Formica is the largest producer of high-pressure laminates globally, manufacturing the widest portfolio of surfacing products in the industry, with 14 manufacturing facilities in 12 countries and operating in over 100 countries. In 2006, Formica’s annual revenue was nearly a billion US dollars. This month, we talk to Lynn Younger, Vice President and Treasurer at Formica, about her efforts to refinance the company following its successful exit from Chapter 11 in June 2004, and her global treasury consolidation management project. Lynn is based at the company’s head office in Cincinnati, Ohio (USA).
Vice President and Treasurer
Lynn P. Younger was named Vice President and Treasurer and Corporate Officer of Formica Corporation in April 2004 after spending 16 years with Chiquita Brands International, Inc., most recently as Assistant Treasurer. She served as President of the Cincinnati Treasury Management Association for 1997 to 1998. Lynn has been an active member of the Association for Financial Professionals since 1988 and is a member of the National Association of Corporate Treasurers and the Risk and Insurance Management Society.
Lynn has presented at EuroFinance Conferences each year since 1997, focusing her topics on the Latin American Region and doing business as a US multinational throughout the globe. Lynn has presented in Mexico City, Mexico; Miami, Florida; Boston MA; Greenwich CT; Shanghai, China, and chaired the US Multinational Conference in Miami, Florida in April 2004.
Lynn has a Bachelors of Business Administration Degree in Business Management from the University of Cincinnati. Lynn has a Masters of Business Administration Degree in International Business from Xavier University, having studied abroad at the European University in Antwerp, Belgium, Sophia University in Tokyo, Japan and in Singapore.
What is the structure of Formica’s treasury?
We have a small global treasury department that consists of three people, including myself. We are responsible for global financing, worldwide management of pension funds, global insurance and worldwide treasury management. Until quite recently, the majority of our treasury management activities were managed independently in 21 locations throughout the world.
How did the treasury structure come about?
Frequent ownership changes beginning in the 1980’s, combined with several difficult acquisitions, began to affect the company’s performance in 2001. Ownership change has been one of the contributing factors of decentralisation, resulting in some less than optimal structures in the business. The company is finally in a steady state position with the same principal investor group for the past three years and the same CEO for the past five years. Our CEO, Frank A. Riddick III, implemented an operational and strategic turnaround in 2002, and as a result, profitability has increased significantly in the last five years, doubling from 2002 through 2006.
Do you have any plans to centralise the treasury operations?
Yes. We have begun a global centralisation process which will reduce our 21 treasury centres to five regional centres, located in the US, the UK, Taiwan, China and Brazil. At the moment, cash management is done locally in-country. We will establish a treasury centre in each of the four regions, including a treasury centre in Shanghai, China, that will manage all of the functions that support treasury management. Each treasury centre will report directly to the regional CFO, with management reporting direct to Corporate Treasury.
In anticipation of the establishment of these new treasury centres, meetings were held in North America, Europe, Asia and South America in 2006 to introduce the concept of regional treasury centres. We feel that the best approach for success is to include all the individuals who are currently in the role, to provide them a voice in the transition, and to allow them to fully understand the impact on their business. Our newly appointed global bank partners attended all of these meetings.
As a result of our integrated approach to the project, we decided to host the first ever Asia finance meeting in July 2006 in Shanghai, China. Seven countries were represented. As mentioned earlier, we agreed to establish two treasury centres in Asia, one based in Shanghai, China and one based at our regional head office for Asia in Taipei, Taiwan, with the China centre reporting into Taiwan. Due to the complexity of provincial banking laws in China, we determined that a stand-alone treasury centre in China would be necessary to manage all of our locations throughout the country.
We visited four European locations last year due to the volume of activity that is currently managed in these facilities. These regional offices in Europe will be combined into one European treasury centre based in Newcastle, UK, with all back-office functions migrating to the treasury centre, including accounts payable, accounts receivable, payroll and day-to-day cash management, and European cash forecasting.
Corporate Treasury will manage the day-to-day cash management functions for North America, including the US, Canada, Mexico and the Caribbean from our head office in Cincinnati, Ohio. We are currently migrating our Canadian operation to our head office and hope to have this completed sometime in mid 2007.
We have determined that our regional office in Brazil will stand-alone, managing the South American business.
Corporate Treasury will accomplish all of the integration with one principal global bank partner – Bank of America, utilising their partner banks where necessary. In addition, Formica engaged PNC Bank, N.A. to provide all cash management services for the US, with the
remittance onsite service in Puerto Rico. Our US conversion to PNC Bank became effective on 1st December 2006.
We began the global treasury management project in May 2006 and expect completion sometime late in 2007. This has been accomplished through the support of Bank of America and PNC Bank. We have not utilised any third-party consulting services for this project. Formica does not yet have the systems capability and the underlying ERP system to support a global treasury programme, but we are currently evaluating the possibility of implementing a Treasury Workstation.
What was behind the decision to go with just one bank?
Bank of America is the lead agent on our global credit facility. Formica has an established credit relationship with Bank of America – we have worked with them for many years – and we have a high level of confidence in this bank to manage a global treasury programme. Bank of America offers excellent service, quality products and expert sales representatives. On a global basis, Bank of America has the ability to provide our company full visibility to all our bank accounts globally, control over all of our processing and funds flow, and the capability to move funds anywhere in the world from the head office, and most importantly, provide a disaster recovery solution. Our expectation is that this global cash management programme will decrease idle cash by 40% and thus reduce interest expense through permanent debt reduction and provide improved cash forecasting capability. It is also our expectation that bank service providers will decrease by approximately 50% and the number of bank accounts will decrease by 40%, thus creating additional expense reduction opportunities.
I understand that Formica entered Chapter 11 in 2002. What impact did this have on the treasury?
It was only Formica Corporation in the US that entered Chapter 11 in March 2002 – this was due to the company’s inability to service the (then) current debt level. The company exited Chapter 11 on 10th June 2004. The impact to treasury operations during that period was that credit became extremely tight, with most of the cash being restricted. The company retained higher than normal cash balances as we had to operate on a cash flow basis and had a limited revolving credit line. Credit insurance was also difficult to maintain at the required levels, especially in Europe. The company had a difficult financing structure in place during the bankruptcy period.
Cerberus Capital Management LLC (Cerberus), a Private Equity firm, became our primary investor. Cerberus, Oaktree Capital Management LLC and others made an equity contribution in June 2004. Cerberus continues to be the primary investor today, owning approximately 80% of the company. The cash equity injection in June 2004 of $175m was primarily used to pay off all the creditor banks from the bankruptcy period. At the exit of Chapter 11 on 10th June 2004, debt was reduced by approximately $440m.
And at the same time Formica negotiated a new revolving credit line?
Yes. A revolver was necessary for cash flow requirements and to support the business. Formica’s cash needs are seasonal, with our peak use of cash between January and June. We traditionally pay down debt between July and December.
What was the next challenge for you after that?
Post-bankruptcy, we concentrated on opportunities within the business, the implementation of the new credit facility and moving toward a more normalised operating environment.
The company began the process of refinancing the exit credit facility in mid 2005, and subsequently closed with a new credit facility on 15th March 2006. Through the new credit facility, we lowered our cost of term debt by 200 basis points and facilitated a distribution to our shareholders, while continuing to maintain our existing level of interest expense. Formica now has a new global credit facility with increased liquidity and additional flexibility. In addition to refinancing our global facility, we also refinanced our Asian credit facility on 30th March 2006. As you can see, 2006 was primarily focused on refinancing the organisation.
During the refinancing what were the banks’ main concerns?
The banks were concerned primarily with free cash flow and liquidity. The company went through the rating agency process and was rated single B by S and P and B1 by Moody’s, with both agencies providing a stable outlook. We were also able to provide adequate responses and support to all creditors, rating agencies and banks, confirming that the company was in fact able to refinance its debt, pay a distribution to our shareholders and continue to improve operations within the business.
What is your experience working with private equity investors? They obviously expect a return on their investment which also puts the company under financial strain.
We have an extraordinarily positive and strong relationship with Cerberus, who are actively involved as directors in the management of our company.
What are your plans for the next 12 months?
Our goal is to have the global treasury management consolidation project completed by the third quarter of 2007. In addition, we are reviewing our procurement card and travel and entertainment card programmes, and evaluating Formica’s global pension fund performance.
Corporate Treasury is also planning on improving our global cash forecasting system, which today is very labour intensive and manual. We are analysing the potential of implementing a more streamlined and automated cash flow forecasting process, possibly through the implementation of a Treasury Workstation and utilisation of the Bank of America systems and reports.
In support of Formica’s operational and financial success over the past few years, Corporate Treasury will continue to strive to improve processes and procedures and to support the company’s expected growth and profitability.