The Five-Step Turnaround Process: Humboldt Creamery Case Study


In February 2009, the chief executive of Humboldt Creamery, an 80-year-old Northern California milk cooperative, resigned abruptly, leaving the rural community in which it operated shocked and stunned. In an instant, the creamery went from what was perceived to be a flourishing enterprise to a company whose very existence became uncertain and threatened. Six months later, the creamery's assets were sold in a Section 363 bankruptcy sale for far less than the $80 million to $100 million the cooperative members thought it was worth, but nevertheless avoided a potentially devastating liquidation and economic blow to the already depressed region. When all was settled, fewer than a dozen jobs were lost, cows continued to be milked, generational families stayed intact, and a community remained hopeful.

The Humboldt Creamery case is an excellent example of how a team of restructuring, bankruptcy and investment professionals came together under a committed board of directors to handle a crisis and stave off a disaster. It also demonstrates how a time-proven five-step process, which is part of the training of Certified Turnaround Professionals, can lead managers, investors, and lenders in a crisis from a set of carefully considered alternatives to an optimal solution.

Step One: Situation Analysis
Humboldt Creamery had grown from a local enterprise to an iconic marketer of milk products with $130 million in sales in 2008. After the former CEO resigned, he alleged that there were irregularities in the company's financial reports that made the company appear better than it actually was. (Criminal charges were later brought against the former CEO, who pleaded not guilty.)

At that moment, there was no certainty that the company was viable or that it could continue in its previous form, if at all. With that knowledge and fear, the board of directors hired a certified restructuring professional to guide it through the inevitably painful process of analyzing past performance and creating alternatives for going forward.

As with nearly every restructuring engagement, the first step was to determine whether there was a viable core business and the resources to implement a turnaround. With the help of creamery personnel, the restructuring professional recreated the prior year's financial results from a detailed product profitability analysis and current valuation of working capital. This analysis showed that the creamery was deeply insolvent and the novelty products produced in its Los Angeles facility were not worth saving. However, the milk and ice cream products produced in its Fernbridge, Calif., facility were profitable and the enterprise value of its Fernbridge operations substantially exceeded its liquidation value.

Step Two: Management Change
Virtually every study of corporate failure points to management as the probable cause of distress and most likely key to recovery. The goal of the restructuring adviser is to ensure that capable management remains and those who caused the failure or impede the turnaround are removed.

In the case of Humboldt Creamery, the board quickly elevated the Creamery's chief operating officer, an effective and respected leader, to interim CEO. He worked closely and cooperatively with the professionals who became involved with the case. No other management changes were deemed necessary.

Step Three: Emergency Action
After confirming the existence of conditions for a turnaround, restructuring teams will typically implement emergency actions to ensure short-term survival, and this often includes laying the groundwork for a possible bankruptcy. In the Humboldt Creamery case, the dairy farmer cooperative that depended on the creamery agreed in an emergency meeting to defer $2 million of milk payments to buy time. WARN notice, required by law to notify employees 60 days in advance of a plant closing or layoff, was given to the Los Angeles facility employees to set in motion the steps necessary to close the facility, reduce expenses and release cash from working capital.

Forbearance discussions were initiated with the creamery's secured lenders and interviews with qualified bankruptcy attorneys commenced. The creamery retained bankruptcy counsel, and in April 2009 it filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Santa Rosa, Calif.

Step Four: Business Restructuring
The goal of a business restructuring is to restore the enterprise's capital structure and long-term profitability. Working with the interim CEO and the existing management team, the turnaround professional developed projections and funding requirements for a potential fresh start under a plan of reorganization. However, the difficulty of developing credible historical information made fresh start reorganization problematic.

In April 2009, the debtor engaged an investment banker to solicit buyers under a Section 363 asset sale process, and in August 2009 Foster Farms Dairy emerged as the successful bidder for the Fernbridge operation. In December 2009, the court approved a liquidating plan for the remaining assets.

Step Five: Return to Normalcy
A return to normalcy is the usual end of the turnaround process for the professionals and the start of a new beginning for the company, provided that the process includes time to replace the legacy shortcomings that caused the company to fail. Today, the Humboldt Creamery is a unit of the largest privately-owned dairy in California.

Lesson Learned
If an enterprise has slipped into distress, investors and lenders should know that trained Certified Turnaround Professionals are available to employ a time-tested process to ascertain and, when feasible, restore a company's value. For even in the darkest circumstances, with professional help and a proven process, brighter days may still lie ahead.