Case Studies
Obayashi Corporation
Description:
A leading global publicly held corporation based in the Pacific Rim acquired a large general contractor based in the Southeastern US that subsequently incurred substantial operating losses. The contractor had built a large backlog of public and private construction contracts that were estimated to incur additional losses and consume considerable cash resources in the near future. The parent company desired to exit this business in the least costly manner. Gene Kemp was retained to provide an analysis of exit options.
Process:
Gene led an in-depth review and analysis to include a detailed estimate of the cost to complete all contracts. In conjunction with this review, he assessed the capabilities of existing management, the integrity of their business processes and IT systems and the viability of new business opportunities. Proposals from management for a buyout as well as offers for divestiture to third parties were sought and evaluated. The evaluation led to formulation of a strategy to wind-down the business, complete all contracts in process, dispose of non-core assets, and reduce personnel to a level consistent with current operations. Mr. Kemp was subsequently appointed interim CEO to lead the wind-down.
Results:
All work under contract was successfully completed by significantly restructuring the business, incorporating the closing of unprofitable divisions, reducing staff, enhancing cash management, initiating cost controls and improving financial reporting. All unprofitable divisions were closed as the backlog of contract work was completed. Over a two-year period, the company’s fixed assets including construction equipment, vehicles and real estate were systematically liquidated which provided cash resources for the wind-down. Timely negotiations with customers on public contracts prevented legal disputes and allowed for the successful completion of projects thereby mitigating liquidated damages. Eighty percent of employees were successfully outplaced with professional assistance as projects were completed which created positive press for a coordinated public relations program in local communities affected by the company’s closure. Additionally, the wind-down came in 40% under initial exit cost projections.
Kinetic Systems Inc.
Description:
Kinetic Systems, Inc. Durham, NC, - $570 million revenue, Private Equity owned, design engineering and construction company that was a global leader in high purity specialty piping and mechanical installations. Operating out of regional offices in North America, Latin America, Europe and Asia, the company served fortune 500 customers in electronics, bio-pharmaceutical, solar and general industry. Kinetics had suffered several consecutive years of significant operating losses and had accumulated excessive and stifling high yield mezzanine debt. Liquidity was zero and availability to new lines of credit was nonexistent.
Process:
A new management team led by Gene Kemp, conducted an in depth review of the company’s operations, markets, customers and business processes. This review led to the formulation of a turnaround strategy that focused on key business fundamentals, operational improvement and a global market repositioning. It was followed by a cautious selection and evaluation of new projects; business opportunities and retention plan for certain key personnel. Critical to the successful restructuring, was a change in the company’s operating culture to one focused on financial discipline, operational accountability and strong project controls, coupled with decisive decision making and candid communication with stakeholders. The new management team led the divestiture of non-strategic business units and non-core assets along with the implementation of strong cash planning and controls.
Results:
During the first year, the company experienced an immediate reduction of losses and shareholder confidence returned, allowing for the injection of new equity. Over the next two years, the company realized a 50% improvement in its gross profit margin and a 30% reduction in annual SG&A costs. The company’s return to profitability and positive cash flow, coupled with proceeds from the divestiture of noncore assets, allowed for the full retirement of all outstanding indebtedness. A new revolving line of credit was secured from a commercial bank to provide working capital for growth along with the release of all shareholder guarantees previously provided to sureties, financial institutions and insurers. Increases in surety bonding credit fostered growth of profitable new contracts. Further, a capable management team was recruited and developed to take the company forward.
HBE Corporation
Description:
HBE was a $1 Billion revenue business and one of the US’s largest privately held corporations and owner/operator of 24 large upscale convention hotel properties (14,000 rooms) in 14 states and the nation’s largest planner, designer and builder of healthcare facilities, financial institutions. The hospitality industry was severely impacted by 9/11/2001 events and declining occupancy rates pushed the company in default of covenants to its $800 million debt portfolio with sixteen commercial banks. The design build business was also negatively impacted by economic slowdown and management distraction from issues in hospitality division.
Process:
Gene Kemp led negotiations with lenders to improve terms, improve interest rates and extend the maturities of existing loans that ultimately eliminated default conditions and improved covenants. Further, he led the strategy to divest of certain hospitality assets to private equity investors that generated cash flow required for working capital and to reduce indebtedness with the bank group. For the remaining portfolio, he led staff reduction efforts to reduce payroll and benefit costs by fifteen percent. Simultaneously new construction project management systems were implemented that enhanced project controls, increased contract margin and provided cash forecasting tools necessary to accurately manage liquidity.
Results:
During the first year, the company experienced a return to positive EBITDA from reduction of fixed overhead and substantially increasing both hospitality and construction gross margins. The combination of improved margins, lower interest rates and reduced leverage allowed the business to achieve a net income in year two subsequent to the restructure.
LVI Group, Inc., New York, NY, NYSE
Description:
–$ 1 Billion revenue diversified company listed on the New York Stock Exchange. It was one of the nation’s largest interior construction management and consulting firms; additionally it was one of the largest asbestos abatement contractors. The Company's other operating subsidiaries were engaged in businesses to include energy recovery and power generation, distribution of electrical supplies, the manufacture and sale of dredging equipment and precision machined castings, and the manufacture and sale of electrical products. Growth of this business had been fueled with high yield public debentures (junk bonds). The overextended business faltered to operating losses and required a major balance sheet restructure to survive.
Process:
Gene Kemp was engaged to formulate a strategy and lead execution of activities that would allow the company to return to a profitable, viable enterprise and also a corporation that has positioned it to take competitive advantage in its core business segment markets. Mr. Kemp directed and managed a process to sell non-core businesses to reduce indebtedness while simultaneously leading negotiations that resulted in a financial restructure. Further, he led activities to assure long term success of the Company with a continuing program to reduce overhead and increase gross margins.
Results:
Successful negotiations resulted in a new issue of common stock when combined with sale of non-core businesses produced proceeds sufficient to replace high yield publicly held debt and preferred stock. This new working capital was sufficient to fund the reduced operations that had higher EBITDA margins and lower debt service. This successful restructure received significant acclaim by investment analysts and allowed for the financial survival of this previously troubled company that is a private equity success story today.