Headquartered in Houston, Compressor Engi-neering (CECO) is a provider of highly engineered compressor parts and repairs, pipeline construction as well as maintenance, training and technical services. CECO has been a family-owned business since 1964, when the founder recognized a strong demand for specialized replacement compressor parts for the oil and gas markets.
CECO operates in two complementary divisions, Manufacturing Services and Pipeline Services. Manufacturing Services specializes in the design, production and repair of compressor and engine parts to the gas transmission, midstream, petrochemical and air compression industries. Pipeline Services provides construction and maintenance services to the natural gas industry with services ranging from pipeline integrity work to pipe fabrication, compliance work and mechanical services.
In 2012, Pipeline expanded its operation to include the construction of new natural gas pipelines focused in the Ohio, West Virginia and Pennsylvania area, which significantly increased revenue but added to the complexity of the business. At first, results were promising with revenue increasing 2.4 times between 2011 and 2014. Profitability improved in line with the revenue, but started to slip in 2014.
In mid-2014, CECO hired AEG Partners to review business performance, evaluate opportunities for profit improvement and improve cash flow practices. AEG and CECO’s senior management team quickly identified significant issues in the financial reporting related to Pipeline’s new construction operations. Instead of tracking to the expected EBITDA, the Pipeline business was generating significant losses.
These losses were buried within the complexity of construction accounting, which not only misrepresented profitability but upended the company’s borrowing base. Once the project reporting issues were unwound, the team found an $8.5 million borrowing base over-advance on a $25 million facility. The company faced imminent bankruptcy, which would likely result in liquidation and significant losses to all the stakeholders. The result was an immediate and significant liquidity crisis as the company headed into its seasonal slow period.
To address the problems without distracting the rest of the organization, a turnaround leadership team was put in place led by AEG (Phil Van Winkle, CRO; Jonathan Morrison, interim CFO), key CECO management/ownership (Richard Hotze, CEO; Mark Hotze, COO) and outside counsel Hoover Slovacek (Edward Rothberg, Melissa Haselden).
Corporate structure posed a major hurdle to resolving issues at the troubled Pipeline unit through legal means, since the problem business was a division. A bankruptcy filing would place the entire company at risk. Survival of the Compressor operations and the “good” Pipeline business was critical to rebuilding the confidence of key stakeholders, maintaining debt service and providing a runway to execute a successful turnaround.
Given these constraints, the turnaround team focused on four critical areas: separating the Pipeline operations into a “good” and a “bad” business, opening communications with all stakeholders, gaining full control of liquidity and improving oversight and operating procedures within the Pipeline business.
Good Business/Bad Business
The team separated the receivables and payables associated for the good and bad portions of the Pipeline business. Leadership was terminated, and existing construction projects were wound down. For the bad business, while losses were incurred, the quick action of the shutdown mitigated even worse results. By educating vendors on the implications of the alternatives, they were willing to accept an out-of-court settlement. In short, cash generated by receivables of the “bad” business funded a settlement to those vendors.
Within 24 hours of finding the reporting errors, the restructuring team reached out to the lender to review the issues and discuss alternatives. Not only was the company in an over-advance position, it required additional liquidity to manage through the seasonal slow period. Additionally, the vendor settlement would require the use of the lender’s collateral. The team was able to illustrate a path forward successfully, predicated on operational improvement, asset sales and financial commitments from certain family members that would partially reduce the over-advance. The team consistently and aggressively communicated with the lender to ensure its understanding of the turnaround plan execution and progress.
As with all liquidity crisis situations, visibility and communication are critical to successfully navigating the crunch times. The company’s 13-week cash forecast was overhauled to gain greater insight into individual project level outflows and timing of customer progress payments. Vendors were ranked by priority but all received open communication on status and ability to pay. Collection of receivables was pursued with vigor, and all assets were reviewed for potential sale and cash generation.
Improve Core Operations
Moving beyond classic restructuring tactics to address operational improvements is core to an effective turnaround, and the CECO case was no exception. While the business performed high quality work and enjoyed strong relationships with its customer base, Pipeline leadership had been focused on revenue growth at the expense of profitability. Without a true understanding of its cost structure, contract bids were routinely underpriced. New processes and standards were put in place, with all contract bids reviewed with the CRO and interim-CFO to ensure an adequate level of profitability and cash flow throughout each project based on an accurate costing model. A number of key managers were also replaced who did not have the ability or willingness to shift to new practices. With these changes, the Compressor business significantly boosted performance and started to win new, profitable projects including a major, multi-stage contract with a key customer.
Because of these actions, the company survived the liquidity crisis, avoided bankruptcy, improved profitability and ultimately refinanced the senior debt in full. The cancerous Pipeline construction business was successfully shut down, utilizing the remaining assets to negotiate an out-of-court settlement with that business’ vendors. While the rejuvenated operations were notably smaller from a revenue standpoint, the company’s performance as measured by EBITDA improved from a significant loss to its most profitable year in 2016. The lender also realized a full recovery and the company will continue to be a family-owned operation, adding to its history of more than 50 years.
The restructuring team was empowered to act by the company’s board of directors and quickly gained control of the situation. Open communication with all stakeholders was critical to success as any one of them could have changed the direction of the turnaround to a liquidating bankruptcy. The restructuring team was able to clearly outline a path forward that respected each of the stakeholder’s rights, based on a plan with superior economic outcomes. Alternative options were preserved and respected by the turnaround team with risks mitigated throughout the process. As such, each stakeholder was willing to support the process and provided the company the time to achieve the turnaround successfully.
This case highlights the importance for a clearly defined turnaround plan that respects the rights of all stakeholders, preserves options in multiple outcome scenarios, and is openly and actively communicated. Moreover, it illustrates how industry players “around the table” can work together to generate value for all as opposed to a one-sided win.