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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

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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


1
The Anatomy of a TurnaroundA Seminar prepared
by FTI Consulting, Inc. and the ALTMA Group for
theWorld Bank ConferenceCorporate
Restructuring International Best Practices
  • March 24, 2004

2
Agenda
  • 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

3
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.

4
  • Introduction

5
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
    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.

6
Stages 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
7
Stages of Business Decline
The Corporate Demise Curve
8
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 companys
problems to incubate during this stage.
9
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

10
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

11
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

12
Potential Areas to Search for Warning Signs
Accounting/Accounts Receivable
Stakeholders
Warning Signs
Management/Board of Directors
Operating Trends
Late or Nonpayment of Obligations
13
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

14
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

15
LaRoche IndustriesCompany History and Primary
Conditions Leading to Chapter 11 Filing
Case Study
16
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.

17
A 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
18
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
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

19
Diversified Geographic Presence
LaRoche had several small manufacturing
facilities acquired through a roll-up strategy.
20
Past 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.
21
Factors 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
22
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
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
23
2. 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.


24
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

Source Bloomberg
  • As credit markets tightened, deleveraging
    through a sale of assets or refinancing became
    increasingly more difficult.

25
4. 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.

26
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.

27
Turnaround Options
28
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/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.

29
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.

30
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

31
Turnaround 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)

32
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
  • 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

33
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
  • 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

34
Stages of the Turnaround Process
35
Stages 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.
36
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

37
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

38
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

39
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 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.

40
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.

41
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).

42
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

43
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

44
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

45
Case Study
LaRoche IndustriesTurnaround Options andPlan
Formulation
46
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
  • 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

47
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

48
Stage 2 Situation Analysis
49
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 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.

50
Stage 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
51
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 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.

52
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
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.
53
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 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).
54
Stage 4 Business Restructuring
  • Below are the major business units analyzed for
    sale or retention during the Chapter 11
    proceedings

55
Stage 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.

56
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
    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.

57
Stage 5 Return-to-Normal
Operational Solvency
Funding
Costs of Emergence
Resolution of Outstanding Issues
All must be solved to emerge from Chapter 11
58
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.

59
Role of Professionals
60
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 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

61
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
  • Lending Solutions
  • Turnaround Restructuring
  • Transitional Management
  • Transaction Advisory

62
Services to Underperforming Companies
Performance Improvement
  • Operational and financial enhancement
  • Strategic assessment
  • Benchmarking
  • Shareholder value improvement
  • Cash and working capital management
  • Supply chain management

63
Services to Underperforming Companies
Lending Solutions
  • Raising additional lender financing
  • Business plan development
  • Cash flow modeling
  • Lender negotiations
  • Collateral assessment

64
Services 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

65
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
  • Serve in court-appointed positions

66
Appendix ATurnaround Tools13-Week Cash Flow
Forecast
67
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68
Appendix B Turnaround Tools Liquidation Analysis
69
(No Transcript)
70
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71
Appendix C Turnaround Tools Projections
72
Executive 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.
73
Revenue by Year by Country
74
Revenue Bridge 2000 2006 (dollars in millions)
Note Change due to volume in 2000 and 2001
includes net new business.
75
EBITDA by Year by Country
76
EBITDA Bridge 2000 2006 (dollars in millions)
Note Change due to volume in 2000 and 2001
includes net new business.
77
Summary 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.

78
Appendix DPresenter Bios
79
Randall 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.

80
Elliot 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.

81
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_at_fticonsulti
    ng.com or (212) 499-3633.

82
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_at_abtv.com or (336) 275-9110.
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