Jones Plumbing Systems Inc.,

Birmingham, Alabama

Simultaneous with being Chief Executive Officer of Drexel, Robert Amter was appointed Chief Executive Officer of Jones in a last ditch effort to save the company.

Jones, a $40 million in sales manufacturer of plastic and cast iron drain and pipe connector products sold to plumbing wholesalers and direct to retail chains, such as Home Depot.  Jones was owned by The Jordan Company, the New York leveraged buy-out firm.

Problems:

» For seven months year-to-date, operating losses totaled $2.8 million and 14% of sales.  Net losses totaled $5 million and 25% of sales.

» Net losses had been registered in 1991, 1993 and 1994 of $2.5, $1.1 and $1.1 million respectively

» Net sales had declined 19% from $21.6 million to $17.5 million for the six months year-to-date in 1995 versus 1994.

» Gross profit margin had dropped from 30.0% of sales to 16.7% while selling, general and administrative expenses had increased from 24.9% of sales to 30.3%.

» Cash flow was a negative $880,000 for the six months year-to-date.

» Bank loans totaled $11.5 million and were 103% of total capital.

» 45% of the $7.0 million inventory had turnover of less than 2, and 35% had turns of less than one.

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Priorities:

» Consolidate the Alabama manufacturing operation from 13 buildings and 339,000 square feet into one building and 130,000 square feet.  Move into the 130,000 square foot finished goods warehouse.

~ Prior to moving, complete a plant layout and flow diagrams to determine if manufacturing and warehousing operations would fit.  Confirm the feasibility of reducing direct labor from 270 employees to 151.

» Establish a buy-out source for the viable cast iron product line and close the money losing foundry.  A one shift operation, Jones’ foundry was a large contributor to the operating losses.  Prior to closing the foundry:

~ Complete engineering drawings and specifications.  Of the 300 part numbers, over 200 did not have drawings or specifications that potential suppliers could use to establish a price quotation.

» In addition to its manufacturing business, Jones had developed itself into a “master distributor” of purchased product which was unrelated to its core business.  The slow moving inventory had over $2 million tied up in this product line, some of which was obsolete.  The goal was to reduce the product line by 30% and convert the $2 million in discontinued inventory into cash.

» Implementing product pricing discipline.  Jones’s had reduced its selling prices to gain sales and market share.  Manufacturing inefficiencies and this strategy had been the main causes of the lower gross profit margin and lost sales.  September’s increase in the gross profit margin to 12.1% from a low of 9.3% was related to improved product pricing disciplines.

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Results Achieved the first 3 months:

» Reduced the operating loss 28% from $2.0 million to $1.4 million, an annualized improvement of $2.2 million.

» Increased free cash flow 27% and $575,000 from $2.2 million to $2.7 million

» Reduced selling, general and administrative expenses $838,000 from $3.0 million to $2.1 million.

» Reduced inventory 13% from $7.0 million to $6.1 million.

» Reduced salaried headcount 28% for an annual savings of over $700,000.

» Reversed the downward trend in the gross profit margin.  At its lowest point it was 9.3%.  In September it was 12.1% – the highest in six months.

» In September 1995, sufficient progress had been made in implementing the operating plan’s priorities to be able to forecast when the turnaround would be completed, the financial results and the cash required.

» By October 1995, just 4 months after starting to implement the operating plan, 50% of it had been completed:

Started the consolidation of 13 manufacturing buildings into one building. The finished goods warehouse had been physically reorganized and computerized to allow the transfer of manufacturing equipment into the same building.

Completed engineering drawings of over 200 cast iron parts. Identified and negotiated the outsourcing of cast iron product from foreign and domestic sources to facilitate closing the foundry.

Reduced the “master distributor” product line to allow the discontinued products to be converted into cash.  Home Depot committed to purchasing its discontinued product.

» Sufficient progress had been made to assure the Bank that the “Most Likely” financial statement scenario could be achieved.  This meant that Jones would become profitable in less than one year for the first time in three years.

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Conclusion:

Despite this progress, it became apparent that because of a shortage of working capital and the debt repayment obligations to the Bank, the remainder of the turnaround could only be accomplished with the support of the Bank.

~ The Jordan Company was willing to make an equity infusion.

The Bank acknowledged that the operating plan was correct and the company was progressing to a turnaround.  However, the Bank was unwilling to extend the loan and give Jones more time.  This forced Jones to file for Chapter 11 bankruptcy protection in November 1995.

Jones requested the Court to authorize the use of the Bank’s cash collateral for a debtor-in-possession loan.

~ During Robert Amter’s testimony, the Judge agreed that Jones had progressed at a surprisingly rapid pace and seemed able to achieve the operating plan and financial results presented.

~ The Bank officer’s testimony agreed, but he testified that the Bank had tired of this loan and preferred to take its chances on liquidation to recover its loan principal.  The Judge said he had no choice but to deny Jones’ petition.

A short time later Jones entered Chapter 7 bankruptcy and liquidation.  The Bank lost most of its principal in liquidation.

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