13-Week Cashflow Statement Modeling Case-in-Point, SGC, Inc.

Our second case-in-point company is Smithy Glass and Ceramic, Incorporated, as we will refer to it, SGC, Inc. They are a long established manufacturing company with global operations. They manufacture glass tableware and then supplement that with other products sourced from other manufacturers around the world. They're the largest glass tableware manufacturing, distribution and service network in the Western hemisphere and among the largest in the world with retail and wholesale customers in over 100 companies. They sell under their own branded line as well as other brand names primarily in the food service, retail, e-commerce, and business-to-business channels. SGC has had some problems of late. First of all, they are a small asset-intensive company with very limited diversity in terms of product offerings. By small, we're looking at a company with under a billion in sales and they were a public company as well. We've disguised the company for teaching purposes. However, they are small by all standards, both terms of their market cap and as well as their overall sales. There are limited growth opportunities in their industry which is both cyclical and very mature. The US operations for SGC are highly unionized and that makes cost cutting very difficult. They have limited amount of cash and weak cashflow which creates a constant reliance on capital markets. This, of course, can create problems if there are issues with the credit or if there are issues with the markets. They had very high leverage going into 2020 at 4.5x. That's x EBITDA of course, and because of this, they had significant refinance risk. And lastly, COVID-19 caused shutdown of travel and restaurant business, which further diminished their liquidity. Closures during holiday 2020 season might put SGC underwater, and that is the point in time we are going to focus on during this case-in-point. Let's take a look at SGC's liquidity under their current borrowings. They have an asset-backed revolver of 100 million and that includes 15 million of letters of credit, which are outstanding. Letters of credit are used in international finance to arrange for payment much more quickly than an account receivable or an account payable allows for. Companies doing business internationally tend to use LOCs quite frequently. They are provided by banks and they usually count against any availability under a credit facility. So current availability at the point in time of our case-in-point is about 80 million. And this revolver is maturing in December of 2022. The revolver is asset-backed so there is specific collateral assigned to the loan and that collateral sets the base for how much of a loan can be drawn at any point in time. This is based on 75% of eligible accounts receivable, and we'll talk about this when we do the modeling. And 75% of eligible inventory. There's also a minimum cash balance of 20 million required. And lastly, the interest rate on the asset-backed revolver is LIBOR plus 300. There's a commitment fee of 25 basis points and the total sort of all-in financing here is around 3% thanks to extremely low LIBOR rates. SGC also has a $440 million term loan. The current balance as of November 6th when we begin the 13-week cash flow statement is 394 million. This loan is payable April of 2024. There is no amortization on the loan and there's no prepayment penalty, but there is a cash sweep, and this is why the loan balance is less than the original balance because any excess cash that the company generates will be put toward paying the loan back. The current interest rate for this loan is LIBOR plus 375, which is currently around 3.75%. The term loan, because it is static, will not be impacting the 13-week cash flow statement that we're going to build. However, we will spend a significant amount of time with the asset-backed revolver, calculating its availability and also determining whether there is room under that facility to satisfy SGC's financing needs.