This story is about Sivyer Steel Corporation, a turnaround that earned us the 2019 Turnaround of the Year Award. Even better, we gained the satisfaction of keeping the business operating throughout and out of a Chapter 11 363 sale bankruptcy.
The turnaround of Sivyer Steel Corporation.
Sivyer Steel located in Bettendorf IA was (and still is) one of the country’s oldest continuously operating steel casting companies. Frederick Lincoln Sivyer founded the company in 1909. It originally served the farm equipment, mining, crane equipment and chain belt industries and was formerly located in the Milwaukee, WI area. In the early 2000’s and into the next decade, the Company grew to $70M in revenue and 400 employees.
What trouble looks like.
Sivyer’ s real troubles started in 2014, when the foundry industry began a sharp decline from weakness in the mining, agriculture, oil and gas industries – a decline that would last for years. With sales dropping and costs rising, Sivyer’ s business began to slide. By May of 2016 Sivyer informed its Banks it has defaulted on its bank agreements due to significant decline in its financial condition. These losses continued with revenues declining well into 2016. By the end of 2016 revenue would drop to $33M, causing a loss of close to $8M! The Company did not have many choices – either turn things around or close-up shop. We were brought in by the Bank to assess the situation. Our opinion was that things were critical but with a strong customer base and support from the Bank, a turnaround was not only feasible but justifiable. The ultimate goal for us and their Bank was to preserve jobs plus knowing that a liquidation was neither a good financial option for the Bank nor for the community, employees or all other creditors. Here is our initial assessment:
- Cash was in critical condition; difficulty paying suppliers, many past due with the impact to close the foundry down due to insufficient materials; operations were shutting down routinely; barely able to cover payroll
- Difficult to find workers, especially skilled (maintenance, tool makers)
- Company in a true “turnaround” situation; management has been operating in this situation for over 2 years without success
- $10MM in Bank secured debt
- $9MM in unsecured debt was a huge drag on business
- Company had deferred over $2M in unsecured creditor trade debt to Notes
- Revenue declined rapidly in 2015 from 2014 then found itself with declining revenues mid-2016
- Actual margins running below 5%; some products at negative margins
- The Company had deferred its 401(k) profit sharing contributions by close to $338,000 going back 3 years
- Overall inventory levels too high – at around $9M; should have been around $5M to $6M; there was also $2MM plus in “overstock” inventory
- “Salaried” workforce already took a 10% salary cut and reduced staff by 30% in September 2016
The turnaround begins.
Our first recommendation to right the ship was as to enter into Forbearance Agreement”, whereas, the Bank agreed to forbear from exercising certain rights. Included in the forbearance agreement were certain provisions requiring the Company to initiate a turnaround “Go Forward Plan” and to appoint a Chief Restructuring Officer. Turning Point Management Advisors LLC (“TPMA”) was appointed to the newly created positions.
The turnaround and restructuring process.
Under the direction of TPMA, the Company put together and implemented a “Go Forward Plan” that was presented and approved by the Bank and a participating Bank in November 30, 2016. Note that the complication related to the situation was the presence of a participating Bank that needed to also agree to the next steps.
- We created a Go Forward Business Plan that demonstrated short-term, mid-term and long-term viability supported by believable assumptions about the future of the business including a a 24-month financial projection and a bridge analysis.
- We negotiated directly with several trade creditors ($9,000,000 in unsecured debt) to assure continued support of supplies and materials. This included additional deferrals of close to $1M.
- Many customers received an across the board general price increase and wealso were the main conduit for contact, negotiating and management of customers as necessary. Sometime this included direction “not to ship” until the Company had new P.O’s for the price increase..
- In November of 2016, I along with other management met with union leadership and proposed a 10% wage reduction for all union employees. Of course, this was aggressive but after a vote of union employees, the proposal was accepted and reduced annual labor costs by over $1,000,000.
- Other efforts included some other important changes as follows:
- Certain prepayments from customers
- We moved Sivyer to a tier two position with several customers; this in effect accelerated sales.
- Based on our foundry experience, we directed additional cost reduction items that effectuated a reduction in monthly cash burn which included process improvements (scrap. efficiencies, overtime, labor utilization).
- We did extensive reviews focusing on variable and fixed margins,implemented changes to increase margins or to some extent, exit unprofitable business.
These changes had a positive effect on EBITDA as early as November of 2016 and most of 2017. The Bank’s continued support was instrumental in the process. With the aggressive restructuring initiatives that were undertaken -TPMA and the Company projected positive EBITDA of close to $2.8M in 2017 and $6.3M for 2018.
What the win looked like.
As noted above, the Company was very successful in 2017 as the Company had $37,161,000 in net revenues and almost $1,500,000 in positive EBITDA. which was a year-over-year improvement of close to $5,000,000.Sivyer was an “orphan company” of a private equity in Milwaukee, WI as the firm had sold off all the other companies in its investment portfolio. Thus, it had gotten all of it money and profits out of the fund and the fund was basically terminated. As the Company moved towards substantial improvement in EBITDA and with the hopes to settle out of court with the unsecured creditors (more to come later), it made sense to ownership to try and sell the business. So, in April 2017 the Company hired an investment banker.
The investment banker identified several potential investors with over 700 parties contacted. including strategic and financial investors. A full data room was established with detailed information about the Company with TPMA, as CRO, the main contact for the Company.
In early fall 2016, after several visits and communications with many investors, a qualified buyer was identified and signed a Letter of Intent to buy all the assets of Sivyer Steel Corporation.
But the critical issue remained – $9,000,000 of unsecured debt. The potential Buyer did not want to risk litigation from any, or all, of these unsecured creditors thus was willing to fund a pool of dollars that could be used to settle with these creditors. And the deal would be a a “friendly” foreclosure between the Company and the Bank, the Company and the Buyer.
A negotiation between the Buyer, TPMA and Company, as part of the asset purchase agreement, would agree to fund $1,370,000 to settle out amounts due to them. The Buyer wanted to be sure that the suppliers would support the business after the deal was closed.
TPMA directed the settlement process given familiarity with the vendors and experience with settling with unsecured creditors.
The process was to be conducted during early 2018 various classes of creditors: key vendors, judgement creditors ,legal and professional creditors etc. The goal was to treat all as equally as possible without significant negotiations. As we approached the end of February 2018, our projections indicated about a 70% success rate in settlement.
The other key issue was the Company needed to complete a sales transaction as soon as possible as fresh cash was needed thus time was of the essence.
In February 2018, we discovered that a key competitor purchased an unsecured creditor’s debt and with the cooperation of two other unsecured creditors that theysolicited, the group forced an involuntary bankruptcy.
In March 2018, TPMA and Company ownership, engaged Bradshaw law firm, Des Moines, IA as debtors counsel. Immediately, Sivyer filed a petition for Reorganization under Chapter 11, Title 11. The involuntary bankruptcy filing was dismissed.
TPMA was re-engaged as CRO and financial advisors along with debtor’s counsel. We attended and advised on Court hearings and with Court approval, retained the investment banker. We continued oversight of the Company operations, financial condition and Banking relationships including DIP financing.
It was agreed between debtor’s counsel, the Company and TPMA to conduct a Section 363 auction and secure a stalking horse bidder. Initially, the potential buyer agreed to stay in the deal as the stalking horse but unfortunately dropped out given the participation of the above competitor. Fortunately, the investment banking process yielded a local buyer as the stalking horse.
Ultimately the Company assets were sold via auction to the local buyer and on July 28, 2018 and all 225 employees were re-employed by the new Company, Sivyer Steel Castings LLC.
The Bank decided to finance the new Company and remains the lender to Sivyer. The Company continues to operate today with an additional approximately $6M in new cash. And no major customers were lost in this process.
Twists and Turns
We experienced many twists and turns in this turnaround but in the end Sivyer Steel is operating with full employment as the 200 plus employees retained their jobs and the Company lost no major customers.