Turning Point Management Advisors, LLC

Case Study – Turnaround Distribution Industry

Situation:

A family-owned, 95 year-old, wholesale distribution business that provided the highest quality brand name supplies and equipment to institutional and industrial launderers and dry cleaners in the upper Midwest had experienced three years of declining revenues along with operating losses. The downward trend in financial results had caused the Company’s lender for over 20 years, to become concerned about the Company’s future ability to repay its $2.0 million asset- based line of credit which was fully collateralized by accounts receivable, inventory and cash surrender value of life insurance policies. As a result of the continued operating losses, the Company was also experiencing cash flow issues. Consequently, the bank indicated to the Company that it may not renew its credit facility unless the Company retained a turnaround management firm to address its deteriorating financial results. Turning Point was engaged to assess the Company’s financial performance and business operations, organization, prepare recommendations and a plan to drive a financial turnaround. Additionally, Turning Point was engaged to develop a cash forecasting process and re-establish the basis from which to renegotiate the current credit facility or seek a new lending partner. Turning Point was selected based on its in depth due diligence of the situation, the Principals’ business experience managing and operating companies through turnaround and their successful track record of renegotiating and sourcing new bank credit facilities.

Challenges:

  • Three years of declining revenues and operating losses
  • Low gross margins in the Supplies business segment
  • Excessive warehouse space and costs due to multiple, inefficient Company-owned locations
  • Unionized warehouse workforce
  • High inventory levels with declining sales
  • Lack of sound financial management including gross margin analysis, inadequate cash flow reporting, minimal key metrics tracking plus no financial plan to monitor actual results against
  • Bank relationship was strained; new credit relationship may be necessary

Our Process:

We completed a thorough review of the Company’s operations and financial performance to date including an analysis of gross margins for all product lines. We analyzed current cash flow and prepared a 13-week rolling cash flow forecast for the Company to operate within.  We completed an organization review to assess the strengths and weaknesses of management and employees. Turning Point then prepared a SWOT (strengths, weaknesses, opportunities and threats) analysis on the Company, generating a realistic operating and financial plan for the upcoming fiscal year with recommendations for immediate action necessary to improve the financial results of the business. Additionally, we prepared a longer range operating and financial plan with specific recommendations to be implemented. The analysis and the short and long-term operating and financial plans along with our recommendations were presented to the Bank.

The Success:

The Bank concurred with our assessment and recommendations for a business turnaround and our short and long term financial/operating plans. The Bank agreed to maintain the current credit facility for the Company until a new credit facility was secured. Turning Point assisted the Company with the implementation of certain recommendations. One of the most critical recommendations was the sale of a warehouse location which converted an under-performing asset into needed cash. The sale of the warehouse location was completed within six months. With an improved balance sheet, the Company secured a new credit facility with lower rates and better terms from a local bank. The Company is now operating successfully and profitably.

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 – Note Holder Debt Restructure

The principals of Turning Point represented a class of Note Holders of a large Midwest lumber company that were in the process of renegotiating with their senior lenders.  Through the process of meeting with the 160 plus Note Holders, conducting information meetings with Company management, and reviewing and assessing the Company’s turnaround Plan, we were able to achieve a 98% approval by the Note Holders. They accepted the new terms and conditions recovering a majority of their investment as well as allowing the Company to restructure out of court and continue to operate in a difficult economic environment.