modifies certain disclosure requirements. This new guidance is effective for fiscal years beginning after December 15, 2019 for public companies. Early adoption is permitted for either the entire standard or provisions that eliminate or modify requirements. Adoption of the standard willhas not impactimpacted our financial condition, results of operations or cash flows.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The guidance simplifies accounting for income taxes by removing certain exceptions. This new guidance is effective for fiscal years beginning after December 15, 2020 for public companies. Early adoption is permitted. We are continuing to evaluate the impact the adoption of this standard will have on our financial condition, results of operations or cash flows.
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform”. The ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or any other reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. The Company is currently assessing which contracts may be affected.
Note 2 — Business Combinations
4. Revenues
The Company intends to continue to selectively pursue opportunistic acquisitions that provide additional products and processes, as well as entrance into new growth markets. There were 0 new acquisitionsfollowing table presents the Company's net sales disaggregated by major sales channel for the 52 weekstwelve months ended December 29, 201931, 2020 and December 30, 2018.29, 2019:
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 29, 2019 |
| (In thousands) |
Net Sales | | | |
Transportation | $ | 105,463 | | | $ | 131,589 | |
Appliance | 11,302 | | | 13,600 | |
Other | 3,449 | | | 7,300 | |
Total | $ | 120,214 | | | $ | 152,489 | |
General Recognition Policy
Revenue is recognized by the Company once all performance obligations under the terms of a contract with the Company's customers are satisfied. Generally, this occurs with the transfer of control of its automotive, HVAC, and other products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products. The Company’s payment terms vary by the type and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.
In general, for sales arrangements, the Company deems control to transfer at a single point in time and recognizes revenue when it ships products from its manufacturing facilities to its customers. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to transfer upon
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, and the customer has significant risks and rewards of ownership of the asset. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
Contract Balances
The timing of revenue recognition, billings and cash collections and payments results in billed accounts receivable. The Company does not have deferred revenue. Additionally, as noted in the Accounts Receivable section of Note 3 — Inventory2, Summary of Significant Accounting Policies, management reviews the allowance for doubtful accounts at regular intervals. Account balances are charged off against the allowance when management determines it is probable the receivable will not be recovered. The allowance for doubtful account balances are noted in the Accounts Receivable section of Note 2.
Practical Expedients
The Company elects the practical expedient to expense costs incurred to obtain a contract with a customer when the amortization period would have been one year or less. These costs include sales commissions as the Company has determined annual compensation is commensurate with annual sales activities.
The Company elects the practical expedient that does not require the Company to adjust consideration for the effects of a significant financing component when the period between shipment of its products and customer’s payment is one year or less.
5. Inventories
Inventory consists of the following:
|
| | | | | | | |
| December 29, 2019 | | December 30, 2018 |
| (In thousands) |
Raw materials | $ | 7,963 |
| | $ | 9,563 |
|
Work in progress | 129 |
| | 548 |
|
Finished goods | 4,955 |
| | 6,175 |
|
Total inventory | $ | 13,047 |
| | $ | 16,286 |
|
| | | | | | | | | | | |
| December 31, 2020 | | December 29, 2019 |
| (In thousands) |
Raw materials | $ | 7,366 | | | $ | 7,963 | |
Work in progress | 1,225 | | | 129 | |
Finished goods | 3,360 | | | 4,955 | |
Total inventory | $ | 11,951 | | | $ | 13,047 | |
During the third quarter of 2019, the Company increased the inventory allowance by $1.7 million which is included in cost of sales in the condensed consolidated statement of operations. This was due to the loss of business from the end of life of certain programs coupled with the on-going implementation of the Company's new Enterprise Resource Planning (ERP) system providing more detailed information that led the Company to review estimated future demand in the next twelve months. The allowance for inventory valuation was $1.0$0.4 million and $0.6$1.0 million at December 31, 2020 and December 29, 2019, and December 30, 2018 respectively.
Included in inventory are assets located in Mexico with a carrying amount of $3.1 million at December 31, 2020 and $3.6 million at December 29, 2019, and $3.3 million at December 30, 2018, and assets located in Canada with a carrying amount of $1.1 million at December 31, 2020 and $1.0 million at December 29, 2019 and $1.2 million at December 30, 2018.2019.
Note 4 —
UNIQUE FABRICATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property, Plant, and Equipment
Property, plant, and equipment consists of the following: |
| | | | | | | | | |
| December 29, 2019 | | December 30, 2018 | | Depreciable Life – Years |
| (In thousands) | | |
Land | $ | 1,663 |
| | $ | 1,663 |
| | |
Buildings | 5,934 |
| | 6,898 |
| | 23 – 40 |
Shop equipment | 22,982 |
| | 21,166 |
| | 7 – 10 |
Leasehold improvements | 1,234 |
| | 1,130 |
| | 3 – 10 |
Office equipment | 1,866 |
| | 1,651 |
| | 3 – 7 |
Mobile equipment | 190 |
| | 283 |
| | 3 |
Construction in progress | 1,543 |
| | 1,514 |
| | |
Total cost | 35,412 |
| | 34,305 |
| | |
Accumulated depreciation | 11,997 |
| | 9,227 |
| | |
Net property, plant, and equipment | $ | 23,415 |
| | $ | 25,078 |
| | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 29, 2019 | | Depreciable Life – Years |
| (In thousands) | | |
Land | $ | 538 | | | $ | 1,663 | | | |
Buildings | 6,923 | | | 5,934 | | | 23 - 40 |
Shop equipment | 23,436 | | | 22,982 | | | 7 - 10 |
Leasehold improvements | 1,245 | | | 1,234 | | | 3 - 10 |
Office equipment | 2,331 | | | 1,866 | | | 3 - 7 |
Mobile equipment | 152 | | | 190 | | | 3 |
Construction in progress | 2,315 | | | 1,543 | | | |
Total cost | 36,940 | | | 35,412 | | | |
Accumulated depreciation | 14,557 | | | 11,997 | | | |
Property, plant, and equipment, net | $ | 22,383 | | | $ | 23,415 | | | |
Depreciation expense was $3.0 million for the twelve months ended December 31, 2020 and $2.9 million for the 52 weekstwelve months ended December 29, 2019, $2.6 million for the 52 weeks ended December 30, 2018, and $2.2 million for the 52 weeks ended December 31, 2017.
2019.
Included in property, plant, and equipment are assets located in Mexico with a carrying amount of $4.1$3.7 million and $3.2$4.1 million at December 29, 201931, 2020 and December 30, 2018,29, 2019, respectively, and assets located in Canada with a carrying amount of $0.6$0.4 million and $0.7$0.6 million at December 31, 2020 and December 29, 2019, and December 30, 2018, respectively.
UNIQUE FABRICATING, INC.
Notes to Consolidated Financial Statements
Note 5 —7. Intangible Assets
Intangible assets of the Company consist of the following at December 31, 2020:
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted Average Life – Years |
| (In thousands) | | |
Customer contracts | $ | 26,518 | | | $ | 21,719 | | | 8.16 |
Trade names | 4,673 | | | 1,924 | | | 16.43 |
Non-compete agreements | 1,162 | | | 1,162 | | | 2.53 |
Unpatented technology | 1,534 | | | 1,477 | | | 5.00 |
Total | $ | 33,887 | | | $ | 26,282 | | | |
Intangible assets of the Company consist of the following at December 29, 2019:
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted Average Life – Years |
| (In thousands) | | |
Customer contracts | $ | 26,523 | | | $ | 18,304 | | | 8.16 |
Trade names | 4,673 | | | 1,698 | | | 16.43 |
Non-compete agreements | 1,162 | | | 1,142 | | | 2.53 |
Unpatented technology | 1,535 | | | 1,124 | | | 5.00 |
Total | $ | 33,893 | | | $ | 22,268 | | | |
Intangible assets |
| | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Weighted Average Life – Years |
| (In thousands) | | |
Customer contracts | $ | 26,523 |
| | $ | 14,936 |
| | 8.16 |
Trade names | 4,673 |
| | 1,452 |
| | 16.43 |
Non-compete agreements | 1,162 |
| | 1,118 |
| | 2.53 |
Unpatented technology | 1,535 |
| | 818 |
| | 5.00 |
Total | $ | 33,893 |
| | $ | 18,324 |
| | |
Contents
UNIQUE FABRICATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average amortization period for all intangible assets is 8.96 years. Amortization expense for intangible assets totaled $4.0 million for the twelve months ended December 31, 2020 and $3.9 million for the 52 weekstwelve months ended December 29, 2019, $4.1 million for the 52 weeks ended December 30, 2018, and $4.1 million for the 52 weeks ended December 31, 2017.
2019.
Estimated amortization expense for the next five years is as follows (In thousands):follows:
| | | | | | | | |
| | Estimated Amortization Expense |
| | (In thousands) |
2021 | | $ | 2,456 | |
2022 | | 1,305 | |
2023 | | 979 | |
2024 | | 759 | |
2025 | | 573 | |
Thereafter | | 1,533 | |
Total | | $ | 7,605 | |
|
| | | |
2020 | $ | 3,914 |
|
2021 | 2,456 |
|
2022 | 1,305 |
|
2023 | 979 |
|
2024 | 759 |
|
Thereafter | 2,212 |
|
Total | $ | 11,625 |
|
In addition, the Amended and Restated Credit Agreement allows for increases in the principal amount of the Revolver and the New US and CA Term Loans not to exceed a $10.0 million principal amount, in the aggregate, provided that before and after giving effect to the proposed increase (and any transactions to be consummated using proceeds of the increase), the total leverage and debt service coverage ratios do not exceed specified amounts. The Amended and Restated Credit Agreement also provides for the issuance of letters of credit with a face amount of up to a $2.0 million, in the aggregate, provided that any letter of credit that is issued will reduce availability under the Revolver.
The Amended and Restated Credit Agreement contains customary negative covenants and requires that the Company comply with various financial covenants, including a total leverage ratio and a debt service coverage ratio, as defined in the Amended and Restated Credit Agreement. Additionally, the New US Term Loan and CA Term Loan each contains a clause, effective December 29, 2019,30, 2018, that requires an excess cash flow payment to be made to the lenders to reduce the New US Term Loan or theand CA Term Loan if the Company’s cash flow exceeds certain thresholds as defined by the Amended and Restated Credit Agreement.
consolidated EBITDA and certain financial covenants, including the maximum total leverage ratio and the minimum debt service coverage ratio, as well as adding the requirement that the Company maintain minimum liquidity and minimum unadjusted consolidated EBITDA, each as defined. The Fourth Amendment permits distributions as long as the Borrower is in compliance with specified conditions including that the Borrower's liquidity, as defined, is not less than $5 million after giving effect to the distribution, total leverage ratio is not more than 2.00 to 1.00, post distribution, debt service coverage ratio ("(“DSCR")”, as defined, is not greater than 1.10 to 1.00, and Borrower is in compliance with financial covenants, before and after giving effect to the distributions.
Maturities on the Company’s Amended and Restated Credit Agreement and other long term-debt obligations for the remainder of the current fiscal year and future fiscal years (In thousands):years: