Turning Point Management Advisors, LLC

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.

Case Study – M&A Advisory, Manufacturing Industry

Situation

A mid–sized iron foundry in the Upper Midwest had successfully orchestrated a business turnaround and bank credit line renegotiation through the management and guidance of the principals of Turning Point. However, the most recent economic downturn caused the Company’s monthly revenue to drop precipitously by 50-75%. The Company needed additional financing and/or capital to sustain itself during this business downturn. Banks were very risk averse as their own balance sheets were being scrutinized by bank regulators during the financial system crisis. If capital and/or financing could not be obtained, ownership would be forced to sell the Company. If a sale of the Company could not be completed, liquidation would be the only option.

Our Process

We assessed the Company’s operating cost structure and reduced expenses wherever possible to minimize the current cash burn. We conservatively projected the business over the next two years to determine the required interim, and potentially permanent, financing required. We met with the current bank to determine their willingness to lend additional funds to the Company if a security interest could be provided in additional collateral (land, buildings and fixed assets). The current bank was not interested in expanding the current credit agreement. We met with other banks but they were not interested in providing a new credit facility given the uncertainty of the industry and the economy. We asked ownership if they were willing to inject the capital necessary to sustain the business over the next 24 months. They were not interested. We proposed to ownership and the bank an aggressive plan to market and sell the Company within 6 months.

The Success

Within four months, we completed the sale of certain Company assets (the customer base and some fixed assets) to a leading firm in the foundry industry. The proceeds allowed all secured creditors to be paid in full. Through an out of court liquidation, the remaining fixed assets have been sold and the real estate is in the process of being put on the market. We expect the unsecured creditors to recover approximately $.30 – $.40 on the dollar. In addition, we were able to negotiate a sizable non-compete payment for ownership. All stakeholders are very pleased with the outcome of these transactions.