|
Item
2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Business Description
We are a leading provider of manufactured vinyl coated fabrics. Our best known brand, Naugahyde, is the product of many improvements on a rubber-coated fabric developed a century ago in Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing.
Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 600 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes, adhesive back coatings and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts character prints and non-registered prints, lamination and panel cutting.
Our vinyl coated fabric products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior trim components from floor to headliner which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated by either flame or hot melt adhesive for seating, fascia and door applications.
Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for durability and weatherability is used. We also manufacture a line of products called BeautyGard
®
, with water-based topcoats that contain agents to protect against bacterial and fungal microorganisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses and aircraft.
We currently conduct our operations in manufacturing facilities that are located in Stoughton, Wisconsin and Earby, England.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of our significant accounting policies, refer to Note 1 – “Summary of Significant Accounting Policies” to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K/A for the fiscal year ended January 1, 2017.
Recent Accounting Pronouncements
See Note 15 – “Recent Accounting Pronouncements” to the Consolidated Financial Statements for a discussion of recent accounting guidance.
Overview:
The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending December 31, 2017 and the prior year ended January 1, 2017 are 52-week years.
Our Earby, England operation’s functional currency is the British Pound Sterling and has sales and purchases transactions that are denominated in currencies other than its functional currency, principally the Euro. Approximately 30% of the Company’s global revenues and 34% of its global raw material purchases are derived from these transactions. The average year-to-date exchange rate for the Pound Sterling to the U.S. Dollar was approximately 8.4% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 10.2% higher in 2017 compared to 2016. These exchange rate changes had the net effect of decreasing net sales by approximately $1.6 million for the nine months ended October 1, 2017. The overall effect on net income was a positive amount of approximately $448,000 for the nine months ended October 1, 2017 compared to the corresponding period of 2016 as the negative effect of the Pound Sterling was offset by the positive effect of the Euro.
Three Months Ended October 1, 2017 Compared to the Three Months Ended October 2, 2016
The following table sets forth, for the three months ended October 1, 2017 (“three months 2017”) and October 2, 2016 (“three months 2016”), certain operations data including their respective percentage of net sales:
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|
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Three Months Ended
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
October 2, 2016
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|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Sales
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|
$
|
22,498,456
|
|
|
|
100.0
|
%
|
|
$
|
24,675,521
|
|
|
|
100.0
|
%
|
|
$
|
(2,177,065
|
)
|
|
|
-8.8
|
%
|
|
Cost of Sales
|
|
|
18,310,782
|
|
|
|
81.4
|
%
|
|
|
19,325,342
|
|
|
|
78.3
|
%
|
|
|
(1,014,560
|
)
|
|
|
-5.2
|
%
|
|
Gross Profit
|
|
|
4,187,674
|
|
|
|
18.6
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%
|
|
|
5,350,179
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|
|
|
21.7
|
%
|
|
|
(1,162,505
|
)
|
|
|
-21.7
|
%
|
|
Other Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling
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|
|
1,285,822
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|
|
|
5.7
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%
|
|
|
1,238,035
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|
|
|
5.0
|
%
|
|
|
47,787
|
|
|
|
3.9
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%
|
|
General and administrative
|
|
|
1,543,689
|
|
|
|
6.9
|
%
|
|
|
1,830,932
|
|
|
|
7.4
|
%
|
|
|
(287,243
|
)
|
|
|
-15.7
|
%
|
|
Research and development
|
|
|
483,221
|
|
|
|
2.1
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%
|
|
|
412,854
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|
|
|
1.7
|
%
|
|
|
70,367
|
|
|
|
17.0
|
%
|
|
Total operating expenses
|
|
|
3,312,732
|
|
|
|
14.7
|
%
|
|
|
3,481,821
|
|
|
|
14.1
|
%
|
|
|
(169,089
|
)
|
|
|
-4.9
|
%
|
|
Operating Income
|
|
|
874,942
|
|
|
|
3.9
|
%
|
|
|
1,868,358
|
|
|
|
7.6
|
%
|
|
|
(993,416
|
)
|
|
|
-53.2
|
%
|
|
Interest expense
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|
|
(418,698
|
)
|
|
|
-1.9
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%
|
|
|
(394,401
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)
|
|
|
-1.6
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%
|
|
|
(24,297
|
)
|
|
|
6.2
|
%
|
|
Other expense
|
|
|
(115,482
|
)
|
|
|
-0.5
|
%
|
|
|
(17,015
|
)
|
|
|
-0.1
|
%
|
|
|
(98,467
|
)
|
>100
|
%
|
|
Income before taxes
|
|
|
340,762
|
|
|
|
1.5
|
%
|
|
|
1,456,942
|
|
|
|
5.9
|
%
|
|
|
(1,116,180
|
)
|
|
|
-76.6
|
%
|
|
Tax provision
|
|
|
65,170
|
|
|
|
0.3
|
%
|
|
|
156,898
|
|
|
|
0.6
|
%
|
|
|
(91,728
|
)
|
|
|
-58.5
|
%
|
|
Net income
|
|
|
275,592
|
|
|
|
1.2
|
%
|
|
|
1,300,044
|
|
|
|
5.3
|
%
|
|
|
(1,024,452
|
)
|
|
|
-78.8
|
%
|
|
Preferred dividends
|
|
|
(753,145
|
)
|
|
|
-3.3
|
%
|
|
|
(722,029
|
)
|
|
|
-2.9
|
%
|
|
|
(31,116
|
)
|
|
|
4.3
|
%
|
|
Net income (loss) available to
common shareholders
|
|
$
|
(477,553
|
)
|
|
|
-2.1
|
%
|
|
$
|
578,015
|
|
|
|
2.3
|
%
|
|
$
|
(1,055,568
|
)
|
<-100%
|
|
Revenue:
Total revenue for the three months 2017 decreased $2,177,065 or 8.8% to $22,498,456 from $24,675,521 for the three months 2016. Automotive sales for the three months 2017 decreased 9.6% compared to the three months 2016 as the increase in sales of several new programs in the European market was offset by a decline in the U.S. as automotive manufacturers continued to adjust their production due to a softening in the U.S. market.
Industrial sales for the three months 2017 were down 7.3% compared to the prior year period. The quarterly effect of the currency fluctuation reduced the negative sales variance by $260,000 as the strong Euro benefited quarterly sales and offset the small negative effect of the translated British Pound Sterling.
Gross Profit:
Total gross profit for the three months 2017 decreased $1,162,505 or 21.7% to $4,187,674 from $5,350,179 for the three months 2016. The gross profit percentage was 18.6% of sales for the three months 2017 compared to 21.7% for the three months 2016. The lower gross profit percentage was partially due to unfavorable material usage variances for the three months 2017 compared to the three months 2016. Gross profit was also negatively impacted by rising raw material prices and operating inefficiencies resulting from newly awarded automotive platforms ramping up in Europe. The currency effect was minimal as the quarterly average GBP to USD translation rate was relatively stable compared to the prior year.
Operating Expenses:
Selling expenses for the three months 2017 increased $47,787 or 3.9% to $1,285,822 from $1,238,035 for the three months 2016. The increase resulted primarily from additional staffing and promotional costs incurred in the three months 2017 compared to the three months 2016.
General and administrative expenses for the three months 2017 decreased $287,243 or 15.7% to $1,543,689 from $1,830,932 for the three months 2016. This decrease was due to lower employee benefit costs and professional fees for the three months 2017 compared to the three months 2016.
Research and development expenses for the three months 2017 increased $70,367 or 17.0% to $483,221 from $412,854 for the three months 2016. The increase resulted from additional staffing and increased expenditures for new product development.
Operating Income:
Operating income for the three months 2017 decreased $993,416 or 53.2% to $874,942 from $1,868,358 for the three months 2016. The operating income percentage was 3.9% of sales for the three months 2017 compared to 7.6% for the three months 2016. Operating income decreased primarily from the decrease in gross profit which was partially offset by the decrease in operating expenses.
Interest Expense:
Interest expense for the three months 2017 increased $24,297 or 6.2% to $418,698 from $394,401 for the three months 2016. The increase was primarily due to debt repayment partially offset by new capital leases for equipment purchases and higher interest rates on LIBOR and prime during the three months 2017 compared to the three months 2016.
Other Expense:
Other expense for the three months 2017 increased $98,467 to $115,482 from $17,015 for the three months 2016. The amount in other expense principally is the currency gains and losses recognized by the U.K. operations on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros and U.S. Dollars. The Company also recognizes gains and losses from the change in fair values on its foreign currency exchange contracts.
Tax Provision:
The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its member. Uniroyal’s income is allocated entirely to UEPH as its sole member. Uniroyal Global then receives this income allocation as a member of UEPH less the dividends paid on the preferred units held by the former members of Uniroyal. For federal income tax purposes, UEPH is a pass through entity and the Company’s share of its taxable income is reported on its tax return. The taxable income applicable to the distribution for the preferred ownership interests is reported to the members who report it on their respective individual tax returns.
For the three months 2016, the tax provision was comprised of U.K. tax plus a state and local tax provision on the Company’s U.S. income. There was no U.S. Federal tax provision for the 2016 period due to a reduction of deferred tax asset valuation allowances that offset the provision. At January 1, 2017, the Company concluded after an analysis that it was more likely than not that all of the deferred tax asset would be realized and, accordingly, eliminated the valuation allowance. Therefore, the provisions for the three months ended October 1, 2017 included, in addition to the U.K. tax and state and local tax, a provision for Federal tax on the Company’s income less the income applicable to the distribution for the preferred ownership interests.
Preferred Stock Dividend:
The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEP Holdings, LLC and UGEL (formerly EPAL) to the sellers. These preferred units carry quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 6.5%. The dividend rate on the Series B UEP Holdings preferred units which started at 5.5% increases by 0.5% on the anniversary of the issuance up to a maximum of 8.0%.
Nine Months Ended October 1, 2017 Compared to the Nine Months Ended October 2, 2016
The following table sets forth, for the nine months ended October 1, 2017 (“nine months 2017”) and October 2, 2016 (“nine months 2016”), certain operations data including their respective percentage of net sales:
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
October 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
74,334,434
|
|
|
|
100.0
|
%
|
|
$
|
76,976,985
|
|
|
|
100.0
|
%
|
|
$
|
(2,642,551
|
)
|
|
|
-3.4
|
%
|
|
Cost of Sales
|
|
|
59,434,030
|
|
|
|
80.0
|
%
|
|
|
59,241,192
|
|
|
|
77.0
|
%
|
|
|
192,838
|
|
|
|
0.3
|
%
|
|
Gross Profit
|
|
|
14,900,404
|
|
|
|
20.0
|
%
|
|
|
17,735,793
|
|
|
|
23.0
|
%
|
|
|
(2,835,389
|
)
|
|
|
-16.0
|
%
|
|
Other Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
3,896,166
|
|
|
|
5.2
|
%
|
|
|
4,011,017
|
|
|
|
5.2
|
%
|
|
|
(114,851
|
)
|
|
|
-2.9
|
%
|
|
General and administrative
|
|
|
5,294,935
|
|
|
|
7.1
|
%
|
|
|
6,051,854
|
|
|
|
7.9
|
%
|
|
|
(756,919
|
)
|
|
|
-12.5
|
%
|
|
Research and development
|
|
|
1,454,179
|
|
|
|
2.0
|
%
|
|
|
1,316,696
|
|
|
|
1.7
|
%
|
|
|
137,483
|
|
|
|
10.4
|
%
|
|
Total operating expenses
|
|
|
10,645,280
|
|
|
|
14.3
|
%
|
|
|
11,379,567
|
|
|
|
14.8
|
%
|
|
|
(734,287
|
)
|
|
|
-6.5
|
%
|
|
Operating Income
|
|
|
4,255,124
|
|
|
|
5.7
|
%
|
|
|
6,356,226
|
|
|
|
8.3
|
%
|
|
|
(2,101,102
|
)
|
|
|
-33.1
|
%
|
|
Interest expense
|
|
|
(1,217,348
|
)
|
|
|
-1.6
|
%
|
|
|
(1,232,814
|
)
|
|
|
-1.6
|
%
|
|
|
15,466
|
|
|
|
-1.3
|
%
|
|
Other expense
|
|
|
(108,607
|
)
|
|
|
-0.1
|
%
|
|
|
(279,075
|
)
|
|
|
-0.4
|
%
|
|
|
170,468
|
|
|
|
-61.1
|
%
|
|
Income before taxes
|
|
|
2,929,169
|
|
|
|
3.9
|
%
|
|
|
4,844,337
|
|
|
|
6.3
|
%
|
|
|
(1,915,168
|
)
|
|
|
-39.5
|
%
|
|
Tax provision
|
|
|
491,099
|
|
|
|
0.7
|
%
|
|
|
484,798
|
|
|
|
0.6
|
%
|
|
|
6,301
|
|
|
|
1.3
|
%
|
|
Net income
|
|
|
2,438,070
|
|
|
|
3.3
|
%
|
|
|
4,359,539
|
|
|
|
5.7
|
%
|
|
|
(1,921,469
|
)
|
|
|
-44.1
|
%
|
|
Preferred dividends
|
|
|
(2,230,381
|
)
|
|
|
-3.0
|
%
|
|
|
(2,165,695
|
)
|
|
|
-2.8
|
%
|
|
|
(64,686
|
)
|
|
|
3.0
|
%
|
|
Net income available to
common shareholders
|
|
$
|
207,689
|
|
|
|
0.3
|
%
|
|
$
|
2,193,844
|
|
|
|
2.8
|
%
|
|
$
|
(1,986,155
|
)
|
|
|
-90.5
|
%
|
Revenue:
Total revenue for the nine months 2017 decreased $2,642,551 or 3.4% to $74,334,434 from $76,976,985 for the nine months 2016. Automotive sales for the nine months 2017 decreased 1.8% compared to the nine months 2016 as the increase in sales of several new programs in the European market was offset by a decline in the U.S. as automotive manufacturers adjusted their production due to a softening in the U.S. market. Industrial sales for the nine months 2017 were down 6.7% compared to the prior year period. Contributing to the decline was the net currency effect of the exchange rate change of approximately $1.6 million. Without the effect of the exchange rate change, total revenue would only have decreased by 1.4%.
Gross Profit:
Total gross profit for the nine months 2017 decreased $2,835,389 or 16.0% to $14,900,404 from $17,735,793 for the nine months 2016. The gross profit percentage was 20.0% of sales for the nine months 2017 compared to 23.0% for the nine months 2016. The lower gross profit percentage was partially due to mix as the ratio of lower margin automotive sales to higher margin industrial sales increased for the nine months 2017 compared to the nine months 2016. Gross profit was also negatively impacted by rising raw material prices and operating inefficiencies resulting from newly awarded automotive platforms ramping up in Europe. The decrease was partially offset by a positive net currency effect in the amount of $168,000.
Operating Expenses:
Selling expenses for the nine months 2017 decreased $114,851 or 2.9% to $3,896,166 from $4,011,017 for the nine months 2016. Lower commissions on sales were partially offset by increases in staffing and other costs. Also contributing to the decrease was the net currency effect of $109,000.
General and administrative expenses for the nine months 2017 decreased $756,919 or 12.5% to $5,294,935 from $6,051,854 for the nine months 2016. This decrease was due to lower employee benefit costs and professional fees for the nine months 2017 compared to the nine months 2016. Also contributing to the decrease was the net currency effect of $169,000.
Research and development expenses for the nine months 2017 increased $137,483 or 10.4% to $1,454,179 from $1,316,696 for the nine months 2016. The increase resulted from additional staffing and increased expenditures for new product development. This was partially offset by the net currency effect of the exchange rate change in the amount of $46,000.
Operating Income:
Operating income for the nine months 2017 decreased $2,101,102 or 33.1% to $4,255,124 from $6,356,226 for the nine months 2016. The operating income percentage was 5.7% of sales for the nine months 2017 compared to 8.3% for the nine months 2016. Operating income decreased primarily from the decrease in gross profit. This was partially offset by the reduction in operating expenses for the nine months 2017 compared to 2016 and a positive net currency effect of $492,000.
Interest Expense:
Interest expense for the nine months 2017 decreased $15,466 or 1.3% to $1,217,348 from $1,232,814 for the nine months 2016. The decrease was primarily due to debt repayment partially offset by new capital leases for equipment purchases and higher interest rates on LIBOR and prime during the nine months 2017 compared to the nine months 2016.
Other Expense:
Other expense for the nine months 2017 decreased $170,468 to $108,607 from $279,075 for the nine months 2016. The amount in other expense principally is the currency gains and losses recognized by the U.K. operations on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros and U.S. Dollars. The Company also recognizes gains and losses from the change in fair values on its foreign currency exchange contracts.
Tax Provision:
The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its member. Uniroyal’s income is allocated entirely to UEPH as its sole member. Uniroyal Global then receives this income allocation as a member of UEPH less the dividends paid on the preferred units held by the former members of Uniroyal. For federal income tax purposes, UEPH is a pass-through entity and the Company’s share of its taxable income is reported on its tax return. The taxable income applicable to the distribution for the preferred ownership interests is reported to the members who report it on their respective individual tax returns.
For the nine months 2016, the tax provision was comprised of U.K. tax plus a state and local tax provision on the Company’s U.S. income. There was no U.S. Federal tax provision for the 2016 period due to a reduction of deferred tax asset valuation allowances that offset the provision. At January 1, 2017, the Company concluded after an analysis that it was more likely than not that all of the deferred tax asset would be realized and, accordingly, eliminated the valuation allowance. Therefore, the provisions for the nine months ended October 1, 2017 included, in addition to the U.K. tax and state and local tax, a provision for Federal tax on the Company’s income less the income applicable to the distribution for the preferred ownership interests.
Preferred Stock Dividend:
The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEP Holdings, LLC and UGEL (formerly EPAL) to the sellers. These preferred units carry quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 6.5%. The dividend rate on the Series B UEP Holdings preferred units which started at 5.5% increases by 0.5% on the anniversary of the issuance up to a maximum of 8.0%.
Liquidity and Sources of Capital
Cash, as it is needed, is provided by using the Company’s lines of credit. These lines provide for a total borrowing commitment in excess of $40,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $19,833,352 at October 1, 2017, $15.5 million of the lines bears interest at LIBOR plus a range of 1.95% to 2.45%, depending on the underlying borrowing base and $4.3 million bears interest at the bank’s prime or base lending rate which was 4.25% at October 1, 2017. At October 1, 2017, the lines provided an additional availability of approximately $2.1 million. We plan to use this availability to help finance our cash needs for the remaining months of fiscal 2017 and future periods. The balances due under the lines of credit are recorded as current liabilities on the balance sheet.
Given our capital resources in the U.S. and the potential for increased investment and acquisitions in foreign jurisdictions, we do not have a history of repatriating a significant portion of our foreign cash. Accordingly, we have not recognized a deferred tax liability for these unremitted earnings. In the event that circumstances should change in the future and we decide to repatriate these foreign amounts to fund U.S. operations, the Company would record a tax expense and pay the applicable U.S. taxes on these repatriated foreign amounts.
The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 1.07 at October 1, 2017 and 1.13 at January 1, 2017.
Cash balances increased $429,543, after the effects of currency translation of $111,147, to $1,751,129 at October 1, 2017 from $1,321,586 at January 1, 2017. Of the above noted amounts, $1,608,624 and $970,327 were held outside the U.S. by our foreign subsidiaries as of October 1, 2017 and January 1, 2017, respectively.
Cash provided by operations was $3,333,591 for the nine months 2017 compared to $5,133,064 for the nine months 2016. Cash provided by operations came from net income of $2,438,070 and $4,359,539 for the nine months 2017 and 2016, respectively, as adjusted by cash flows related to changes in assets and liabilities of $(769,957) and $(813,626) for the nine months 2017 and 2016, respectively.
Cash used in investing activities was $1,905,156 for the nine months 2017 compared to $1,486,270 for the nine months 2016. During 2017 and 2016, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations.
For the nine months 2017, cash used in financing activities was $1,110,039 as compared to $3,848,860 used in financing activities for the nine months 2016. The Company paid $2,204,199 and $2,147,408 of preferred dividends for the nine months 2017 and 2016, respectively. The Company had net advances on its lines of credit of $2,029,826 and $220,428 for the nine months 2017 and 2016, respectively.
In May 2016, the Company modified the terms of the secured promissory note in the amount of $1,285,593 related to the Wardle Storeys acquisition and paid the note in full on May 31, 2016.
Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of October 1, 2017 and through the date of filing of this report.
We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.
We have no material off balance sheet arrangements.
