The Company, a newly formed Company in mid-2010, builds bulk material transportation equipment primarily for the over-the-road tank and trailer industry. It is owned by a family-owned investment firm focused on building a portfolio of growth oriented, privately held companies throughout the local region.
The Company was formed through a merger of two of the investment firm’s holdings (“RW” and “EN”) located in MN that were acquired in 2009 and 2010, respectively. The strategy was to combine the similar manufacturing and engineering capabilities of the companies under a single new brand. Although a new entity, the Company’s products are backed by over thirty years of previous experience in the market segments they serve. The Company has two manufacturing locations located in Northwest MN. Before their acquisition by the family investment firm, the two Companies were profitable and cash flowing.
RW manufactures steel belly dump trailers used primarily for hauling sand, gravel, aggregate, asphalt, concrete, stone and more. EN primarily manufactured food grade stainless tank trailers plus some carbon steel industrial vacuum tank trailers used in a variety of liquid bulk hauling applications. It also produced fire trucks, tank trailers for the municipal water and septic pumper markets. EN had one primary customer accounting for a large part of their sales plus some repair business that generated approximately 2-3% of total revenue.
Upon the merger, The Company brought in a new President/CEO from the industry with a strong background in engineering, sales, and quality. The merged Company grew its sales in 2011 and expanded its customer base but had significant losses and had not yet made a monthly profit. During the first year of the merger, it introduced a new product line of trailers (aluminum end dumps) which it had difficulty building and selling. It burnt through a lot of cash in a short period of time which was covered by the family investment firm’s line of credit after its Bank was unwilling to continue funding the business.
For the first seven months of 2011, the Company’s sales were $4.8 million with a net loss of $1.7 million compared to $4.7 million in sales and a net loss $1.1 million for all of 2010. 2011 year to date gross margin was approximately a negative 10%.
During June 2011, the CFO had left the business and the CEO had resigned effective June 10, 2011. This left a huge vacuum in both leadership and company management. A board director took over in the interim as acting chief operating officer. Two managers were assigned interim roles, one as interim general manager of the EN operation and one as general manager of RW. There had been no official replacement for the CFO though various accountants for the family investment firm and the Company are handling day-to-day financials and accounting functions.
The company had approximately 45-50 employees, between the two manufacturing operations and office administration. Sales leadership also left the Company in early July 2011.
In addition, the Company had sold one MN facility and was leasing it back. It is required to move from the facility by December 31, 2014.
Along with the month-to-month losses the Company was borrowing cash on the related party line of credit at a rapid rate. There were no outside bank credit arrangements. All funding was done internally through the Family Investment Firm and its working capital line of credit. Accounts payable aging had grown to approximately $500k over 30 days with some suppliers placing holds on deliveries until payments were received causing continuity issues in manufacturing operations.
Gross margins were nonexistent and not being reviewed or managed. There had been no margin or pricing reviews, and the cost of the units was not analyzed.
Inventories appeared high given the sales level and demand. It was noted that certain inventories were purchased in bulk in advance, but not used for some time in production. At 2010-year end, the Company incurred a major inventory write-off of approximately $750,000.
Selling general and administrative expenses seemed disproportionally high given current revenue levels.
It was unclear whether the Company could be profitable and cash flow. The Family Investment Firm had invested close to $7 million in the Company and incurred $2.5 million in recent line of credit borrowings to fund operating losses. There was no clear outlook for future payback. The first order of business was to determine if this Company was a going concern.
There was not clear or experienced management in place. The two operations were operating completely independently and there was no real manufacturing leadership in place for the entire Company. There was no real production or capacity planning in either operation. Additionally, Sales was not utilizing Engineering for design or for quoting support thus leading to huge cost overruns on jobs.
The determination of the Company’s going concern capability was critical along with its immediate need for interim experienced executive leadership. After our initial interviews, we believed, with the right “fixes”, the Company could survive and continue as a going concern.
- Established Executive Leadership
- On July 1, 2011, Turning Point Management Advisors stepped in as interim executive management to operate the Company day-to-day; Bob Silhacek as acting CEO and President and Mike Wise as acting CFO.
- The CEO and President responsibilities included – day-to-day management of the business, full P&L responsibilities, organizational direction, structure and priorities, performance assessments (including hiring and firing), processes, controls, quality, operations, reporting to the BOD, and with the support of the CFO, assessment of product margins, cost structures, expenses, and revenue streams.
- The CFO responsibilities included – accounting/finance, accounts receivable and accounts payable management, cash management and forecasting, financial reporting and analysis, business projections and modeling, operations reviews and development of key metrics, risk management and other administrative functions as required.
- Stabilized the Business
- As part of our interim management responsibilities, we immediately stabilized the business eliminating the cash burn, implemented employee communication meetings regarding goals, profitability and cash flow and executed the short-term actions deemed necessary including but not limited to the following:
- Conducted an immediate cash flow analysis understanding cash burn and opportunities to reduce cash needs as soon as possible.
- Completed a thirteen-week rolling cash flow model that projected cash position week by week, for 90 days into the future with well documented assumptions, in as much detail as necessary, to validate projections.
- Completed a margin review of current business including analyzing the costs associated with current sales and backlog; determined as soon as possible if current orders were profitable; identifying pricing adjustments where/if needed.
- Addressed inventory levels, excess inventories, valuation and purchasing management. Determined if inventories could be managed through vendor relationship around payment timing and scheduling.
- Conducted detailed operations reviews and assessments – process flow, work orders, production scheduling, potential increases in through-put, etc.
- Conducted short term organizational review to determine if the appropriate staffing was in place, eliminate overlap of duties, and job fit.
- Addressed vendor past due situations through negotiations of revised terms and deferrals.
- Analyzed SG&A costs to determine immediate opportunities to reduce.
- Completed a Reforecast of the business for the balance of 2011.
- Conducted Tank Trailer Market and Competitive Analysis
- As part of our going concern analysis, we needed to specifically determine the viability of EN. To determine its viability, we completed a thorough market analysis including industry size, vertical markets and key attributes assessment, number of competitors, leading manufacturers/market share, assessment of the company’s capabilities versus the competition. We determined the vertical markets to continue pursuing, to be pursued or to exit. Bottom line, we believed it was a viable operation with new opportunities for growth due to the needs in the North Dakota oil fields.
- Restructured Organization
- We reduced the size of the organization from 48 to 31 employees to fit the current revenue projections for the business. All reductions were in manufacturing. A total annualized savings of approximately $750K.
- We established the management team, redefined their responsibilities, expectations and goals for the next six months.
- We added critical positions that were not previously in place – RW production manager (also part of the ongoing management team), production scheduler and inventory buyer.
- Increased Production Capacity and Throughput
- We completed operational reviews at the two manufacturing plants, identifying production inefficiencies, process bottlenecks, process/flow improvements, capacity issues, current constraints (lack of inventory, equipment repairs/needs, workforce skills, etc.) and floor layout issues. A significant number of issues were identified, and action plans completed to address each.
- We also addressed all safety and plant cleanliness issues.
- We introduced floor metrics through the use of white boards indicating status (department location and expected completion) of every production job on the floor.
- We introduced work force incentive plans based on the number of trailers produced each month versus expectation.
- Reviewed Product Pricing, Product Costs (Materials, Labor and Overhead) and Gross Margins
- We completed an in-depth review of all product lines to clearly understand the pricing, costs and margins identifying any opportunities to bring margins to acceptable levels through targeted price increases or cost reductions. After our review, we established new labor rate and overhead rates for proper margin analysis and price lists for all product lines. This included the proper classification of cost between “true manufacturing” costs and those classified as selling, general and administrative costs.
- Each month we review and analyze gross margin by unit as to results and issues with any product manufactured so we then can make substantive adjustments to improve margins. We implemented a more robust quoting process to include a thorough review by key engineering staff members of all costs to construct various products. This process ensures our ability to obtain appropriate gross margins on all jobs accepted for production.
- Increased Product Distribution Through Dealer Network Expansion
- We greatly increased the number of RW units sold to dealers representing the RW belly dump products. In the past all sales for EN units were sold direct to customers. To broaden our distribution, we began utilizing these same dealers to begin selling the EN’s water vacuum trailers made specifically for the North Dakota oil field applications.
- ERP System Upgrade
- The company managed its manufacturing and inventory systems on one software system and its accounting applications on another software application. This created numerous issues in reconciling the ERP system perpetual inventory balances with the General Ledger Book balances. We moved the accounting applications to the same software application used for ERP and inventory management.
- Implemented Daily Dash Board Reports
- Daily Treasury Report – Financial personnel responsible for completing a daily treasury report consisting of the prior day’s information – Bank account status, outstanding checks balance, net cash availability, invoicing for the day and MTD, cash receipts detail, and major cash disbursements.
- Production Status Reports – Each plant’s production manager has a daily production meeting and provides a daily status of all jobs in production – their location in the manufacturing process and any issues that must be addressed. We have also implemented a notification process for units completed for pick up or delivery and billing.
- Implemented weekly Inventory Cycle Counts
- To avoid the potential for any large book to physical inventory adjustments as the company had experienced in the past, we implemented a weekly cycle count process aimed at counting all inventory items over several weeks. This process has provided us information to correct errors in process, data input, etc. We are now much more confident in our inventory management systems.
- Improved Balance Sheet
- We cleaned up the balance sheet through fixed asset audit writing off nonexistent assets, two physical inventories adjusting books to actual physical quantities and review of all accruals and prepaids ensuring proper support for each. We implemented a monthly balance sheet account reconciliation review process to ensure all balance sheet account balances are proper and supported.
- Developed the 2012 Strategic and Financial Plan
- We developed the 2012 Strategic and Financial Plan utilizing the Balanced Scorecard methodology to define strategic objectives and how we will measure our success against those objectives. We defined a quarterly management review process on status of all initiatives.
- Immediately stopped the monthly losses, cash burn and line of credit borrowing. In August 2011, the second month under Turning Point leadership/management, the Company achieved its largest monthly sales total in 2011 to date of $1.2 million and its first month of profitability and positive EBITDA, $14K and 78K, respectively.
- Greatly improved cash management through timely invoicing of completed units, collection of accounts receivable, improved payment terms, reduction of past due accounts payable for better delivery of materials and supplies for increased production output.
- Eliminated the dependence on the line of credit, holding the balance at $2.5 million in 2011. The business has not borrowed any money since July 2011 except for minor working capital timing issues and has generally operated on cash from operations. The Company also paid back the $175,000 intercompany payable.
- Tripled the RW product output from 7 belly dump trailers when we arrived in July 2011 to a record output of 22 trailers in June 2012.
- Increased overall sales from $4.3 million in the first half to $4.7 million in the second half of 2011, a 9% increase. Under Turning Point’s management, for the period August through December 2011, the Company achieved a gross margin of 14%, generated an operating profit of $100K and was EBITDA positive.
- In the first half of 2012, increased sales to $5.9 million, a 37% increase over the same period in 2011 while generating a gross profit of $1.0 million, or 17.2%, net income of $104K and EBITDA of $501K, or 8.6% of net sales.
- Utilizing cash from operations to invest in equipment repairs/upgrades to improve manufacturing operations.
- Increased sales backlog significantly. As we increased capacity, we asked our dealers for commitments to purchase units thus locking in slots for production. Because of this, we have greatly increased orders. RW backlog at June 30, 2012 was approximately $4.0 million, or enough to cover our 2012 Plan expectation for the second half. EN has a $750K backlog and continues to see exceptional activity in requests for quotation on a variety of products.
- In our EN company, we have introduced a number of new products including vacuum water transport trailers, carbon steel pup trailers, stainless steel pup trailers and are moving toward production of 406, 407, and 412 code trailers. Margins that were either negative or zero on food grade transport trailers are now anywhere from 10 to 22%.