Turning Point Management Advisors, LLC

Case Study – Sivyer Steel Corporation

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:

  1. 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
  2. Difficult to find workers, especially skilled (maintenance, tool makers)
  3. Company in a true “turnaround” situation; management has been operating in this situation for over 2 years without success
  4. $10MM in Bank secured debt 
  5. $9MM in unsecured debt was a huge drag on business
  6. Company had deferred over $2M in unsecured creditor trade debt to Notes 
  7. Revenue declined rapidly in 2015 from 2014 then found itself with declining revenues mid-2016 
  8. Actual margins running below 5%; some products at negative margins
  9. The Company had deferred its 401(k) profit sharing contributions by close to $338,000 going back 3 years
  10. Overall inventory levels too high – at around $9M; should have been around $5M to $6M; there was also $2MM plus in “overstock” inventory
  11. “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.

Turnaround activity.

  • 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:
  1. Certain prepayments from customers 
  2. We moved Sivyer to a tier two position with several customers; this in effect accelerated sales.
  3. 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). 
  4. 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.

New Direction

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.

Next steps

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.  

Case Study – Turnaround Manufacturing Industry; Interim Executive Management

Situation

A family owned investment firm, focused on building a portfolio of growth oriented, privately held, companies throughout the local region, acquired two outstate, Minnesota-based, manufacturing companies providing bulk material transportation equipment to the over-the-road tank and trailer industry. The two companies were merged in mid-2010 to gain operating efficiencies. New executive management was brought in to lead the newly combined entity. Unfortunately, under the new management, the company was not profitable, experiencing significant cash flow losses every month plus the integration failed. In the beginning, sales had increased every month; however, the operating and cash flow losses continued to mount and the Company had drawn down $2.8MM on a line of credit. Half way through the year, the CEO, acting CFO and other management personnel left the organization. Turning Point was engaged to provide interim executive management services and to assess whether the business was truly a going concern. Turning Point assumed the roles of executive management and were charged with running the Company’s day to day operations and reported directly to the Company’s board of directors.

Challenges

  • Number 1 question – Going concern?
  • Improving revenues while continuing to generate operating and cash flow losses
  • Large build up in line of credit to fund losses
  • Low gross margins in trailer products
  • High inventory levels given sales volume – History of material and sizable book to physical inventory write downs
  • Board was lead to believe backlog was close to $3MM yet order backlog was nonexistent
  • No targeted or concerted sales effort in place
  • Lack of sound financial management including gross margin analysis, inadequate cash flow reporting and minimal key metrics tracking
  • Vendor payments were well past due creating raw material/supply delivery concerns

Solution

We immediately set out to stabilize the business operations, implemented communication meetings with all employees as to our process and conducted the following:

  • Cash flow analysis to understand opportunities to reduce cash needs immediately
  • Completed a 13-week rolling cash flow model to manage against
  • Reviewed all product gross margins analyzing costs associated with current orders and backlog to determine level of profitability and determine if immediate price increases were necessary
  • Addressed inventory levels reviewing excess inventories, valuation and purchasing management
  • Operations review and assessment to understand production scheduling, process flow and floor layout, throughput, etc.
  • Organization assessment to determine correct number of employees, skill set and job responsibilities
  • Addressed the vendor past due situations with immediate communication
  • Created a business plan and forecast
  • Conducted a market opportunity and competitive analysis for the Company’s current and potential future products
  • Developed a three year strategic and financial plan

Results

The Company was cash flow positive for the entire second half of the year due to increased sales, greatly improved product gross margins, a 30% smaller organization and reduced cost structure. Through Turning Point’s market and competitive analysis, the business altered its product offerings and the vertical markets served creating an extremely viable business going forward. Turning Point’s three year strategic plan has provided the roadmap for long term growth and profitability. The Company’s board of directors has retained Turning Point to provide interim executive management and execute the strategic plan on an ongoing basis

Case Study – Turnaround, Manufacturing Industry; New Credit Facility

Situation

A mid –sized iron foundry in the Upper Midwest had been losing money for 3 years in a row and had defaulted under their credit agreement. The Company was operating under a forbearance agreement with the Bank and the Bank had lost confidence in management. The Bank insisted that the Company hire turnaround professionals. The principals of Turning Point were engaged to assess the Company’s financial and operational plans, to manage the cash crisis, drive a turnaround and re-establish the basis from which to renegotiate the credit facility. Turning Point was selected based on their manufacturing, operational and financial backgrounds

Challenges

  • The Company was operating under a Bank forbearance with high banks fee and interest.
  • Cash burn was over $150,000 per month.
  • Management had no operating plan to run the business day-to-day, much less turn the business around.
  • The owners wanted help to solidify the company’s position for the future and keep the 150 jobs in place.

Solution

After months and years of losing money, the Company, with Turning Point guidance, began turning a profit in within 3 months of engagement. Cash burn was eliminated and positive cash flows began within that 3 month period. We assessed the Company’s strengths and weaknesses, analyzed their financial situation and revenue streams. Since the Company did not have a lot of time, selected pricing and surcharge adjustments and focused cost cutting measures were implemented. The quickest and most effective strategy was going to be driven largely by aggressive pricing and cost cutting as well as aggressive cash management. The price increases were focused on those customers identified with low margin products. Expense were cut and the Company streamlined the organization.

Results

  • Within 3 months, the Bank renewed its Credit Facility with the Company, removed the forbearance agreement and implemented standard terms and conditions.
  • The Company paid down around $5,000,000 in debt owed to the Bank and was consistently profitable.
  • Top operation’s and sale’s leadership were hired and the organization improved its processes with frequent communication with its employees.
  • The Company was able to retain a majority of its employees based on this turnaround effort.

Case Study – Turnaround Manufacturing Industry; M&A Advisory

Situation

A mid–sized manufacturing company based in the Upper Midwest with three operating divisions, an iron foundry, a machine shop and a bridge inspection crane manufacturing unit, had been losing money for several years in its foundry and machine shop divisions. The crane manufacturing division was profitable but was only 20% of total company revenue and considered a non-core operating division. The company had severe cash flow problems as it was struggling to meet supplier obligations to continue operating as a going concern. It had used all its available credit on a working capital line and was struggling to stay current on its term debt payments. The Bank was considering a foreclosure on the business given the historical operating results and no apparent plan to achieve positive cash flow to cover their debt obligations. To complicate matters further, the company had not paid employee withholding taxes for some time and the IRS had placed a lien on certain assets of the company. Turning Point was engaged to manage the severe cash crisis, assess the Company’s financial and operating plans, drive a financial turnaround, and re-establish the basis from which to renegotiate the current credit facility, seek a new lending partner and/or sell the business units. The principals of Turning Point were selected based on their manufacturing, operational and financial backgrounds

Challenges

  • Ongoing losses with no plan in place
  • Low margins with their 3 largest customers
  • Cash burn was over $100,000 per month.
  • Management had no operating plan to run the business day-to-day, much less turn the business around.
  • Lack of sound financial management including gross margin analysis, inadequate cash flow reporting and minimal key metrics tracking
  • Major tax issue as the Company had not paid employee withholding taxes for some time and the IRS had placed a lien on certain assets of the company.

Solution

We assessed the Company’s operations, analyzed their financial situation and examined current cash flow. We determined the quickest and most effective strategy to immediately improve cash flow and operating results was going to be aggressive price increases, commodity surcharge adjustments and cost cutting throughout the organization along with effective cash management (working with customers and suppliers). The price increases were focused on major customers identified with low margin products and implemented within 45 days of engagement. Commodity surcharges were adjusted to provide appropriate margins to the business rather than just a cost pass through to customers. Cuts in discretionary expenses and a reduction in force were implemented after 90 days. After years of losing money, the Company began generating positive EBITDA (free cash flow) in the 4th month after engaging Turning Point and every month thereafter

Results

Turning Point was able to turn the business around and operate it on a positive EBITDA basis for 7 months until it successfully sold the Foundry and Machine Shop divisions to the largest foundry operator in the industry. The acquiring firm invested significant capital in plant and equipment improvements, retained 95% of the employees and 100% of the manufacturing work force and had plans to bring in new business which would require an expansion of the existing workforce. All the Company’s secured and unsecured creditors were paid in full from the proceeds of the transaction

Case Study – M&A Advisory, Manufacturing Industry

Situation

A business division was established in 2001 in Humboldt, Iowa as a strategic expansion of a parent company. The division started in a 25,000 square foot facility specializing in the design and fabrication of custom stainless steel material handling and packaging equipment for food stock environments. The division was envisioned as an extension of the parent company and its controls business. The division was designed to have the capability, resources and experience to offer certain upgraded levels of both fabrication and controls. The division operated as a stand-alone entity with large, quality customers, including exclusive manufacturing agreements with companies like Wells Dairy (Blue Bunny) in Le Mars, IA. The parent company’s long-term plans for growth and profitability in the division and strategic alignment with their controls business did not meet its current strategic benchmarks. The parent’s core business was growing, and therefore, decided to focus resources on that business. The parent decided to sell the division. The parent company retained Turning Point to advise the Company and determine the best options to optimize the divisions’ value to the parent. Options included selling the Division, continue current operations implementing a viable turnaround plan and/or invest in and grow the business. Turning Point determined the best option to be a sale of the division.

The Success

Turning Point, through its broad base of contacts, identified a number of buyers that fit the profile. The buyer chosen was an excellent fit as it was seeking to expand its market base, add product lines and establish a new distribution location. The sale was completed within 90 days of engagement.