CASE STUDY: Manufacturing Industry – Failure of integration that created cash flow issues
Safeguarding the business
Javelin Holdings Limited was incorporated to acquire the business and assets of Javelin Plastics Limited from its administrators in March 2017; the Company operated as a plastics moulding operation from premises in the Albany Business Park, Camberley, Surrey. Following the acquisition, the Company sought to integrate a pre-existing business under the same ownership and control in order to drive revenues, achieve cost reductions and increase profitability.
However, losses were encountered in the period February 2018 to July 2018 as sales were lower than anticipated coupled with greater than forecast direct costs due to delays encountered in integrating both businesses and achieving the growth and synergies that it anticipated. As a result, the Company faced cash flow difficulties and despite an injection of funding from the Director, was unable to make any significant in-roads in reducing the debt that had accumulated.
As a consequence, in order to seek protection from creditor action the Director sought advice from Opus with regard to how best safeguard the business and assets for the benefit of all stakeholders and creditors alike. Following a review, it was concluded that those objectives would best be achieved through an Administration process and ultimately Steve Parker and Trevor Binyon, Partners at Opus were appointed to act as Joint Administrators for that purpose.
Bespoke products, high running costs
The challenge was to bring both companies together; the plastic moulding company acquired out of administration had a smaller number of larger clients with little variety in mould requirements. The purchaser’s business was founded on a larger customer base of variable size with a more varied mould requirement. The purpose of the acquisition was part of the purchaser’s expansion plans and the anticipation was to integrate the companies by bringing them both onto one site thereby maximising value and revenue from the combined customer base to drive turnover whilst benefiting from the cost reduction to overhead anticipated by the commonality of the respective operations and the expected economies of scale.
However, the mix of customers resulted in an increase in smaller order values and a greater requirement in the variety of moulds used to fulfil those orders. The combined effect was to significantly increase manufacturing time due to the starting, stopping and overall longer running times of the machinery being used which resulted in higher costs. The combined operation had a diverse and wide range of customers with specialist requirements and the pricing model had not been adequately adjusted to recognise this change the net effect of which resulted in the operating costs being greater than forecast and a reduction in margins. The anticipated synergies which the combined business was expecting to achieve were not working as expected.
How we helped
Immediately Opus reviewed the company’s financial and operational performance and in consultation with Management and Stakeholders concluded that Administration was both necessary and appropriate; as such a strategy was formulated to start the process to achieve a pre-pack sale through an Administration process. That strategy was implemented by the Opus team with the assistance of specialist agents Hilco; a valuation of the business and assets was undertaken, and a full marketing exercise conducted whilst guidance and assistance was provided to management on the day to day activities of the business.
Throughout the Opus team had three key stakeholders to consider:
- The funders who has provided finance through an invoice discounting facility and asset loan.
- The administrators of Javelin Plastics Ltd who held a charge in respect of the deferred sale consideration.
- The Director who had provided loans for working capital.
The marketing campaign identified a number of interested parties and following discussions and negotiations a buyer was found, a deal negotiated, and the contract agreed. However, the proposed purchaser pulled out of the sale just before the deadline to complete.
This created a number of very clear and present dangers to the company as the continuation and continuity of the business was now at risk and extremely problematic. No headroom existed in the funding facilities, payment deadlines for the monthly salaries and wages were imminent and ongoing manufacturing was required to meet contractual deadlines all of which if not remedied could have seen a collapse in the business and its value. At this stage it was necessary for Administrator’s to be appointed so the Opus team could formally step in at take control. In quick response, the Opus team renegotiated terms with the existing lenders, scaled back management and production head count retaining both operational function and capacity whilst contacting all key customers and suppliers.
The Opus team spoke to the top five customers, all of which were high value businesses, to discuss interim contributions towards overhead and production costs and to agree minimum manufacturing production agreements. The business used moulds that are very specialist and any new manufacturer has to be verified that it meets industry standards by an association body. Finding a new manufacturer and the approval process takes time and the company’s customers could not allow this delay in their supply chains as it would impact on their own customers and result in fines if deadlines were not met and a consequent loss in goodwill for them.
All five customers agreed contributions (as in the end did others) signed production agreements and agreed to supply the raw materials required without cost for production. In addition, there was a requirement for all finished stock to be acquired as part of the production agreement. As a direct result the Opus team had secured investment to cover the overheads of c£80k per week for the payroll, running and production costs in order to maintain trading in the short term and ensure manufacturing production was maintained. With ongoing production schedules in place this afforded customers time to identify a replacement manufacturer without any disruption in supply. A win for all parties involved.
Trading ultimately continued under the control of the Administrators for 3 months generating a turnover of £1.45m and a Net Profit before tax of c£600k representing a very favourable outcome for all stakeholders and creditors. The initial plan was to trade for 8 weeks to complete customers’ orders however this extended by 4 weeks and a condition precedent of the Administrators entering into the production agreements was for the customer to discharge in full their debt to the company prior to the commencement of production. Through considered thought, commercial pragmatism and creative flair this situation presented the Opus team with the ability to be able to repay c£1.6m in 9 business days to the principal funder. Payment in full will be made to all 3 secured lenders in addition to which an anticipated surplus in excess of c£250,000 paid back to unsecured creditors by way of a dividend who were unlikely to have seen any return at the outset of the Administration. This outcome was considerably assisted by the full support and commitment of the management team who throughout demonstrated complete engagement to deliver the formulated strategy.
Javelin was a significant local employer and Camberley has long been the base for the British Army’s Ghurkha Regiments. There are many Nepalese families in the area and a number worked at Javelin. Whilst under our control the employees wanted to express their thanks for the manner in which the Opus team handled a difficult and emotional situation with sensitivity and care and as a result Curry Thursday was introduced when the families brought in vast pots of delicacies for everyone.
Key administration facts
- Trading profit – c£600,000
- Turnover during the administration trading period of £1.45m – up c21% on initial projections
- Plant & machinery sales achieved £700k – an improvement of c46% on initial expectations
- Payment in full to be made to all 3 secured lenders
- Unsecured creditors to receive a dividend of c10-15p in the £ as opposed to zero return anticipated at the outset
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