After being bought and sold five times in 15 years and leveraged to the hilt during a late '90s acquisition spree, Formica Corp. was hit hard by the post-Sept. 11 economic decline.
The company could not pay its debts and found itself in violation of its covenants. Suppliers were nervous, customers looked on skeptically and employees felt disenfranchised.
That's when Formica bondholder CSFB brought in Frank Riddick, a former investment banker with Merrill Lynch who had spent years at Armstrong World Industries, most recently as the company's president and COO.
Riddick's mission? Fix everything, starting with the financial situation and then moving to address more fundamental operating issues. Riddick's plan could be viewed as a road map on turning around a company via bankruptcy.
"Our first order of business was to address the financial problems," says Riddick. "They needed to be addressed so that we could give confidence to our employees and our customers -- particularly our customers -- that the company would be there to support them in the future."
Riddick and his board decided to lead Formica into Chapter 11 bankruptcy. "It provided the best way to stabilize our business from a financial point of view while giving us enough money to continue to operate and move through the restructuring process with some protection," Riddick says.
With a bit of a financial breathing room, Riddick could then turn his attention toward addressing Formica's systemic operational issues. "There had been a substantial lack of investment in terms of product development, new product launches, sampling, systems and infrastructure for a number of years."
While Formica needed new investment, it also needed to reorganize the way it allocated its resources and arranged its infrastructure. Though markets for Formica's high-pressure laminate products had shifted, the company's manufacturing footprint had stayed the same, leaving excess manufacturing capacity in North America and Europe even as demand outstripped supply in the ASEAN markets and China.
With the help of an analysis from Integrated Project Management Co., Formica conducted cost and benchmarking studies, analyzed its product lines and moved to rationalize production without closing any North American plants. It increased profitability by moving some production to Brazil, outsourcing work to India, shifting distribution centers within the U.S. and closing a plant in France.
With the help of new cash infusions from Cerberus Capital Management LP and Oaktree Capital Management LLC, the financial picture has shifted dramatically under Riddick's guidance. In two years, Formica has cut its debt burden from $540 million to $175 million while transforming a negative net worth of $250 million into equity capital of $175 million.
This success has allowed Riddick to focus on restructuring Formica to reflect the global scope of its operations, reduce scrap rates from 20% to 15% and introduce an expanded product portfolio.
In 2004, Riddick says Formica saw sales of about $750 million and a 50% increase in EBITDA.
Riddick feels good about hitting these number just five months since the company emerged from bankruptcy. "There is a fair amount of stigma associated with Chapter 11 that makes it difficult to attract new customers and employees," admits Riddick. "The longer we get away from that event, the easier things will become."
