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The Anatomy of a Turnaround
A Seminar prepared by
FTI Consulting, Inc. and the ALTMA Group for the
World Bank Conference
Corporate Restructuring: International Best Practices
March 24, 2004
1
Agenda
I.
II.
Introduction
Stages of Business Decline
III.
Case Study: LaRoche Industries
• Primary Conditions Leading to Insolvency
IV. Turnaround Options
V. Stages of the Turnaround Process
VI. Case Study: LaRoche Industries
• Turnaround Options and Plan Formulation
VII. Role of Professionals
VIII. Appendices
2
Presenters
• Randall S. Eisenberg, FTI Consulting, Inc.
• Elliot Fuhr, FTI Consulting, Inc.
• Sean A. Gumbs, FTI Consulting, Inc.
• Peter L. Tourtellot, Anderson Bauman Tourtellot Vos & Co.
3
Introduction
4
Introduction
•
High visibility corporate failures in the United States and other countries have heightened
awareness of the corporate restructuring field. While these particular companies may be newsworthy, the reality is that business failures of all sizes occur in all regions of the world with
significant impacts on local and global economies.
•
The foundational issue affecting how these business failures are dealt with is the country-specific
willingness to rehabilitate distressed companies versus liquidate them. Assuming this willingness,
countries must have in place (or develop):
– Mechanisms to support direct restructuring negotiations with major creditors (Out-of-court
workouts); and
– A legal / government structure to provide oversight for in-court restructurings
•
The are a host of critical policy issues to be considered during business rehabilitation, including:
– Local regulations regarding the displacement of employees (an unfortunate potential
outcome)
– Local regulations regarding discharge of debt via restructuring
– Local regulations regarding payment of government obligations (e.g., taxes)
•
This seminar will provide participants with frameworks for identifying the stages of business
decline and the stages of the turnaround process. The goal is to provide the tools to assist both
companies and their creditors to institute corrective measures earlier and to avoid the high costs of
insolvency.
5
Stages of Business Decline
Chart of the Causes of Business Failure
Sheer bad luck
1%
Internally generated
problems within
management’s control
52%
External factors beyond
management’s control
8%
Real balance of external
and internal factors
24%
Internal problems triggered by
external factors
15%
Source: Association of Insolvency and Restructuring Advisors
6
Stages of Business Decline
The Corporate Demise Curve
Expected Performance
Infancy Stage –
Stagnation (Stage 1)
Early Stage – Underperforming
(Stage 2)
Midstage - Significant
Performance Impairment
(Stage 3)
Late Stage – Crisis
(Stage 4)
7
Stages of Business Decline
Infancy Stage – Stagnation (Stage 1)
•
Operating margins and other key ratios falling behind industry averages
•
Period-over-period revenues flat or declining
•
Increased inventory write-downs
•
Lack of (or misguided) product investment
•
Problems with integration of acquisitions
Changes in the environment (e.g., economic, competitive or regulatory) combined with
internal shortcomings (e.g., poor, fraudulent or unbalanced management) can cause a
company’s problems to incubate during this stage.
8
Stages of Business Decline
Early Stage – Underperforming (Stage 2)
•
Significant declines in revenue and/or EBITDA as variable costs grow and fixed costs
remain constant
•
Assets are not sufficiently liquid
•
Underutilization of fixed assets
•
Needed capital is tied up in receivables and inventories
•
Management attention is diverted from traditional functions due to cash shortage
This is the time to keep a grass fire from turning into a forest blaze…but management
may not be willing to accept that problems exist or appreciate the severity of these
problems.
9
Stages of Business Decline
Midstage – Significant Performance Impairment (Stage 3)
•
Credit and merchandise shortages occur
•
Cash and credit difficulties become apparent to both insiders and the general business
community
– Creditors unwilling to advance further credit
– Suppliers may refuse to ship altogether
•
Increased risk of loan covenant defaults
•
Potential loss of key customers and/or suppliers
•
Potential loss of key employees
Without proper forecasting, a cash shortage may be the first time management
acknowledges a problem. With insolvency looming, action must be taken immediately.
10
Stages of Business Decline
Late Stage – Crisis (Stage 4)
•
Company cannot pay obligations as they come due
– Inability to service long-term debt
•
Overall payables growth with delinquent payables becoming significant and unmanageable
•
Actual or appearance of insolvency
•
Public acknowledgement of business failure
In some countries, legal systems are not structured for a turnaround at the crisis stage,
therefore a company’s only option is to liquidate.
11
Potential Areas to Search for Warning Signs
Accounting/
Accounts Receivable
Stakeholders
Management/
Board of Directors
Warning
Signs
Late or Nonpayment
of Obligations
12
Operating
Trends
Potential Areas to Search for Warning Signs
Stakeholders – Creditors, Lenders, Customers, Investors and Employees
• Loss of financial backing
• Loss of major supplier where special relationships existed, such as extended credit terms
• Excessive negotiations regarding credit issues
• Increased stock trading and/or declining stock price (public company)
• Excessive staff turnover/loss of key employees
• Increased vendor concerns cause management to spend more time preserving relationships
Management/Board of Directors
• Loss of key officers and/or members of the Board of Directors
• Ineffective leadership (i.e. lack of vision, rigidity among management)
• Cash management becoming a primary activity at the expense of traditional management functions
• Not capitalizing on potential synergies after mergers or acquisitions
Late or Nonpayment of Obligations
• High percentage of payables over 90 days past due
• Inability of the company to make timely deposits of trust funds such as employee withholding taxes
and pension plans
• Inability to service long term debt
• Vendor canceling terms and requiring cash on delivery
• Difficulty meeting payroll
• Line of credit at or near ceiling with no recent decreases
• Frequent or continued extensions of credit
13
Potential Areas to Search for Warning Signs
Operating Trends
• Loss of major customer with no apparent redirection or operational changes by management
• Increasing operating costs
• Key operating ratios continue to decline
• Decreasing or inadequate margins
• Loss in market share/Increasing competition
• Cash flow shortage
• Unusual or extraordinary litigation and events not customarily encountered in the industry
• Significant discrepancies between actual and projected results over the last three years
Accounting/Accounts Receivable
• Default on payment by major customers
• Creative accounting and beneficial adjustments to the books
• Poor record keeping or inadequate financial records
• No internal operating controls (i.e. lack of cash flow budgets or contingency plans)
• Change in accounting firm
• Major bad debt
• Excessive receivables unpaid over 90 days
• Lack of collection policy and lack of significant controls
• Insufficient segregation of duties in the collections department
14
Case Study
LaRoche Industries
Company History and Primary Conditions
Leading to Chapter 11 Filing
15
LaRoche Industries, Inc.
Background
•
By 1999, LaRoche Industries, Inc. was an international diversified producer and
distributor of inorganic and organic chemicals operating in three principal segments,
including Nitrogen Products and Electrochemical Products both in the North American
and European Markets.
•
The Company operated eight plants including four Ammonium Nitrate plants, one
Ammonia plant, one plant producing both fluorocarbon and Chlor-alkali products, and
two Chlor-Alkali facilities in Europe.
•
Also operated 23 national ammonia/AN distribution centers throughout the continental
United States.
16
A Brief History….
1986-1990
1986 Founded by William LaRoche
through a management buyout of
U.S. Steel Corporation’s
Nitrogens, mixed fertilizers, and
retail business
1991-1995
1994 Establishment of Joint
Venture with Avondale
Ammonia
1995 Construction of Seneca, IL
blasting grade ammonium
nitrate facility
1988 LaRoche acquires certain
chemical production operations of
Kaiser Aluminum and Chemical
Corp in Gramercy, Louisiana
1996-1999
1997 / 1998 Expansion into Western
Europe by purchasing a 50% joint
venture interest in a Rhodia
Chlor-Alkali operation in France
("ChlorAlp"), and by purchasing a
Chlor-Alkali facility in Frankfurt
from Hoechst Celanese
1998 March Initial downturn in
ammonia and Chlor-Alkali prices
1998 November Company begins
corporate reorganization efforts
1990 Strategic capacity investments at
Cherokee, Alabama AN facility
1999 Purchase of the remaining 50%
interest of ChlorAlp
1990 Phase out of CFC, replace with
HCFC
1999 Refocus on core AN and ChlorAlkali business including the sale
of Aluminas business and related
Joint Ventures, strategic review of
options
17
Diversified Products and Markets
A closer look at the chemistry reveals a high dependence on natural gas
for raw materials necessary to make end products.
Electrochemical Products
Nitrogen Products
Products
• Ammonium Nitrate
• UAN Solutions
• Industrial Ammonia
European Chlor-Alkali Products
•
•
•
•
•
• Chlorine
• Caustic Soda
• Fluorocarbons
Markets
Markets
• Fertilizers
• Blasting Products
• Industrial Products
Chlorine
Caustic Soda
Chlorinated Methanes
Hydrochloric Acid
Calcium Chloride
US Chlor-Alkali Products
•
•
•
•
•
•
Pharmaceuticals
Agrochemicals
Water Treatment
Pulp and Paper
Detergents
Silicones, fluoropolymers
and solvents
18
Markets
•
•
•
•
•
Vinyls
Water Treatment
Chemicals
MDI/TDI
Titanium Dioxide
Diversified Geographic Presence
LaRoche had several small manufacturing facilities acquired through a “roll-up” strategy.
Frankfurt
Seneca
Geneva
Pont-de
Claix
Crystal City
Cherokee
Atlanta
Gramercy
Fortier
Corporate Headquarters
Manufacturing Facilities:
Nitrogen Products
Industrial Ammonia Distribution Center
Nitrogen Products Terminal
Chlor-Alkali Products
Chlorinated Methanes
19
Past Performance
Historical Sales
$400
$70
$389.5 $398.6
$386.9
$390
EBITDA
$380
$370
$360
$50
$361.0
$46.4
$40
$350
$339.0
$340
$35.0
$30
$342.6
$30.5
$33.1
$17.3
$20
$330
$10
$320
$310
$57.8
$60
1995
1996
1997
1998
$0
1999 2000PF
Sales over the five years prior to
2000 remained at relatively
consistent or improving levels.
1995
1996
1997
1998
1999 2000PF
Yet, profitability slumped due to the
increased costs of production and
depressed pricing.
Notes:
(1) Pro Forma for the divestiture of Aluminas and the purchase of the remaining 50% interest in ChlorAlp.
20
Factors Contributing to Poor Performance
Decreasing Prices for
Products
Increasing Costs of Raw
Materials
High Debt / Interest Burden
Inappropriate Overhead
Capital Spending
Catastrophic Event
Approximately two years of depressed market prices for its domestic
Nitrogen and Chlor-alkali products.
• Supply/Demand imbalances compounded by foreign imports
Natural Gas, both the raw material and source of energy for Ammonia and
Ammonium Nitrate products grew steadily from mid-1998, and increased
dramatically in the first 5 months of 2000 immediately before filing.
High levels of debt due to the purchase of European operations. Cyclical
nature of business does not promote even debt repayment strategy.
Overhead levels in place for a large company with multiple layers of
management.
Although strategic acquisitions were made, most were non-accretive to
value. Maintenance capital expenditures were above normal due to the
age of facilities.
Explosion in July 1999 at Kaiser plant idled Gramercy electrochemical
facility for six months resulting in accumulated loss on income and
damages in excess of $16mm.
21
1. Pricing Market Impact
Domestic prices for Nitrogen and Chlorine / Caustic Soda dropped to lower levels than
in the previous profitable years. Hedging strategies were not sufficient to offset the
sharp increase in natural gas prices.
Ammonium Nitrate Historical Pricing
LaRoche Chlor-Alkali Historical Selling Price
250
400
ECU
Ammonium Nitrate
225
300
Caustic Soda
200
$ per ton
$ per ton
200
175
100
150
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Chlorine
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
A commodity business with little control over product pricing.
22
2. Natural Gas Market Impact
Natural Gas Prices Sold to Industrial Consumers
1997-2001
– Natural Gas, a precursor for most of LaRoche’s
products, experienced an unprecedented 4-fold
increase in price in a matter of months directly
after filing.
$ per ton
9.0
8.0
7.0
– Natural Gas contributed to 56-67% of unit cost for
production of ammonia, while ammonia
contributed to up to 79% of unit cost for various
ammonium nitrate products.
6.0
5.0
4.0
3.0
– The Company was unable to hedge its risk
against the rising costs due to liquidity reasons.
2.0
1.0
0.0
Jan
97
Jul
97
Jan
98
Jul
98
Jan
99
Jul
99
Jan
00
Jul
00
Jan
01
Source: Natural Gas Monthly
LaRoche was unable to pass along higher raw material prices to customers and found
it difficult to compete with better capitalized, more efficient competitors.
23
3. Debt Position
Debt increased due to two major factors:
• Europe Plant acquisitions required a total of $75-$80 million from 1997 through 1999
• Early debt retirement and new debt issues cost of $17 million in 1997
Debt (a) to
EBITDA
Debt to Free
Cash Flow
(b)
Debt to
Assets
Enterprise
Value to
EBITDA
Debt to
Enterprise
Value (c)
Agrium, Inc.
1.5x
3.2x
0.3x
4.0x
0.4x
Mississippi Chemical
6.0x
28.1x
0.3x
8.9x
0.7x
Geon Co.
1.2x
2.0x
0.2x
8.4x
0.2x
Georgia Gulf
2.6x
3.1x
0.7x
7.3x
0.4x
Olin Corp.
1.1x
1.1x
0.1x
4.1x
0.3x
Pioneer Cos, Inc.
7.1x
12.2x
0.8x
7.1x
1.0x
Average
3.3x
8.3x
0.4x
6.7x
0.5x
LaRoche (d)
9.7x
n/a
0.7x
1.7x
1.7x
Source: Bloomberg
(a) Debt includes all interest-bearing debt obligations.
(b) Free cash flow is defined as EBITDA minus capital expenditures.
(c) Enterprise value is defined as debt plus market value of equity less cash.
(d) EBITDA ratios calculated on projected FY 2000 peformance.
Enterprise value based on Chase debt plus market value of notes.
 As credit markets tightened, deleveraging through a sale of assets or refinancing became
increasingly more difficult.
The message: Don’t take on debt unless you can pay it back.
24
4. Other Expenditures
• Overhead levels were in place for a much larger company:
− Legacy Issues – Due to the Company’s creation from ancillary parts of USX and Kaiser, there
were certain contract stipulations binding LaRoche which mirrored the pension and medical
benefits plans of those legacy employers. LaRoche was burdened with high costs of labor.
• Certain investments and expenditures occurred which added little accretive value:
− LaRoche Air and Filter Business - $14 million
− Personnel Team Building Program - $4 million
− Dividend Payments - $3 million
− Stock Repurchase Program of approximately $25 million
• Capital spending was above normal:
− Replacement of brine line for Gramercy operations - $12 million
− Cherokee Plant expansion - $31 million. Expansion yielded little if any payback. Further,
LaRoche did not have a “look-back” procedure to monitor return on investment from capital
projects.
• Explosion at Gramercy Plant site resulted in $16 million in damages and losses.
− The thinly capitalized company could not overcome the lost revenue. Although LaRoche
ultimately did recover business interruption insurance, the time delay was significant.
25
Result: Stages of Business Decline
• Infancy Stage – Stagnation (Stage 1)
− Due to increased costs, certain production facilities were idled short-term.
− Operational revenues declined along with EBITDA as variable costs were growing
and fixed costs remained constant.
• Early Stage – Underperforming (Stage 2)
− Vendors tightened existing credit.
− Cash shortage ensued.
• Midstage – Significant Performance Impairment (Stage 3)
– Weak operating performance left Company in violation of certain debt covenants included
in its senior credit facility beginning in mid-1998 resulting in amendments and reduction in
borrowing bases from this point through filing.
• Late Stage – Crisis (Stage 4)
− Company defaulted on bond interest payment in March 2000.
26
Turnaround Options
27
Foundations for a Successful Turnaround
The foundations of a successful turnaround are:
– The overall environment must be receptive to business restructuring. Government,
companies and creditors each play important roles in shaping this environment.
– The specific business under consideration must be worth restructuring.
Overall Environment
Government Role
– Regardless of the country, a legal system must be in place for dealing with distressed
or financially troubled companies.
– The “model” for a successful legal structure should weigh many variables although
the decisions and ultimately the outcome will differ for every country. For instance:
– Stance of the government concerning creditor issues – Favorable/Nonfavorable?
– Stance of the government concerning company/debtor issues –
Favorable/Non-favorable?
– Stance of the government on financial issues such as monetary backing and
other monetary policies for troubled companies
– The most favorable option for a government may consider a combination of both
creditor and debtor concerns.
28
Foundations for a Successful Turnaround
Corporate Role
• Recognize when a turnaround/workout is necessary. Prolonging this will likely only
decrease chances for success.
• Make a commitment to the task and the time and get appropriate crisis management
and legal advice.
• Define roles and responsibilities of key employees and communicate.
• Quantify the problem and evaluate options and resources, understand advantages,
disadvantages, opportunities and consequences.
• Establish control over financial data and performance requirements, include deadlines
for reports.
• Require clearly written and defined plans, quantified and in time sequence with
resources identified and obtain any relevant accurate and timely information.
Creditor Role
• Make a commitment to work with the company to return maximum value to the
stakeholders.
29
Foundations for a Successful Turnaround
The Business Must be Worth Restructuring
• Identify one or more viable core businesses
– Shrink company back to segments that provide positive cash flow
– May involve selling profitable business segments unrelated to the core business
• Ensure sources of adequate bridge financing
– Seek internal sources first to lessen the need for external financing
– Form collections team
– Factor receivables
– Utilize trade credit
– Evaluate inventory
– Reduce costs
– Secure outside financing
– Banks
– Asset lenders
– Other
An informal survey conducted at a national meeting of the Turnaround Management
Association suggests that only approximately 20% of all distressed companies recover.
30
Turnaround Options
•
Factors to consider when choosing a viable turnaround option include:
– Sophistication, size, and history of company
– Quality / integrity of company’s management
– Types and sizes of creditors’ claims
– Attitudes, leverage and positions of other parties-in-interest that will play a role in
negotiations
– Fundamental business circumstances and prevailing economic conditions
– Depth of the company’s financial problems and the future outlook
•
Analyzing the above factors will help to choose:
– Reorganization or complete liquidation
– Reorganization via direct negotiation with major creditors (Workout)
– Reorganization with government oversight (e.g., U.S. – Chapter 11,
U.K. – Administration under the Insolvency Act)
By committing to a turnaround effort and analyzing the situation, management can
begin to choose the appropriate turnaround option.
31
Advantages of Workouts
• Conservation of Resources
– With planning and focus, efforts directed
towards a successful workout
– Avoid costly professional fees which
frequently occur in governmental cases
– Agreement is usually faster, directed to be
more sensible and fair
• Continuation of Business and Maximization of
Value
– Less disruptive to business, no court/trustee
to which to attend
– Management maintains decision-making
control
– Considerable asset base maintained, future
cash flows less compromised
• Facilitated Negotiations
– More trust and less hostility in negotiations
– More informal, speedier, and less frustrating
than court hearings
– Goodwill and public relations preserved
32
•
Governmental provisions avoided
– Some type of government approval may
be necessary, depending on legal
structure
– Management loses some control and
efficiency in decision making ability, more
flexibility without court system
– Depending on a country’s legal system,
management can possibly lose control
over company to creditors or lenders
– Formal process, court hearings, and
attention to detail complicates turnaround
•
More Time for Rehabilitation
– New funding possibly easier to obtain and
may be granted better terms
•
Forgiveness of Debt
– Debt unpaid may be forgiven if this is part
of a previous agreement
Advantages of Turnarounds with Government Oversight
• Negotiations with Several Parties
– If a larger number of creditors exists,
consensus may be difficult and opposition
can occur at any point, rendering past
work useless
• Prevent Imminent Threat of Attack while
Settlement is Pending
– Additional lawsuits, foreclosures, or
seizure of assets may impair workout
efforts
– There may be protection in the automatic
stay provisions depending on the legal
structure in place
• Priority Debts and Income Tax Laws
– Certain tax provisions may make
government-assisted turnaround more
advantageous
– Cancellation of debt taxable income may
deter creditors from this course and make
liquidation more attractive
33
•
Terminal Business
– If there is no hope, remedies to
repossess monies increasing the value
of the estate may be available
depending on the legal structure in place
– Recovery of preferential payments
– Fraudulent transfers/conveyances
•
Legal Provisions
– Depending on the country’s legal system
a company may be able to reduce or
eliminate certain obligations (e.g., in the
US it may reject executory contracts) or
modify rights of secured creditors
Stages of the Turnaround Process
34
Stages of the Turnaround Process
1
2
3
4
5
Management
Change
Situation
Analysis
Emergency
Action
Business
Restructuring
Return-toNormal
Stabilize
Restructure
Position for Growth
Stages can overlap and some tasks may impact more than one stage.
Overall, moving through all stages can take 12 – 36 months.
35
Stage 1: Management Change
•
Select a CEO (current or new) who can successfully lead a turnaround
– Proven track record
– Ability to assemble a management team that can restructure and implement effective
turnaround strategies
•
Weed out obstructionists
– May require replacement of some or all of top management including weak Board
members
•
Once appropriate management is in place, management must first address issues related to
the following four major stakeholder groups:
– Human Resources
• Executives
• Employees
– Vendors
– Lenders
– Customers
•
It is essential for communication with the major stakeholders to take place initially, as well as
through each stage of the turnaround process
36
Stage 2: Situation Analysis
•
The objectives that should be set and accomplished during the Situation Analysis stage
include:
– Determine viability of business
– Determine the severity of the situation
• Create a 13-week cash flow forecast to understand cash usage (See Exhibit A)
– Identify an effective turnaround strategy
• Operational
– Revenue increasing strategies
– Cost reduction strategies
– Asset reduction and redeployment strategies
– Competitive repositioning strategies
• Strategic
– Specific goals and objectives
– Sound corporate and business strategies
– Competitive repositioning strategies
• Combination strategies
37
Stage 2: Situation Analysis
•
Objectives (continued)
– Understand the life cycle of the business in relation to the chosen strategy
– Identify and document key issues in order to establish framework for integration of
strategy into Business Plan
• What products/business segments are most profitable?
• What are strengths and weaknesses of the Company?
• What areas should be expanded? Liquidated?
• In what areas do the real potential for this business lie?
• What direction should this business take?
– Develop preliminary action plan
• Communicate to all key parties in the company as well as bankers, major creditors
and vendors outside the company
38
Stage 2: Situation Analysis
•
Turnaround strategies will likely be impacted by public policy considerations. For example, if a turnaround
strategy will include employee displacement, local regulations must be considered. Some examples
follow:
– United States
• WARN Act requires employers who are planning massive lay-offs to give affected employees
at least 60 days notice of such an action.
– United Kingdom
• The employer must consult the employee’s representatives (this includes unions) if 20 or more
people are going to be made redundant (lay-offs). Failure to do so can result in the employer
being forced to pay Protective Awards (wages) to laid-off employees for a period of time.
• The employer must also consult the Department of Trade and Industry (D.T.I.) prior to
dismissals (30 days before dismissal of 20 - 99 employees, 90 days prior to dismissal of 100 or
more employees)
– Germany
• For operational-driven lay-offs (e.g., plant closings or general reductions in the work force), a
so-called “Social Selection” is a prerequisite. The employer must consider the personal and
social circumstances of all comparable employees when deciding which to terminate. A
company might be forced to terminate the most capable employee, if this employee is, by the
applicable standards, least deserving of protection under social considerations.
39
Stage 2: Situation Analysis
Examples (continued)
– France
• Employment in France is not “at will”. Dismissals can only be made based on demonstrably
and limited objective grounds which must be brought to the attention of the employee in writing.
Dismissals are subject to stringent, and often bureaucratic, procedural statutory constraints.
• Redundancies, or lay-offs on economic grounds, are subject to separate and complex
procedural and substantive constraints particularly in the case of multiple dismissals.
• The French entity (as opposed to the group to which it may belong) must be in a sufficiently
severe economic situation to justify laying off staff or making them redundant.
• There are a number of French State Agencies which have a statutory right to be advised of,
and in some cases to authorize, proposed dismissals by private sector employers.
– Republic of Lithuania
• For operational-driven lay-offs (e.g., plant closings or general reductions in the work force) that
will affect at or around 10% of its workforce, an employer must notify the relevant territorial
labor exchange, the municipal institution and the employees’ representatives.
40
Stage 2: Situation Analysis
Examples (continued)
– India
• If the reason for termination is a commercial decision taken by the employer (for example, to
reduce his workforce), the employer is obliged (depending on the number of workmen
employed by him) to retrench the workman or provide retrenchment compensation.
• Under the Industrial Disputes Act, the employer is also obliged to pay compensation to
workmen in the event of laying off such workmen or upon the closure of an undertaking in
which such workmen are employed.
– Philippines
• The authorized causes for terminations of employment are 1) installation of labor saving
devices; 2) Redundancy; 3) retrenchment to prevent losses; and 4) the closing or cessation of
operation of the establishment or undertaking.
• In each of the cases, the employer must serve a written notice on the workers and the
Department of Labor and Employment at least one month before the intended date of
termination.
• Termination pay must also be paid to the workers affected. Severance amounts are driven by
the reason for termination (higher for termination due to the installation of labor-saving devices
or redundancy).
41
Stage 3: Emergency Action
•
The objectives that should be set and accomplished during the Emergency Action stage are:
– Stabilize the business by gaining control over the situation
• Analyze 13-week cash flow forecast and evaluate which areas to improve
• Centralize the cash management function to ensure control
– Stop cash bleed and enable the organization to survive
•
Raise cash internally and externally
– Review balance sheet for sources of cash
– Sell unprofitable business entities
– Secure asset-based loans (if needed)
•
Lay-off employees and eliminate unnecessary departments quickly and fairly
– Stretching out lay-offs is poor for employee morale
– Better to cut too deeply all at once than make small cuts repeatedly
• Remaining employees tend to lose focus of necessary functions when there is job
uncertainty
42
Stage 4: Business Restructuring
•
The objectives that should be set and accomplished during the Business Restructuring stage
are:
– Enhance profitability through remaining operations
– Restructure business for increased profitability and return on assets
•
At this point, turnaround actions increase to full force
– Change focus from cash to profits
– Conduct product profitability / customer profitability analyses
– From information collected during situation analysis, a turnaround strategy should be
identified, developed and implemented
• Evaluate employee compensation and reward dedicated employees
•
Fix the capital structure
– Renegotiate debt (short and long term)
•
Ensure meaningful financial / information systems are in place
– Operationalize certain emergency stage actions (e.g., 13-week cash flow)
– Ensure accurate cost data (direct / indirect) is available
•
Fully involve employees to save the business
– Create team power to root out inefficiencies and promote profitability
– Maximize workforce efficiency and cut out unnecessary work
43
Stage 5: Return-to-Normal
•
The objectives that should be set and accomplished during the Return-to-Normal stage are:
– Institutionalize emphasis on profitability, ROI, and value-added philosophy
– Seek opportunities for profitable growth
– Build competitive strengths
– Shift from cash flow concerns to maintaining a strong balance sheet, long-term financing
and control systems
– Improve customer service and relationship
44
Case Study
LaRoche Industries
Turnaround Options and
Plan Formulation
45
Stage 1: Management Change
•
•
•
•
Management was focused and prepared to lead the Company through a turnaround
Professionals were hired to assist management in the turnaround process
Management’s compensation was tied to performance
Management accepted the challenge to fix what was broken
– All restructuring options were to be considered
– Workdays got longer and the intensity / effort level increased
46
Stage 2: Situation Analysis
To stabilize business, an infusion of capital or a significant reorganization was
necessary. Several financial options were considered with the hope of avoiding a major
operational restructuring. Financial options considered were:
– Equity Infusion
– $75 million second secured debt offering (increases liquidity but raises leverage)
– $40 million private placement of second secured debt with bondholders and asset
based lenders
– Pre-arranged subordinated notes restructuring
– Chapter 11 protection and reorganization
47
Stage 2: Situation Analysis
Financial Restructuring
Option
$75mm second secured debt
offering
Primary
Advantage
Resolves short-term liquidity
issues, retires some existing
secured debt
Primary
Type of
Disadvantage
Cost
Does not resolve leveraged capital Closing Costs, excess interest, and
structure or cash burn issues
a subsequent restructuring
$40mm private placement of
second secured debt with
bondholders and asset based
lenders
Reduces short term financial
burden by covering amortization
payments for one year and
reducing revolver
Does not resolve leveraged capital Closing Costs, excess interest, and
structure or cash burn issues
a subsequent restructuring
Pre-arranged subordinated notes
restructuring
De-levers the Company
Immediate liquidity needs to be
addressed through a bridge loan
while a consensus between parties
is reached
Professional fees and fees in
relation to bridge loan
Chapter 11 protection and
reorganization
De-levers the Company and
allows protection and liquidity for
management to implement
operational improvements
Negative reaction from public
(vendors, employees, customers),
also a costly process
Professional fees for estimated 18
months plus fees on DIP
48
Stage 2: Situation Analysis
• Cyclical nature of industry required the flexibility of a revolver.
• Availability of capital had to be sufficient to cover operating losses, debt service costs and
capital expenditures during down cycles.
−
−
−
−
Current Interest Costs
Plus: Projected Maintenance CapEx / Turnarounds
Equals: Non-Operating Cash Needs
Equals: Minimum EBITDA Plus Capital Availability Requirement
$30 million
$30 million
$60 million
• This requirement would be reduced by lower debt service costs if bonds were restructured.
• Ultimately, a pre-arranged bankruptcy was not an option due to time and liquidity constraints.
Moreover, bonds were held by par holders seeking status quo and not a restructuring.
• Out of cash and credit, LaRoche Industries used the Chapter 11 process in May, 2000 to
effectuate its turnaround.
49
Stage 3: Emergency Action
Stabilize business
Identify and
implement cost
savings initiatives
Resolve Company’s short term cash
need (then ensure long term liquidity)
Immediate
Focus on core
businesses, exit / sell
non-core businesses
REORGANIZATION
Re-position in marketplace with
appropriate strategy and structure
to ensure profitability
Time Horizon
De-lever the Company’s
balance sheet
50
Later stages of
Reorganization
Stage 3: Emergency Action
•
•
•
•
Secure a DIP facility loan to provide initial necessary funding of the business.
Initiate negotiations with key vendors to ensure continued services.
Create a comprehensive employee retention plan.
Focus management efforts towards cash management issues:
– Analyze 13-week cash flow and evaluate areas in which to improve.
– Evaluate controls throughout cash management process including purchasing,
collections, payables, etc.
– Monitor extensively the Company’s cash inflows and outflows, accelerate
collections and contact vendors to negotiate a stretch in payment terms.
• Work with European site partners to gain concessions and improvements in site
economic balance.
• Communication is key to customers, employees, vendors, creditor, and any other
related parties.
• Implement a Fix, Sell or Keep strategy for all assets on a plant by plant basis.
51
Stage 3: Emergency Action
Management recognized the need for significant changes and with its advisors began to focus on
cost reductions both before and after filing for Chapter 11 protection:
Action
Result
Corporate consolidation and reduction from 110 to 40 people
$5 million annual savings
Suspension of dividend and ownership consulting payments
$1.2 – 2 million annual savings
Reduction in discretionary capital spending programs FY 2000
Strategic review of operations to identify possible operational
improvements (yet most required additional capital to implement)
$15 – 20 million cut
Sale of AN plants and Gramercy
facility
Management realized that the most efficient method of cutting cost would be to sell certain
assets, reducing unnecessary losses and expenses and infusing the Company with cash.
52
Stage 4: Business Restructuring
The sale of multiple divisions provides a necessary capital infusion and allows the Company
to focus on profitable business segments, reducing cash burn and future obligations.
Determine which assets
to dispose of through
profitability analysis,
review of past
performance and
analysis of future
market attractiveness.
Determine appropriate
method of disposition to
reap the most benefit
(monetary, reducing
liability, etc.)
53
Implement decisions,
dispose of assets, apply
cash to most
appropriate sources
(e.g., paydown of DIP,
additions to working
capital).
Stage 4: Business Restructuring
Below are the major business units analyzed for sale or retention during the Chapter 11
proceedings:
Business
AN Plants
Avondale Ammonia JV
Estimated
Value
$160mm
Estimate Cost
to Repair
-
$12mm
Sale /
Retain
Sale
-
Reject Agreement
-
Sale
Retain
Gramercy
ChlorAlp
$70mm
$15mm - $20mm
Frankfurt
$16mm - $17mm
-
Retain
IP&S
$47mm - $66mm
-
Retain
Businesses
Sold
AN Plants
Approx Sale /
Settlement Price
$44mm
$10mm
Reasoning
Production costs too great, cash burn business, strategic buyer in place, necessary to pay down DIP
Non-competitive business effected by natural gas costs, sale would effectively settle claims and issues
with JV partner
Cash burn business, sale would effectively reduce environmental liabilities, payables, and claims
Entity did not file Ch 11., no potential buyers, the marketplace had turned to the upside of the cycle,
generating positive earnings
Entity did not file Ch 11., no potential buyers, the marketplace had turned to the upside of the cycle,
generating positive earnings
Profitable business, competitive strengths, lower fixed cost burden
Proceed
Distribution
$28.5mm to DIP lenders, $10.1mm to pre-petition lenders, $4mm in holdbacks, rest went to fees
Avondale Ammonia JV
$800k
Cash to pay down DIP and for resolution of all matters and complete severing of all ties with JV party
Gramercy
$5mm
$2mm cash to pay down DIP, with non-cash reduction of $3mm of environmental liabilities transferred to buyer
54
Stage 4: Business Restructuring
Proposed New Structure
LaRoche
Operations
AN Manufacturing
Operations
Cherokee, AL Plant
Gramercy
Chlor-Alkali
IP&S (formerly IPG) and Nitrogen
Distribution Centers
Gramercy Plant
Crystal City, MO Plant
Chlor-Alkali Production
Seneca, IL Plant
European Ops
23 IP&S Customer
Service Centers
Frankfurt Facility
1 Agriculture
Warehouse
Pont-de-Claix, France
Facility (ChlorAlp)
Fluorocarbon Production
Hydrate Partnership
Geneva, UT Plant
Fortier Joint Venture
Avondale Ammonia JV
•
•
•
•
•
Includes 23 IP&S customer service centers, located in 18 states, storing and distributing anhydrous ammonia.
11 of these centers will produce and distribute aqueous ammonia products.
Sales of related storage systems and equipment and customer services will also produce income at those centers.
Interest / ownership will be held in agricultural warehouse in Indiana from which phosphate fertilizer and other AN
derivative products will be stored and distributed.
European subsidiaries will be retained and a product mix will be adjusted to take advantage of local market pricing.
55
Stage 5: Return-to-Normal
A premise to the Plan of Reorganization is that surviving LaRoche (“NewCo”) must be feasible:
– NewCo will cover 80% of the geographical industrial ammonia market, with a current market
size of $140mm per year, expected to grow to $290mm by the year 2005.
• Competition primarily has a regional focus while LaRoche’s operations extend nationally.
• Ammonia is expected to be the preferred product to facilitate removal of contaminants
from the emissions of electric generating systems, mandated by government regulations.
– European businesses remain and are becoming more profitable through the upturn in the cycle
in the European chemical marketplace.
The Plan must also consider the risks involved:
– NewCo will face competition from two regional companies and a number of smaller companies
with a local focus, that could become competitors if they elect to diversify downstream from the
production of ammonia.
– Risks are inherent in implementing a strategy, including external factors such as the potential
for natural gas prices to remain high.
– Capital expenditures will be necessary. Contingent maintenance expenditures can become
reality…quickly.
– Government regulations may result in costly transition to new technology in the German plant.
• Mercury to membrane technology to comply with environmental mandates.
56
Stage 5: Return-to-Normal
Operational
Solvency
Funding
Resolution of
Outstanding Issues
Costs of
Emergence
All must be solved to emerge from Chapter 11
57
Stage 5: Return-to-Normal
Closing the Deal
• U.S. Banks funded the exit financing, but required a “bankable” transaction.
– The new securities had to be priced to allow for liquidity among stakeholders.
• Alternative sources of funding were sought out to build a “cushion”.
– An attempt to repatriate funds from European entities was suggested, but European
lenders were not keen on upstreaming cash to bankrupt parent.
• Bondholders and unsecured creditors sought cash and were unwilling/unable to provide
funds.
• Operational solvency was proven and projected cash flows were positive.
• A schedule of emergence costs was determined and agreed upon by all constituents
• All outstanding issues were resolved and settled prior to emergence
• LaRoche Industries, Inc. successfully emerged from Chapter 11 Bankruptcy on September
28, 2001, with an appropriately reorganized capital and organizational structure.
58
Role of Professionals
59
Services to Underperforming Companies
Business Plan and
Financial Projections
Development of
Management Tools
• Formulate Overall Business Strategy
• Coordinate Capital Investments With
Financial Liquidity
• Determine Suitable Capital Structure
• Develop Inventory Management
Application
• Extend Existing Systems to Include
Tracking of Forecast Accuracy
• Analyze Cost Components of
Marketing and Distribution
Programs
• Estimate Financial Impact of New
Products
• Develop Five-Year Projection Model
• Coordinate with All Departments
Contributing to Plan
Client
Cost Reduction Analysis
Liquidity Forecasting
• Identify Key Operating Drivers
• Analyze Internal Value Chain
• Identify Relevant Data Sources
• Analyze Working Capital
Management
• Review Supply Chain Management
Strategy
• Review Effectiveness of Sales and
Distribution Network
• Automate Data Collection and
Integration
• Create Weekly Cash Flow Model
• Assess Ordering Procedures
• Design Short-Term Borrowing
Analysis
• Assist Management with Short Term
Capital Spending Program
• Calculate Impact of Recommended
Cost Reductions
60
Services to Underperforming Companies
• The professionals role is to tailor services in all stages of the demise curve
• The “right” turnaround advisory team should be able to provide all of the following services:
• Performance
Improvement
The Corporate Demise Curve
• Lending
Solutions
• Turnaround &
Restructuring
Expected Performance
Infancy Stage - Stagnation
• Transitional
Management
• Transaction
Advisory
Early Stage - Underperforming
Midstage - Significant Performance Impairment
Late Stage - Crisis
61
Services to Underperforming Companies
Performance Improvement
• Operational and
financial
enhancement
• Strategic
assessment
• Benchmarking
The Corporate Demise Curve
Expected Performance
Infancy Stage - Stagnation
• Shareholder
value
improvement
• Cash and
working capital
management
Early Stage - Underperforming
Midstage - Significant Performance Impairment
• Supply chain
management
Late Stage - Crisis
62
Services to Underperforming Companies
Lending Solutions
• Raising
additional
lender
financing
• Business plan
development
The Corporate Demise Curve
Expected Performance
Infancy Stage - Stagnation
• Cash flow
modeling
Early Stage - Underperforming
• Lender
negotiations
• Collateral
assessment
Midstage - Significant Performance Impairment
Late Stage - Crisis
63
Services to Underperforming Companies
Turnaround & Restructuring
• Turnaround plan
development and
implementation
The Corporate Demise Curve
• Out-of-court
restructurings
• Capital structure
and raising of
additional capital
Expected Performance
Infancy Stage - Stagnation
• Vendor
relationship
management
• Cash
management,
projections and
liquidity
enhancement
Early Stage - Underperforming
Midstage - Significant Performance Impairment
Late Stage - Crisis
• Bankruptcyrelated services
64
Services to Underperforming Companies
Transitional Management
• Provide Interim
Management
such as Chief
Restructuring
Officer
• Provide
Executive Suite
with
experienced
resources to
augment / fill
critical needs
The Corporate Demise Curve
Expected Performance
Infancy Stage - Stagnation
Early Stage - Underperforming
Midstage - Significant Performance Impairment
• Serve in courtappointed
positions
Late Stage - Crisis
65
Appendix A
Turnaround Tools
13-Week Cash Flow Forecast
66
Week Ended
Week Number
Lockbox
Office
Credit Card
Auto Debit
Cash Receipts
Other Income
Operating Receipts
$
30-Jan
6-Feb
13-Feb
20-Feb
27-Feb
5-Mar
12-Mar
19-Mar
26-Mar
2-Apr
9-Apr
16-Apr
23-Apr
1
2
3
4
5
6
7
8
9
10
11
12
13
36.0 $
15.0
3.1
7.0
61.1
2.0
63.1
42.0 $
18.0
3.8
7.0
70.8
2.0
72.8
45.0 $
22.0
3.8
8.0
78.8
2.0
80.8
35.0 $
16.0
3.8
7.5
62.3
2.0
64.3
36.0 $
18.0
3.3
7.5
64.8
2.0
66.8
44.0 $
18.0
3.8
7.0
72.8
2.0
74.8
46.0 $
22.0
4.8
8.0
80.8
2.0
82.8
43.0 $
19.0
3.5
7.7
73.2
2.0
75.2
34.0 $
17.0
3.0
7.4
61.4
2.0
63.4
33.0 $
15.5
3.2
7.0
58.7
2.0
60.7
42.0 $
20.0
5.0
7.8
74.8
2.0
76.8
47.0 $
23.0
3.9
7.5
81.4
2.0
83.4
40.0
17.0
3.5
7.2
67.7
2.0
69.7
Total
$
523.0
240.5
48.5
96.6
908.6
26.0
934.6
Payroll and Related Items (ie. health benefits)
Programming
Franchise
Pole Rent
Cable Data
Tax (Sales/Use/Property)
Professional
Insurance
Daily Other
Office Expense
Telephone
Telecommunications Technical
Outside Services
Operating Expenses
9.3
32.2
8.0
1.6
3.2
1.5
0.2
2.1
10.0
0.7
0.7
0.8
0.8
71.0
16.7
5.5
4.7
1.4
0.1
0.8
0.2
0.6
9.0
0.7
0.7
0.8
0.8
42.0
8.3
59.5
0.1
1.8
0.1
1.1
0.2
0.1
10.0
0.7
0.7
0.8
0.8
84.2
17.6
1.3
10.8
1.3
5.6
4.8
0.2
0.6
9.0
0.7
0.7
0.8
0.8
54.2
9.3
33.6
0.0
1.0
0.1
0.5
0.2
1.0
9.0
0.7
0.7
0.8
0.8
57.6
16.7
0.0
19.0
0.5
0.1
0.0
0.2
0.6
8.0
0.7
0.7
0.8
0.8
48.1
8.3
0.0
0.1
1.0
0.1
1.4
0.2
0.1
9.0
0.7
0.7
0.8
0.8
23.3
17.6
60.7
1.4
0.5
5.6
4.7
0.2
0.6
8.0
0.7
0.7
0.8
0.8
102.3
9.3
0.0
0.0
0.8
0.1
0.5
0.2
1.0
9.0
0.7
0.7
0.8
0.8
23.9
16.7
32.0
9.1
0.6
0.1
0.4
0.2
0.6
8.0
0.7
0.7
0.8
0.8
70.8
8.3
0.0
0.1
0.2
0.1
1.6
0.2
0.1
9.0
0.7
0.7
0.8
0.8
22.6
17.6
59.6
6.8
0.2
5.6
4.3
0.2
0.6
8.0
0.7
0.7
0.8
0.8
105.9
9.3
1.3
1.4
1.0
0.1
2.2
0.2
1.0
9.0
0.7
0.7
0.8
0.8
28.5
164.9
285.6
61.6
11.9
20.9
23.9
2.6
9.0
115.0
9.1
9.1
10.4
10.4
734.4
Total Expenses
Restructuring Costs
Capital Expenses
Operating & Capital Expenses
5.0
19.5
95.5
1.5
21.5
64.9
2.0
21.5
107.7
1.5
21.5
77.1
2.0
21.5
81.1
1.5
21.6
71.2
2.0
21.6
46.9
1.5
21.6
125.4
2.0
21.6
47.5
1.5
17.4
89.7
2.5
17.4
42.5
2.0
17.4
125.3
2.0
17.4
47.9
27.0
261.3
1022.7
(32.4)
7.9
(26.9)
(12.8)
(14.3)
3.6
35.9
(50.2)
15.9
(29.0)
34.3
(41.9)
21.8
(88.1)
Pre-Petition Interest Expense
DIP Interest and Fees Expense
Total Interest Expense
0.0
(1.4)
(1.4)
(16.3)
(0.2)
(16.5)
0.0
(0.1)
(0.1)
0.0
(0.3)
(0.3)
0.0
(1.4)
(1.4)
(14.7)
(0.1)
(14.9)
0.0
(0.1)
(0.1)
0.0
(0.3)
(0.3)
0.0
(0.1)
(0.1)
(16.3)
(1.5)
(17.8)
0.0
(0.2)
(0.2)
0.0
(0.1)
(0.1)
0.0
(0.4)
(0.4)
(47.4)
(6.2)
(53.6)
Transfers from/(to) Other Cash Accounts
Transfers from/(to) Credit-Linked Deposit Accounts
Borrowing Activity
0.0
0.0
1.0
0.0
0.0
9.0
0.0
0.0
18.0
0.0
0.0
22.0
0.0
0.0
0.0
0.0
0.0
15.0
0.0
0.0
11.0
0.0
0.0
0.0
0.0
0.0
14.0
0.0
0.0
0.0
0.0
0.0
27.0
0.0
0.0
0.0
0.0
0.0
9.0
126.0
Operating Cash Flow
Net Cash Increase (Decrease)
$
(32.8) $
(12.3) $
(9.0) $
8.9
$
(15.7) $
(7.8) $
46.8
$
(50.5) $
29.8
$
(59.5) $
61.1
$
(42.0) $
30.4
Beginning Concentrated Cash Balance (Book)
Change in Cash
Ending Concentrated Cash Balance (Book)
$
222.9 $
(32.8)
190.1 $
190.1 $
(12.3)
177.7 $
177.7 $
(9.0)
168.8 $
168.8
8.9
177.7
$
177.7 $
(15.7)
161.9 $
161.9 $
(7.8)
154.1 $
154.1
46.8
201.0
$
201.0 $
(50.5)
150.5 $
150.5
29.8
180.3
$
180.3 $
(59.5)
120.8 $
120.8
61.1
181.9
$
181.9 $
(42.0)
139.9 $
139.9
30.4
170.3
$
$
67
$
$
$
$
(52.6)
Appendix B
Turnaround Tools
Liquidation Analysis
68
Estimated Hypothetical Liquidation Analysis At December 31, 2002
Scenario A: Lender Group Revolving Debt Remains at $700 million with No Collateral
($000's)
Estimated
Balance
Realizable Value of Assets
Cash
Net Receivables
Net Inventory
Prepaid and Other Current Assets
PP&E
Intangible Assets
Other Assets
Net Assets of Discontinued Operations
Estimated Proceeds before Expenses*
* Excluding Trademark
$
70,000
47,649
425,525
72,629
312,594
136,315
173,526
773,567
2,011,805
% Realization
Realization Amount
Low
High
Low
High
100%
100% $ 70,000 $
70,000
42%
53%
20,013
25,254
33%
47%
140,423
199,997
0%
0%
35%
52%
109,408
162,549
0%
0%
3%
6%
5,206
10,412
0%
0%
17%
23%
345,050
468,211
Professional Fees
Wind Down Operating Expenses
Estimated Net Proceeds excluding Trademark
Trademark
unknown unknown
Estimated Net Proceeds
(15,000)
(93,898)
236,151
(10,000)
(65,251)
392,960
-
-
$ 236,151
69
$
392,960
Recovery Allocation:
Secured Claims
Proceeds Available to Secured Claims
Total Secured Claims (Mortgages)
% Recovery to Secured Claims before Deficiency Claims
Secured Lenders' mortgage deficiency claims
Realization Amount
Low
High
10,232
11,938
(48,000)
(48,000)
21%
25%
(37,768)
(36,062)
Reclamation Claims
Net Proceeds Available for Reclamation Claims
Total Reclamation Claims
% Recovery to Reclamation Claims
236,151
(13,448)
100%
392,960
(6,724)
100%
Priority Claims
Net Proceeds Available for Priority Claims
Total Priority Claims
% Recovery to Priority Claims
222,703
(74,519)
100%
386,236
(41,073)
100%
148,184
(1,695,749)
(37,768)
(1,733,517)
8.5%
345,163
(1,620,919)
(36,062)
(1,656,981)
20.8%
Unsecured Claims
Net Proceeds Available for Unsecured Claims
Total Unsecured Claims (includes $1.105 billion unsecured Lender Group claim)
Secured Lenders' mortgage deficiency claims
Total Unsecured Claims
% Recovery to Unsecured Claims
NOTE - All recoveries are before any recovery estimate has been attributed to intangible assets.
70
Appendix C
Turnaround Tools
Projections
71
Executive Summary
Below is a summary of key financial data from the Business Plan and DIP forecast ($ in millions):
Revenue
$
Actual
Forecast
2000
2001
6,013.2
$
5,466.0
Projected
2002
$
5,546.8
2003
$
2004
2005
2006
5,761.8
$ 5,945.0
$ 6,239.9
$ 6,457.0
EBITDA
825.0
530.0
518.0
695.1
857.6
963.6
1,037.0
CAPEX
313.0
295.0
375.0
361.0
380.0
318.0
315.0
DIP Balance (end of year)
-
259.5
337.0
330.1
LC Usage
-
18.8
25.0
25.0
Note: The DIP balance is presented through the term of the DIP loan, December 31, 2003.
72
Revenue by Year by Country
(dollars in millions)
2000
US
Canada
UK
Mexico
Germany
Italy
France
Netherlands
ROW
2001
2002
2003
2004
2005
2006
$
3,551.633
162.206
500.560
178.039
626.252
179.837
321.226
493.466
$
3,107.611
146.126
459.986
172.772
638.036
158.352
334.544
0.030
476.904
$
3,172.639
149.983
425.126
177.332
639.875
162.531
343.373
0.062
477.149
$
3,295.016
155.768
441.524
184.172
664.557
168.801
356.618
0.064
495.554
$
3,399.665
160.716
455.547
190.021
685.663
174.162
367.944
0.066
511.293
$
3,568.361
168.690
478.152
199.451
719.686
182.804
386.202
0.069
536.664
$
3,692.453
174.557
494.780
206.387
744.714
189.161
399.632
0.072
555.327
$
6,013.218
$
5,494.361
$
5,548.071
$
5,762.073
$
5,945.076
$
6,240.079
$
6,457.082
* Sales do not include intercompany sales
73
Revenue Bridge 2000 – 2006
(dollars in millions)
Prior year revenue
2000
2001
$ 6,488.0
$ 6,013.0
2002
$
5,466.0
2003
$
5,546.8
2004
$
5,761.8
2005
$
5,945.0
2006
$
6,239.9
Change due to:
Uncommitted business
Net new business
Mix
Volume
Discontinued operations
Pricing
Exchange rate
Other
(255.8)
(3.5)
(250.5)
34.8
(316.0)
(26.1)
(158.4)
(46.5)
76.6
216.8
(10.8)
(39.0)
(164.4)
(48.4)
50.0
192.1
100.4
(12.5)
(26.0)
(39.0)
-
216.9
(1.2)
(9.1)
9.8
(33.2)
-
392.9
(79.3)
21.0
(10.0)
(29.6)
(0.1)
329.0
(101.2)
8.4
8.4
(27.4)
(0.1)
Total change
(475.0)
(547.0)
80.8
215.0
183.2
294.9
217.1
Total revenue
% Change
Cumulative % Change
$ 6,013.0
-7.3%
-7.3%
$ 5,466.0
-9.1%
-15.8%
$
5,546.8
$
1.5%
-14.5%
5,761.8
3.9%
-11.2%
Note: Change due to volume in 2000 and 2001 includes net new business.
74
$
5,945.0
3.2%
-8.4%
$
6,239.9
5.0%
-3.8%
$
2000 - 2006
Total
6,457.0
3.5%
-0.5%
6,488.0
1,207.5
135.5
(3.0)
(628.6)
(164.4)
(207.2)
(408.9)
38.1
(31.0)
$
6,457.0
-0.5%
EBITDA by Year by Country
(dollars in millions)
2000
US
Canada
UK
Mexico
Germany
Italy
France
Netherlands
ROW
2001
2002
2003
2004
2005
2006
$
421.980
27.003
104.844
65.067
113.984
28.673
27.991
2.411
41.357
$
180.395
4.752
84.391
64.461
107.872
27.455
32.887
0.933
70.198
$
151.501
7.900
50.655
76.100
101.575
29.300
39.700
0.900
85.840
$
200.210
10.700
69.300
102.100
106.500
38.500
53.100
0.900
113.690
$
291.110
13.000
85.400
122.400
126.900
30.800
60.700
0.900
126.790
$
342.210
13.700
103.200
130.500
128.000
32.000
69.200
0.900
144.290
$
383.610
14.100
106.000
146.600
127.900
32.500
74.700
0.900
150.690
$
833.309
$
573.343
$
543.471
$
695.000
$
858.000
$
964.000
$
1,037.000
75
EBITDA Bridge 2000 – 2006
(dollars in millions)
Prior year EBITDA
$ 1,215.0
$
825.0
$
530.0
$
518.0
$
695.1
2006
2005
2004
2003
2002
2001
2000
$
857.6
$
2000 - 2006
Total
1,215.0
963.6
Change due to:
Productivity
Uncommitted business
Restructuring
Net new business
One-Offs
Mix
Volume
Pricing
Inflation
Exchange rate
Other
(73.6)
(83.8)
(34.5)
(93.2)
(104.9)
4.4
(36.1)
(36.0)
(141.0)
(86.3)
146.0
23.5
(3.4)
62.3
47.0
(2.3)
(22.6)
(48.4)
(181.7)
(32.4)
146.2
54.9
47.3
41.2
14.2
(3.8)
(14.0)
(39.0)
(124.8)
54.9
119.4
60.7
59.8
11.3
6.1
7.6
(0.8)
(33.2)
(100.3)
31.9
109.8
105.8
10.5
(14.0)
(2.0)
14.4
(3.6)
(29.7)
(111.3)
26.1
101.3
92.1
23.3
(18.2)
(4.0)
13.3
(0.1)
(27.5)
(121.2)
14.4
553.5
337.0
137.5
82.6
61.3
29.2
(161.0)
(248.3)
(639.3)
(234.2)
(96.3)
Total change
(390.0)
(295.0)
(12.0)
177.1
162.5
106.0
73.4
(178.0)
Total EBITDA
% Change
Cumulative % Change
$
825.0
-32.1%
-32.1%
$
530.0
-35.8%
-56.4%
$
518.0
$
695.1
34.2%
-42.8%
-2.3%
-57.4%
Note: Change due to volume in 2000 and 2001 includes net new business.
76
$
857.6
23.4%
-29.4%
$
963.6
12.4%
-20.7%
$
1,037.0
7.6%
-14.7%
$
1,037.0
-14.7%
Summary of Cost Reductions and Restructuring Initiatives
•
The Company’s plan includes significant cost reduction and restructuring initiatives. Below is a
summary of the incremental change in EBITDA per year as a result of these initiatives (dollars in
millions):
SG&A reduction
2002
$
26.0
Global purchasing initiatives
•
Incremental Annual Savings
2003
2004
2005
$
30.8 $
27.6 $
22.3
24.6
20.5
6.3
Plant/facility consolidation
Global Powertrain
Global Seals/Gaskets/SPG
Friction Americas
Friction Europe
Total Aftermarket
Sub-total plant/facility consolidation
(5.1)
(13.7)
12.2
2.7
8.9
5.0
11.8
12.5
8.9
9.1
42.3
9.1
27.0
10.5
2.0
6.9
55.5
Productivity
Global Powertrain
Global Seals/Gaskets/SPG
Friction Americas
Friction Europe
Total Aftermarket
Sub-total productivity
Increase in EBITDA
34.9
20.7
2.8
5.7
33.2
97.3
152.9
47.5
20.2
7.3
5.8
26.9
107.7
201.3
44.7
20.0
5.2
2.5
26.8
99.2
188.6
$
$
$
2006
$
14.5
Total
$ 121.2
2.3
58.7
14.1
7.8
1.6
23.5
30.7
32.1
31.6
6.7
35.5
136.6
33.4
19.4
4.6
3.6
22.7
83.7
124.0
200.0
99.1
24.7
21.3
133.8
478.9
795.4
5.0
0.8
(1.5)
2.0
9.0
10.3
$
39.5
18.8
4.8
3.7
24.2
91.0
128.6
$
$
The forecasted EBITDA trends by product group resulting from the cost reductions are depicted on
the following page.
77
Appendix D
Presenter Bios
78
Randall S. Eisenberg
Senior Managing Director, FTI Consulting, Inc.
Randall S. Eisenberg is a senior managing director in FTI’s Business Turnaround & Restructuring Services practice in
New York. Specializing in the revitalization of underperforming companies, Mr. Eisenberg has over 13 years of
experience advising senior management and Boards of Directors in revitalizing companies that are stagnant or are
under performing.
Mr. Eisenberg’s broad experience includes virtually all aspects of the development and implementation of turnaround
plans in an out-of-court setting or through the Chapter 11 (and certain other international court-supervised)
processes. His diverse background extends into airlines, distribution, financial, food service, healthcare, hospitality,
manufacturing, real estate, retail, and services wherein he has served as advisor to companies, served in interim
management positions, and
advised secured and unsecured creditors.
Mr. Eisenberg has led many large and high profile national and international assignments for companies and their
equity sponsors. His experience includes a broad range of services to underperforming companies emphasizing
implementation of sound business practices that focus on rebuilding shareholder and stakeholder value. He has
served as an advisor to senior management of US Airways and Kmart; a court appointed Joint Provisional Liquidator
to RSL Communications, Ltd., a $1+ billion in revenue global telecommunications company with operations in more
than 20 countries and 50 subsidiaries; and assisted an international fortune 500 retailer, an international software
publisher and distributor, as well as many other diverse companies.
Prior to its acquisition by FTI, Mr. Eisenberg was a partner with the US division of PricewaterhouseCoopers’ Business
Recovery Services practice. He is Past Chairman of the National Board of Directors of the Turnaround Management
Association and member of the American Bankruptcy Institute. He received the Outstanding Contribution to the
Turnaround Profession Award from the Turnaround Management Association.
Mr. Eisenberg holds a Bachelors degree from the University of the Pacific and an MBA from Northwestern University.
He is a Certified Turnaround Professional and a Certified Public Accountant in the States of New York and California.
Mr. Eisenberg can be reached at randall.eisenberg@fticonsulting.com or (212) 499-3614.
79
Elliot Fuhr
Senior Managing Director, FTI Consulting, Inc.
Elliot Fuhr is a senior managing director in FTI’s Business Turnaround & Restructuring Services practice in New York.
Mr. Fuhr specializes in assisting senior management and Boards of Directors in the areas of financial and operational
restructuring, mergers and acquisitions, divestitures, loan workouts, business planning and rapid implementation
projects. He has broad industry experience including engagements with apparel, retail, technology, manufacturing,
financial institutions, real estate, chemical, and oil & gas companies.
Mr. Fuhr has advised numerous clients in a variety of industries. Mr. Fuhr has assisted in the restructuring a $5 billion
international wireless provider through a restructuring in chapter 11; evaluated and sold National Car Rental System,
Inc. for General Motors Corporation; assisted in the restructuring a $600 million inorganic chemical company through
a pre-arranged plan of reorganization; and assisted in the restructuring of a $550 million textile company both through
out-of-court negotiations and through the pre-packaged chapter 11 process. His combined experience includes
workflow and operational improvements, organizational restructuring, cash flow modeling, valuations, restructuring
strategies, and business planning, and accounting.
Prior to joining FTI, Mr. Fuhr was a senior engineer and economist at Exxon Company, U.S.A. and Exxon Chemical
Americas for six years. While at Exxon, he was project leader of a highly successful energy conservation program.
Mr. Fuhr then joined a "Big Five" firm and a boutique turnaround firm where he developed an expertise in
restructuring troubled companies. He has over 19 years experience in consulting.
Mr. Fuhr has published articles about troubled Company restructuring including: “Assessing the Likelihood of a
Turnaround in the High Tech Sector,” ABI Journal (August 1999), "Diagnosing Distressed Companies: A Practical
Example," ABI Journal (October 1994); and "Business Aspects of Chapter 11 Reorganization," Advanced Chapter 11
Bankruptcy Seminar, University of Michigan Law School (1995). Mr. Fuhr is also a contributing author to “Turnaround
& Workouts II – Global Restructuring Strategies for the Next Century”, Wiley, 1999.
Mr. Fuhr holds a Bachelors degree in Chemical Engineering from the University of Pennsylvania and an MBA in
Finance from the Stern School of Business at New York University. He is a member of the Turnaround Management
Association and is a Certified Insolvency and Reorganization Accountant (CIRA).
Mr. Fuhr can be reached at elliot.fuhr@fticonsulting.com or (212) 499-3641.
80
Sean A. Gumbs
Managing Director, FTI Consulting, Inc.
Sean A. Gumbs is an executive with over 12 years of experience creating and maximizing value for stakeholders of
troubled companies. He has specialized in providing strategic, operational, managerial and financial solutions to
distressed companies and investors in both Chapter 11 and out-of-court restructurings. Sean has experience in a
wide range of industries, including financial services, retail, forest products, software publishing and real estate.
Mr. Gumbs has led critical aspects of the bankruptcy process including vendor crisis management for Kmart
Corporation; participated in pre-bankruptcy planning for US Airways; reviewed and refined the short-term
management process for a $1 billion international software publisher / distributor; and assisted a $1 billion financial
data company to create a profit improvement plan and conduct debt renegotiation discussions with its lenders.
In addition to the citations above, Mr. Gumbs has assisted underperforming companies in a variety of industries to
develop restructuring plans that included financial and operational solutions. He has performed business and asset
valuations (both going-concern and liquidation) to assist in the disposition of non-core assets. Mr. Gumbs has
assisted companies throughout all stages of the Chapter 11 bankruptcy process, including bankruptcy contingency
planning, negotiation of DIP financing and development of the plan of reorganization. He has reviewed operations
and management structures to identify inefficiencies, cut costs and increase profitability. He has recommended and
implemented cash management and capital budgeting systems to stabilize and improve cash flow.
Mr. Gumbs’ professional experiences prior to entering the restructuring field include shareholder value strategy
consulting and financial risk management. He holds a B.S. in Economics from the University of Pennsylvania and an
MBA from the Harvard Business School. He is a member of the Turnaround Management Association and the
Association of Insolvency and Restructuring Advisors.
Mr. Gumbs can be reached at sean.gumbs@fticonsulting.com or (212) 499-3633.
81
Peter L. Tourtellot
Managing Director, the ALTMA Group
Mr. Tourtellot is currently one of the founding principals of Anderson Bauman Tourtellot Vos & Company, a highly
successful turnaround management firm created in 1989, now part of the ALTMA Group.
He participated in taking 1.4 billion dollar NYSE Blue Bell (Wrangler Jeans) private through an ESOP transaction,
resulting in substantial return to all participants.
As a turnaround professional he has served as CEO and President of numerous companies. He managed the
turnaround of a large, respected distribution firm which was just days from filing bankruptcy before he took the helm.
He was a Chapter 11 Trustee in the Color-Tex International (North Carolina Finishing) case (Boston Bankruptcy
Court) and Federal Receiver for Spartan Mills, Spartanburg, SC. He has served as interim president or consultant to
a number of corporations which range from manufacturers to retail chains to service firms. He has also earned the
designation of Certified Turnaround Professional (CTP) from the Association of Certified Turnaround Professionals.
Mr. Tourtellot served as the President and Chairman of the Turnaround Management Association. He is the current
President of the Association of Certified Turnaround Professionals and is a member of their board of directors. He
has co-authored "How To Save A Client" for the North Carolina State Bar Quarterly, and has written numerous articles
for business publications, such as "Preserving The Family-Run Business" and “How Outsiders Find the Inside Track”
for Institutional Investors.
He graduated from the University of Phoenix with a degree in business administration and is a graduate of the
Executive Program at the University of North Carolina at Chapel Hill. He is a member of the advisory board for the
Love School of Business at Elon University where he was elected Chairman in 2003 to serve a three year term. He is
a director on the national board of the Turnaround Management Association and serves on the board for the
Carolinas Chapter.
Mr. Tourtellot can be reached at ptourtellot@abtv.com or (336) 275-9110.
82
Sources
Information in this presentation is based upon the professional experiences of the preparers.
Other valuable sources of information used were:
– the Certified Insolvency and Restructuring Advisor (CIRA) materials produced by the
Association of Insolvency and Restructuring Advisors; and
– The Certified Turnaround Professional (CTP) materials produced by the Turnaround
Management Association.
83
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