Title: 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
1The Anatomy of a TurnaroundA Seminar prepared
by FTI Consulting, Inc. and the ALTMA Group for
theWorld Bank ConferenceCorporate
Restructuring International Best Practices
2Agenda
- Introduction
- Stages of Business Decline
- Case Study LaRoche Industries
- Primary Conditions Leading to Insolvency
- Turnaround Options
- Stages of the Turnaround Process
- Case Study LaRoche Industries
- Turnaround Options and Plan Formulation
- Role of Professionals
- Appendices
3Presenters
- 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.
4 5Introduction
- 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
news-worthy, 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.
6Stages of Business Decline
- Chart of the Causes of Business Failure
External factors beyond managements control 8
Sheer bad luck 1
Internally generated problems within managements
control 52
Real balance of external and internal factors 24
Internal problems triggered by external
factors 15
Source Association of Insolvency and
Restructuring Advisors
7Stages of Business Decline
The Corporate Demise Curve
8Stages 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 companys
problems to incubate during this stage.
9Stages 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
10Stages 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
11Stages 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
12Potential Areas to Search for Warning Signs
Accounting/Accounts Receivable
Stakeholders
Warning Signs
Management/Board of Directors
Operating Trends
Late or Nonpayment of Obligations
13Potential 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
14Potential 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
15LaRoche IndustriesCompany History and Primary
Conditions Leading to Chapter 11 Filing
Case Study
16LaRoche 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.
17A Brief History.
1986-1990
1996-1999
1991-1995
1994 Establishment of Joint Venture with
Avondale Ammonia 1995 Construction of Seneca, IL
blasting grade ammonium nitrate facility
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 1999 Purchase
of the remaining 50 interest of ChlorAlp 1999
Refocus on core AN and Chlor-Alkali business
including the sale of Aluminas business and
related Joint Ventures, strategic review of
options
1986 Founded by William LaRoche through a
management buyout of U.S. Steel Corporations
Nitrogens, mixed fertilizers, and retail
business 1988 LaRoche acquires certain chemical
production operations of Kaiser Aluminum and
Chemical Corp in Gramercy, Louisiana 1990
Strategic capacity investments at Cherokee,
Alabama AN facility 1990 Phase out of CFC,
replace with HCFC
18Diversified 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
US Chlor-Alkali Products
European Chlor-Alkali Products
- Ammonium Nitrate
- UAN Solutions
- Industrial Ammonia
- Chlorine
- Caustic Soda
- Fluorocarbons
- Chlorine
- Caustic Soda
- Chlorinated Methanes
- Hydrochloric Acid
- Calcium Chloride
Markets
Markets
Markets
- Fertilizers
- Blasting Products
- Industrial Products
- Vinyls
- Water Treatment
- Chemicals
- MDI/TDI
- Titanium Dioxide
- Pharmaceuticals
- Agrochemicals
- Water Treatment
- Pulp and Paper
- Detergents
- Silicones, fluoropolymers and solvents
19Diversified Geographic Presence
LaRoche had several small manufacturing
facilities acquired through a roll-up strategy.
20Past Performance
Historical Sales
EBITDA
400
70
398.6
389.5
386.9
390
57.8
60
380
46.4
50
370
361.0
40
360
35.0
33.1
30.5
350
30
342.6
339.0
340
17.3
20
330
10
320
310
0
1995
1996
1997
1998
1999
2000PF
1995
1996
1997
1998
1999
2000PF
Sales over the five years prior to 2000 remained
at relatively consistent or improving levels.
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.
21Factors Contributing to Poor Performance
- Approximately two years of depressed market
prices for its domestic Nitrogen and Chlor-alkali
products. - Supply/Demand imbalances compounded by foreign
imports
Decreasing Prices for Products
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.
Increasing Costs of Raw Materials
High levels of debt due to the purchase of
European operations. Cyclical nature of business
does not promote even debt repayment strategy.
High Debt / Interest Burden
Overhead levels in place for a large company with
multiple layers of management.
Inappropriate Overhead
Although strategic acquisitions were made, most
were non-accretive to value. Maintenance capital
expenditures were above normal due to the age of
facilities.
Capital Spending
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.
Catastrophic Event
221. 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
200
per ton
per ton
175
100
Chlorine
150
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
232. Natural Gas Market Impact
Natural Gas Prices Sold to Industrial
Consumers 1997-2001
- Natural Gas, a precursor for most of LaRoches
products, experienced an unprecedented 4-fold
increase in price in a matter of months directly
after filing. - 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. - The Company was unable to hedge its risk against
the rising costs due to liquidity reasons.
243. 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
Source Bloomberg
- As credit markets tightened, deleveraging
through a sale of assets or refinancing became
increasingly more difficult.
254. Other Expenditures
- Overhead levels were in place for a much larger
company - Legacy Issues Due to the Companys 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.
26Result 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.
27Turnaround Options
28Foundations 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/Non-favorable? - 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.
29Foundations 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.
30Foundations 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
31Turnaround Options
- Factors to consider when choosing a viable
turnaround option include - Sophistication, size, and history of company
- Quality / integrity of companys 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 companys 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)
32Advantages 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
- 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 countrys 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
33Advantages 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
- 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 countrys 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
34Stages of the Turnaround Process
35Stages of the Turnaround Process
5
4
3
2
1
Management Change
Situation Analysis
Return-to-Normal
Emergency Action
Business Restructuring
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.
36Stage 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
37Stage 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
38Stage 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
39Stage 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 employees
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.
40Stage 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.
41Stage 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).
42Stage 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
43Stage 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
44Stage 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
45Case Study
LaRoche IndustriesTurnaround Options andPlan
Formulation
46Stage 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 - Managements 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
47Stage 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
48Stage 2 Situation Analysis
49Stage 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 30 million
- Plus Projected Maintenance CapEx /
Turnarounds 30 million - Equals Non-Operating Cash Needs 60 million
- Equals Minimum EBITDA Plus Capital Availability
Requirement - 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.
50Stage 3 Emergency Action
Resolve Companys short term cash need (then
ensure long term liquidity)
Time Horizon
Stabilize business
Immediate
Identify and implement cost savings initiatives
Focus on core businesses, exit / sell non-core
businesses
REORGANIZATION
Later stages of Reorganization
De-lever the Companys balance sheet
Re-position in marketplace with appropriate
strategy and structure to ensure profitability
51Stage 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 Companys 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.
52Stage 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
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.
53Stage 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 appropriate method of disposition to
reap the most benefit (monetary, reducing
liability, etc.)
Determine which assets to dispose of through
profitability analysis, review of past
performance and analysis of future market
attractiveness.
Implement decisions, dispose of assets, apply
cash to most appropriate sources (e.g., paydown
of DIP, additions to working capital).
54Stage 4 Business Restructuring
- Below are the major business units analyzed for
sale or retention during the Chapter 11
proceedings
55Stage 4 Business Restructuring
Proposed New Structure
- Includes 23 IPS 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.
56Stage 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
LaRoches 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
realityquickly. - Government regulations may result in costly
transition to new technology in the German plant. - Mercury to membrane technology to comply with
environmental mandates.
57Stage 5 Return-to-Normal
Operational Solvency
Funding
Costs of Emergence
Resolution of Outstanding Issues
All must be solved to emerge from Chapter 11
58Stage 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.
59Role of Professionals
60Services 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 Five-Year Projection Model
- Coordinate with All Departments Contributing to
Plan
- 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
Client
Cost Reduction Analysis
Liquidity Forecasting
- Identify Key Operating Drivers
- Analyze Internal Value Chain
- Review Supply Chain Management Strategy
- Review Effectiveness of Sales and Distribution
Network - Assess Ordering Procedures
- Calculate Impact of Recommended Cost Reductions
- Identify Relevant Data Sources
- Analyze Working Capital Management
- Automate Data Collection and Integration
- Create Weekly Cash Flow Model
- Design Short-Term Borrowing Analysis
- Assist Management with Short Term Capital
Spending Program
61Services 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
- Lending Solutions
- Turnaround Restructuring
- Transitional Management
- Transaction Advisory
62Services to Underperforming Companies
Performance Improvement
- Operational and financial enhancement
- Strategic assessment
- Benchmarking
- Shareholder value improvement
- Cash and working capital management
- Supply chain management
63Services to Underperforming Companies
Lending Solutions
- Raising additional lender financing
- Business plan development
- Cash flow modeling
- Lender negotiations
- Collateral assessment
64Services to Underperforming Companies
Turnaround Restructuring
- Turnaround plan development and implementation
- Out-of-court restructurings
- Capital structure and raising of additional
capital - Vendor relationship management
- Cash management, projections and liquidity
enhancement - Bankruptcy-related services
65Services to Underperforming Companies
Transitional Management
- Provide Interim Management such as Chief
Restructuring Officer - Provide Executive Suite with experienced
resources to augment / fill critical needs - Serve in court-appointed positions
66Appendix ATurnaround Tools13-Week Cash Flow
Forecast
67(No Transcript)
68Appendix B Turnaround Tools Liquidation Analysis
69(No Transcript)
70(No Transcript)
71Appendix C Turnaround Tools Projections
72Executive Summary
Below is a summary of key financial data from the
Business Plan and DIP forecast ( in millions)
Note The DIP balance is presented through the
term of the DIP loan, December 31, 2003.
73Revenue by Year by Country
74Revenue Bridge 2000 2006 (dollars in millions)
Note Change due to volume in 2000 and 2001
includes net new business.
75EBITDA by Year by Country
76EBITDA Bridge 2000 2006 (dollars in millions)
Note Change due to volume in 2000 and 2001
includes net new business.
77Summary of Cost Reductions and Restructuring
Initiatives
- The Companys 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)
- The forecasted EBITDA trends by product group
resulting from the cost reductions are depicted
on the following page.
78Appendix DPresenter Bios
79Randall S. Eisenberg Senior Managing Director,
FTI Consulting, Inc.
- Randall S. Eisenberg is a senior managing
director in FTIs 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. Eisenbergs 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_at_fticonsulting.com or (212)
499-3614.
80Elliot Fuhr Senior Managing Director, FTI
Consulting, Inc.
- Elliot Fuhr is a senior managing director in
FTIs 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_at_fticonsulti
ng.com or (212) 499-3641.
81Sean 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_at_fticonsulti
ng.com or (212) 499-3633.
82Peter 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_at_abtv.com or (336) 275-9110.