Burke Industries Inc.,

Santa Fe Springs, California

 

Burke’s Businesses:

$105 million in sales Burke Industries had two unrelated manufacturing businesses:

 · Rubber and vinyl flooring products sold to flooring distributors for commercial applications through contractors and architects.

 · Silicone seals for aerospace applications sold to OEMs including Boeing.

Situation:

 · Burke defaulted on its subordinated bond interest payment and filed for Chapter 11 bankruptcy protection.

 · GSC Partners held the majority of the subordinated bonds.

 · With Bankruptcy Court approval, Robert Amter was retained by GSC Partners to operate as untitled chief executive officer of Burke.

Principal issues focused on:

» Determine operational improvements to turnaround Burke’s unprofitable operation including:

Make decisions on facility closings and consolidations,

Make a go/no-go decision on a complementary flooring product line acquisition,

Decide on the correct application of capital spending,

Build an effective organization – particularly the field sales operation.

Develop a strategy to grow sales.

» Pro form the financial statements in preparation for filing a plan of reorganization.

» Write the plan of reorganization.

Problems:

» Incurring Operating Losses and deficit free cash flows.

Income & Cash Flow Statement (000$)                    CY 2000 Actual

Net Sales                                             $105,477

Operating Loss                                   ($1,641)

% to Sales                                              (1.6%)

Interest Expense                                  15,681

Pre-tax Loss                                        ($17,005)

% to Sales                                               (16.1%)

EBITDA                                                  $2,844

% to Sales                                                2.6%

Free Cash Flow                                    ($15,604)

» Burke’s financial information was unreliable, but the statements gave a reasonable indication of each division’s profitability.  Division specific balance sheets were not available, only a consolidated balance sheet.  The reasons for the unreliability:

Poor and inaccurate allocations of overhead.

Plugged direct material numbers.

The newly installed software system produces inaccurate numbers.

» Unqualified Chief Executive Officer and Chief Operating Officer.

» No strategic and operational focus.  A list of six priorities had not been developed for each division.  No operational discipline.  As a result managers and employees did not have clear direction and time was largely squandered on trivia and uncertainty.  Burke does not follow the rule of focusing on the vital few and ignoring the trivial many. Examples of past priorities:

• Purchasing new office furniture and building new offices in Santa Fe Springs headquarters versus investing in productive manufacturing equipment.  This has distracted and demoralized employees.
• Purchasing for a reported $4.5 million and installing old and outdated MAPICS software in an unrealistic time frame versus investing in productive manufacturing equipment.
• While safety is important in any operating company, setting it as a key priority is wrong.  Safety is at best a tactical action to reducing insurance costs and maintaining productivity.
• Plant cleanliness is important but it should not have taken on the importance of a key priority which is distracting from getting the principal priorities completed.  It is also at best a tactical action.
• Rush to judgment with an absence of homework prior to making key decisions.  No common sense on many of the decisions.
• Focusing on low selling prices to obtain increased sales and not on channel segment, product line segmentation, and stock keeping unit (SKU) reduction strategies.

» Top down decision making with the absence of the interactive process of cross-functional communication.  This had led to uncoordinated management.  Silo management.  Lack of proper priority setting.  No discipline.  Unilateral decision making which always results in mistakes.

» Replaced knowledgeable and effective employees with unqualified and unknowledgeable employees in its silicone seal business.  No prior experience in this product line. Ability levels were low.  Arrogantly made major changes in the operation and selling prices which helped drive this division into a $2 million operating loss in CY2000 from CY1999’s $1 million positive operating profit.

» Poor and fragmented organization:

No cost accountants in any division.  Critical positions in a manufacturing operation.

No manufacturing and industrial engineers in any division.  Critical positions in manufacturing.

No Information Technology function in each division.

Too many small manufacturing plants and too many remote warehouses.

» Unacceptable on-time delivery and customer service performance.  Silicone seal division was at 70%.  Flooring division had a capacity obstacle which limited product availability.

» Low capital expenditures such that all plants had not been maintained and had not made investments in state of the art equipment to improve through-put.

» Flooring division’s sales coverage was poor.  Marketing programs and collateral material were virtually non-existent.  There were 19 sales personnel on the manpower list.  Fewer company salesmen and additional commission architectural reps were needed to increase spec sales.

~~~~~~~~~~~~~~~~~~~~~~~~~~~

Corrective Actions – Flooring Division:

During the evaluation used interactive cross-functional communication process involving the key managers and knowledge people to develop the following strategic and operating plan.

Objectives:

On-time Delivery @ 95%.
Achieve 19% Operating Profit Margin.
Achieve 6% per annum sales growth.

Priorities and tactical actions:

Solve software problems

Fix Customer Service

Increase Plant Capacity
Repair/Replace Telephone Systems
Develop small order capability
Rationalize Product Lines
Manage Freight (In/Out)

Improve Through-put and Become Low Cost Producer:

Install cost reduction program

Value analysis

Cell technology

Oil Heated Presses

4-Deck Presses

Reduce SKUs

Cost/benefit analysis of Florida truck fleet

Product Line Development

Conductive Tile

Hammered Tile

Tread Riser (full tread, no seams)

12 foot treads

Corner protectors

Sales & Marketing:

Sales Coverage – Add Architectural Spec. Reps

Marketing Programs-Collateral Materials & Promotions

Organization

Rejoin industry associations

Staff the organization

MIS operation

Manufacturing and Industrial Engineering

Cost Accounting function

Go/No Go decision on selling or closing Roofing Products (EP/R) business.

Solve “Building E” warehouse and Acid Etch location/future.

Corrective Actions – Silicone Seals Division: 

While completing the evaluation, to develop the following strategic and operating plan, used an interactive cross-functional communication process involving key managers and knowledge people.

Objectives:

Operating Profit Percentage: 20% average.
On-Time Delivery, 98% majors, 90% others.
Sales growth, internal, external.
Increase prices, 2%-3%.

Priorities and tactical actions:

Achieve 90% to 98% on-time delivery by implementing:

Raw material availability

Detail planning, spec finishing

Capacity increase: material prep and 3rd shift

Labor resources

Press refurbishment

Develop and execute cost reduction program

Consolidate California plant into Massachusetts plant.

Raw material costs via substitution and price negotiation.

Inside processing vs. outside.

Mold cost vs. prepreg costing.

Employee training.

Restructure Defense business, eliminate money-losing products.

Obtain internal growth via marketplace presence.

MIS Systems:

Material

Production

Cost Accounting

Install AS400 computer

Division specific financial statements

Staff the organization

MIS operation

Manufacturing and Industrial Engineering

Cost Accounting function

Obtain external growth via acquisition of one of two candidates.

Consolidated Financial Forecast:

Income Statement (000$)                           Actual                        ………….Pro forma…………

                                                                          CY2000                       CY2004           CY2004

Assumes nil sales growth

Net Sales                                             $105,477                     $105,477         $105,477

Divest: 2 businesses                                                                  17,439            17,439

Adjusted Net Sales                                                                 $88,038         $88,038

Worst Case     Best Case

Operating Profit                                  $5,158                          $9,907         $17,066

% to Sales                                                 4.9%                           11.3%              19.4%

Less: Corporate Overhead                  (4,784)                         (4,784)           (4,784)

Less: Goodwill                                       (2,015)                         (2,015)           (2,015)

Plus: Reduction Corporate Overhead                                      2,800            3,500

Adjusted Operating Profit                   ($1,641)                      $5,908         $13,767

% to Sales                                                  (1.6%)                            6.7%              15.6%

Interest Expense                                 15,681                             1,500              2,000

Pre-tax Profit                                      ($17,005)                    $4,408             $11,767

% to Sales                                             (16.1%)                            5.0%            13.4%

EBITDA                                                  $2,844                      $10,943         $18,502

% to Sales                                                2.6%                         12.4%             21.0%

Price Earnings Multiple                          6                                   6                      6

Enterprise Value                                 $17,064                     $65,657         $111,014

» To support cost reduction efforts capital expenditures would average $2.6 million annually.  This was 3% of sales and acceptable.  Haskon was higher than normal because of moving the California plant.  This capital spend plan was project specific.

Capital Expenditures (000$)      Burke Mercer Flooring             Haskon/SFS Seals     Total

CY2002                                   $1,000                                         $400             $1,400

CY2003                                   $2,000                                    $2,000             $4,000

CY2004                                   $1,500                                       $800             $2,300

Total                                         $4,500                                    $3,200             $7,700

Average Annual                      $1,500                                     $1,100             $2,600

% to Sales                                  3.3%                                          4.6%                3.0%

At the same time, Robert Amter was chief executive officer of Springfield Precision Instruments Inc.

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