At different points in history, the U.S. trucking industry has faced some very rocky roads. When the recession hit in 2008, shipping demand plummeted, and fuel and tire prices soared. Tighter credit restrictions prevented many trucking companies from getting the financial assistance they required, resulting in nearly 100,000 U.S. employees losing their jobs. Even when the national economy began to recover, the trucking industry inched along.
Only in the last year or so have things accelerated, but the industry is still facing serious challenges with respect to driver availability, freight pricing, freight volume and fuel costs. In the midst of this milieu, a lower-middle market, Midwest trucking company with revenues of $22 million not surprisingly found itself in dire straits.
Having lost money three years in a row, the trucking company was in default on a number of the covenants from its lending agreement. Moreover, its line of credit was nearly maxed out. A leading regional bank had moved the company’s credit facility to their workout group. From the bank’s viewpoint, the company had undertaken neither a significant action to improve its cash position nor the appropriate steps to resolve its operating issues. Restructuring Advisors was brought in to perform a critical needs assessment, build a restructuring plan and advise the bank on whether to maintain the credit or end the relationship.
Finding Cash in the Balance Sheet
A comprehensive assessment of the company’s financial position and the current state of its operations revealed the company could generate more than $1 million from its balance sheet by changing the structure of several insurance policies, focusing on a small number of high-value receivables with significant aging, and reconfiguring payment terms with key suppliers. The insurance policy’s cash value was identified as a working capital improvement needed in the short-term. This created a one-time $400,000 cash infusion. The remaining cash value and projected policy earnings growth was sufficient to reduce the ongoing annual insurance payments by $100,000 for future working capital needs.
We leaned out the invoicing process — removing wasted steps — and reduced the invoice cycle from five days to one, resulting in a $350,000 increase in working capital. Likewise, we reviewed the accounts receivable process and increased collection activity, resulting in a $250,000 cash improvement. Finally, we reviewed key supplier contracts and increased standard payment terms to 45 days without any interruption in supplied services. This yielded a $500,000 increase in working capital.
Altogether these actions — completed in 90 days — solved the company’s immediate cash-flow problems and enabled it to accomplish two milestones it had not achieved in several years: It paid down the $1.3 million revolving credit facility to zero, and it put $200,000 cash in the bank.
An operational analysis revealed another $1.3 million to $1.7 million annual improvement that could be realized without factoring in any additional sales. Upon review of our plans and budgets, the bank determined it would continue to work with the trucking company through the turnaround process. A nine-month forbearance agreement was negotiated and agreed upon by all parties. Our “highway to healthy” had these objectives:
- Complete an intensive cost analysis and negotiate new pricing agreements
- Enhance working capital by reducing days outstanding on receivables and extending payables by 15 to 18 days
- Implement a business process improvement program to reduce time and waste
- Oversee the transformation of fleet maintenance operations
- Mentor the management team on being more proactive in monitoring newly defined KPIs
Establishing Profitable Pricing
Mid-term opportunities ranging from $500,000 to $800,000 were identified, including the development of a pricing model to optimize product/service mix. Previously, the company did not fully understand profitability by customer or service type (cartage, short haul, regional, long haul and special services). We performed an in-depth cost analysis, separating fixed cost from variable cost and determining contribution margin. This objective analysis made it clear to senior management and the owner where improvements could be made. Although this resulted in exiting the business with a few unprofitable customers, it provided the opportunity to enhance service and relationships with most others. Now, the company provides a higher-value service to the customer, with increased margins.
The simple-yet-effective price model tool clearly shows management which pricing level results in acceptable margins, and highlights premium pricing opportunities for value-enhanced services. The company no longer sees itself as a commodity trucking company but as a service solution supplier for customers with unique service needs. This new mindset permeates the organization and has refocused the company in the hiring of drivers, attracting new sales talent, and positioning itself in the market for future growth.
Reducing Receivables and Prolonging Payables
After renegotiating terms with the company’s largest customer, which had the highest outstanding balance, we helped improve a relationship that now generates more business at higher margins. The short-term impact was a $400,000 increase in cash, while the long-term improvement exceeds $500,000 annually. In addition, with the revolver credit facility paid down, a new letter of credit policy enabled the company to qualify for new discounts and receive $300,000 in increased credit from the three largest fuel vendors.
It also became clear that the best route for the company’s future in a changing regulatory environment was in the short-haul, regional market segment as opposed to long-haul. Rather than chasing business just to keep trucks rolling, the company now targets key cities and routes that are inherently profitable. By focusing sales, service and equipment resources in strategically identified markets, the company is better positioned to increase margins and profitability at the current sales volume. Plus, as growth initiatives are executed, profits will grow faster as margins are higher in the new target areas.
Outsourcing Fleet Operations
We recommended that the company retain a fleet services provider to analyze and manage the fleet operations of the company. Estimating a potential savings of $250,000 annually, we hired a specialist provider to validate and implement solutions, which included personnel changes, maintenance and fleet process improvements, and new management.
Within five months the fleet service area was transformed from an out-of-control cost center to a strategic advantage by increasing truck availability, reducing road breakdowns, increasing driver satisfaction and retention, and provisioning equipment to meet customers’ real needs.
An assessment of the organizational structure and dynamics helped management implement needed personnel changes. Only a few employees were impacted, but the results were impressive in terms of improved efficiency. Experienced sales representatives were added in key markets, internal processes were streamlined, positions were realigned and current employees were provided with new responsibilities and the authority to better serve the customer.
All employees were rewarded with pay increases for the first time in six years. Needless to say, this provided a morale boost and a motivational incentive for employees to keep achieving at the new higher level. We coached and mentored the owner’s daughter to groom her for the role of CEO. She currently holds senior management responsibility for financial operations, fleet maintenance, new sales initiatives and all administrative areas. This operating transition plan is coordinated with the owner’s estate and retirement plans and is expected to be fully implemented by year end.
Well-Positioned for Growth
Today, the bank communicates effectively with the trucking company on its activities and results. The company is generating positive cash-flow, and its line of credit has been consistently running with full availability. Gross profits have increased dramatically due to price increases, operating income has been positive for 10 consecutive months and the company is well-positioned for future growth. Should there be an economic downturn, the trucking company has a strong cash position and is better prepared to take actions quickly so as to not jeopardize the long-term viability of the business.
James R. Burritt, the founder of Restructuring Advisors, has more than 28 years’ experience providing restructuring advisory services to troubled and underperforming companies. Burritt can be reached at (865) 567-2341 or firstname.lastname@example.org.
Robert L. Webb is an executive leader with more than 20 years of financial and manufacturing operations management expertise, and specializes in enterprise transformation and transition. Webb can be reached at email@example.com.