The Incoming MBTA GM's Former Company May Face Bankruptcy
Global
Power Equipment Group, the corporation run previously by incoming MBTA
General Manager Luis Ramirez, has had to sell off assets, lay off
employees, and risks declaring bankruptcy as a result of erroneous
financial statements it filed with federal regulators while Ramirez was
CEO.
A
WBUR analysis of Global Power Equipment’s most recent filings with the
Securities and Exchange Commission shows that the company suffers from
what it calls “severely constrained liquidity” as a consequence of
having to correct four years worth of error-riddled financial reports to
the SEC.
In March, the company reported that without a new infusion of credit, Global Power may not have the cash to fund daily business operations.
Global Power has yet to file its 2016 annual financial statement or its first two quarterly reports for 2017.
The MBTA celebrated
Ramirez’s experience as a private sector turnaround specialist when it
announced his appointment to general manager last week. State
Transportation Secretary Stephanie Pollack pointed to Ramirez’s
turnaround skills in a new statement issued to WBUR.
“I
selected Luis Ramirez based on his long and successful career of
transforming and turning around complex organizations, including several
divisions of General Electric,” she said. “Luis is the right person at
the right time to move the MBTA further down the path to being one of
the best transit systems in the country.”
“We believe his body of work is exactly what the T needs."Gov. Charlie Baker
The
statement included a note that Pollack led the general manager search,
and “per statute is responsible for appointing the GM/CEO.” The MBTA did
not respond to multiple requests to speak with Ramirez himself.
Gov.
Charlie Baker also weighed in Tuesday. “We believe his body of work is
exactly what the T needs,” Baker said of Ramirez. “I have no doubt that
when we have this conversation a year from now, most other people will
agree with me.”
Ramirez’s LinkedIn page
highlights his tenure as CEO at Global Power, and his leadership
turning around at least two business units at GE: the corporation’s
Energy Rentals division from 2002-2004, and GE Energy Industrial
Solutions from 2009-2012.
GE is currently selling the Industrial Solutions unit, one of the company’s smallest, according to The Wall Street Journal.
“I keep hearing myself described as a turnaround guy,” Ramirez said in Boston last week. “And it’s true I have been charged with improving and transforming very complicated operations.”
A detailed analysis of SEC filings tells a different story, at least at Global Power Equipment Group.
'We May Not Generate Sufficient Cash Resources To Continue'
Ramirez served as CEO of the Dallas-based energy industry manufacturer from July 2012 to March 2015.
The
company discovered major accounting errors in the firm’s financial
statements during a first quarter 2015 internal review. Ramirez resigned
on March 20, 2015.
In May 2015, Global Power Equipment notified the SEC that it would have to correct the errors and refile its 10-K form, the annual report all publicly traded companies must file with the federal government.
A
spokeswoman for the company said Ramirez's departure was not related to
the restatements, but did not comment further on the circumstances of
his resignation.
The
company was forced to restate reports for 2011, and 2012-2014 -- the
three-year period Ramirez served as CEO. That triggered a cascade of consequences
for the firm, including a shareholder lawsuit and an SEC investigation.
The company’s stock price has also fallen dramatically, down 75 percent
from its value near the end of Ramirez’s tenure.
A T spokesman previously told WBUR that the GM search committee was "well aware" of the shareholder lawsuit.
But the financial restatements also
triggered an even bigger problem. “We may not generate sufficient cash
resources to continue funding our operations,” the firm’s restated March 2017 10-K declares.
Global
Power had two principal sources of money for day-to-day business: cash
from daily operations, and a “revolving credit facility” — a line of
credit companies commonly use to fund known and fixed daily operating
costs such as payroll.
Such
a credit line is not unusual for an equipment and manufacturing
company, according to Andrew Vollmer, a federal securities law expert at
the University of Virginia.
“Some
companies need revolving credit to smooth out the mismatch between the
time cash comes in and the time cash must be paid out," Vollmer said.
Global
Power lost access to that critical credit line in May 2015, immediately
after the company announced that its former financial statements could
“no longer be relied upon.” With that admission, the company was no
longer in compliance with the terms of its loan from Wells Fargo Bank,
its former creditor. The bank also took control of some of Global
Power’s accounts.
Unable
to access credit for daily operations, “we have ... funded our
operations from our net cash flows from operating activities,” Global
Power wrote in a 2017 report. “That is not sustainable," the company
said.
A Plan To Keep The Company Running
In May 2015, the company’s board of directors instituted an urgent “multi-step plan to address our severely constrained liquidity.”
Global Power laid off employees, sold off assets to pay down debt, and
repatriated $8 million from its Netherlands subsidiary.
Specifically,
the company closed a 150,000-square-foot gas turbine manufacturing
facility in Monterrey, Mexico. It also sold off North Adams,
Massachusetts-based TOG Manufacturing, a precision machine parts
manufacturer, for $6 million.
In
2016, Global Power closed its factory at Koontz-Wagner Custom Controls
Holdings, LLC, a wholly owned subsidiary in Chattanooga, Tennessee.
Eighty-one employees were laid off.
A Global Power Spokeswoman told the Chattanooga Times Free Press
at the time that a “downturn in the gas and oil industry [was
responsible] for the layoff of nearly all of its local workforce.”
"It's
a reaction to current market conditions," the spokeswoman told the
Times Free Press in September 2016. "When demand falls off as much as it
had in the energy industry, the company had to react."
The
oil and gas industry had in fact experienced a severe downturn.
However, in its 2017 report to the SEC, Global Power did not reference
overall market conditions specifically in relation to shuttering its
factories. Instead, the company said the downsizing was directly a part
of its plan to deal with its credit-related liquidity crisis.
“The
plan has included the following results,” Global Power reports. “We
have reduced our ongoing operating expenses. … [We] closed our plants in
Monterrey, Mexico and Chattanooga, TN,”
In a March 2017 call with investors,
then-chief financial officer Craig Holmes said, “The reduction in
revenue and profitability caused us to really look hard at our head
count.”
The company had laid off "over [a] thousand
people since the end of 2015,” to keep in line with reduced profit
margin expectations Holmes said. He added later: “[S]o really some hard
cuts there.”
'A Very Tight Timeframe' To Refinance Its Credit Line
But
it wasn’t enough. Global Power was also desperately seeking to
refinance its credit line. The account with Wells Fargo was set to
mature on May 15, 2017. Global Power did not have the cash on hand to
repay the balance, and faced the possibility of default and potential
bankruptcy.
“There
is a very tight timeframe” to avoid default, the company’s March 2017
10-K form states. And the time and resources the firm had to dedicate to
correcting four years of misstated SEC forms significantly delayed
overall efforts to stave off default on its credit line, the company
says.
Global
Power did successfully refinance its credit line on June 16 -- a $45
million account with the New York-based private equity firm Centre Lane
Partners LLC. But the loan includes a strict requirement. Global Power
must provide the lender with its 2016 annual financial statement by Aug.
31.
On
Aug. 11, Global Power notified the SEC that it will be late in filing
its 2016 annual and quarterly reports. “As previously disclosed,” Global
Power writes in the notice,
“the company was engaged in an internal review of its historical
financial statements ... which has resulted in a delay ... the Company
is working to complete the 2016 10-K, and will file them as soon as
practicable.”
Should
the company be unable to file its annual statement before Aug. 31, it
will be in default. Centre Lane Partners would have the right to declare
all payments immediately due. Global Power may once again face the
possibility of bankruptcy.
A Lack Of Internal Controls
Global
Power Equipment Group’s severe financial challenges technically began
in May 2015, two months after Ramirez resigned as CEO. But the company’s
struggles were caused by error-filled financial statements filed to the
SEC, and certified by Ramirez, under his leadership.
Shareholders have filed a class action lawsuit against Ramirez, other former executives and the company in a Texas District Court. The SEC is investigating.
The company also launched its own internal investigation.
Ramirez's attorney did not respond to questions for comment on the lawsuit.
The company’s struggles were caused by error-filled financial statements filed to the SEC, and certified by Ramirez, under his leadership.
“While
the restatement has been a very difficult, extremely time consuming and
expensive process,” former CEO Terence Cryan said in a March earnings call
to investors, “we’re pleased that the special committee of the board
after an extensive investigation found that there was no evidence of
fraud or intentional misconduct.”
Cryan led the company through the financial restatement process.
Global
Power was in dire need of a turnaround following Ramirez’s exit, Cryan
said in that same earnings call. “With our announcement in early May
2015 of a need for a financial restatement,” Cryan said, “we were faced
with both the financial restatement and the need for an operating
turnaround, which has certainly tested all of us over the past 18
months.”
He stepped down on July 26.
Ramirez
writes in his LinkedIn profile that while at Global Power he
established “rigorous ... business process improvements and regular
operating reviews.”
The company’s own updated SEC filings again hint at a potentially different story.
The firm’s March 2017 report
to the SEC identifies at least 11 different classes of accounting
errors made in its previous filings for 2011-2014. The errors range from
recording contracts as entirely complete before they were done,
carrying assets on the books for years after a sale, recognizing
expenses in the wrong period, and errors in accounting for company
entities that operated with foreign currencies.
A spokeswoman for Global Power told The Boston Globe
that the financial reporting tactics that led to the errors had been
used by the company since before Ramirez took the helm as CEO.
“That’s
an amazingly high number of errors,” Mark Bradshaw, chairman of the
accounting department at Boston College, told WBUR. “My guess is that
this is probably a company that was in a cost-cutting frenzy and just
fired all the accountants and then things just went haywire.”
The
shareholder lawsuit alleges Ramirez left the accounting department in
tatters. Global Power’s former director of accounting alleges in the
lawsuit that “all six members of the Company’s
accounting department left the Company within a six-month period
beginning in August 2013,” and that “Ramirez cut the accounting
department’s budget for training to zero dollars.”
Furthermore,
the company’s own updated filing with the SEC identifies “material
weaknesses” in its internal controls: “We did not establish and
implement effective supervision over our finance and accounting
processes and controls (including organizational structure and reporting
hierarchy), and as a result, we did not make appropriate accounting
determinations.”
The
report adds: “We did not maintain a sufficient complement of qualified
personnel with the requisite level of technical expertise to effectively
analyze, review and conclude upon technical accounting matters.”
The Role Of The CEO
How were so many accounting failures missed at Global Power while Ramirez was CEO?
“It
seems like there’s a lot of red flags,” said BC's Bradshaw. “It can’t
be the case that an executive was not aware that financial reporting is
very important. Given that’s one of the [CEO’s] roles to communicate
with investors and debt holders, it seems a dereliction of duty.”
But
Vollmer, the federal securities law expert, said generally what the CEO
knows depends on the type of CEO he or she is. Some come from a
financial background and are deeply involved. Others might not have a
financial background and “lean heavily” on the finance department and
CFO.
Vollmer
said he couldn’t speak to Ramirez specifically, but said that
turnaround CEOs would generally “be sophisticated or reasonably
knowledgeable in accounting and financial matters because those also are
important to turning around a company in financial distress.”
Global
Power says it has begun to take steps to rehabilitate its accounting
department. In order to “ensure knowledgeable and experienced staffing,”
the company writes in its March SEC filing, “we are also enhancing the
technical quality of our accounting staff to support....financial
reporting requirements...We also have introduced training programs for
accounting and operations personnel to ensure that our staff has the
appropriate knowledge and expertise necessary to perform their assigned
duties.”
But
Global Power says it has not yet completed shoring up its accounting
and internal controls, and that the board may determine that additional
steps must be taken to “address deficiencies.”
Uncertain Future
Global
Power Equipment Group is not yet out of the woods. The company states
repeatedly that the costs and impact of having to restate its financial
reporting continues to create a level of uncertainty that threatens its
ability to do business.
The
company has suffered a years-long downward trend. In 2011, the year
before Ramirez took the helm, Global Power posted $70 million net
income. By 2014, Ramirez’s final complete year as CEO, the firm suffered
a $47 million net loss. The losses grew in 2015, and the company says
it expects the trend to continue. It estimates 2016 gross revenue will
drop by approximately $170 million.
“We
may not be able to achieve or maintain our profitability,” the
company says in its 2017 SEC filing. “The restatement of our historical
financial results and the diminished value of our stock have made it
more challenging to recruit qualified personnel.”
Stories about the MBTA
In
2015 alone, Global Power paid more than $14 million in legal and
accounting fees in order to file its financial restatements. The company
expects to incur more fees as it rebuilds its accounting department and
defends against the shareholder lawsuit.
The
firm’s immediate future -- including whether or not it again risks
bankruptcy -- could be determined within the next 10 days, by what its
creditors decide to do if Global Power is unable to file its 2016 annual
statement by Aug 31.
As for the MBTA, Ramirez begins his new job as general manager on Sept. 12.
Gov. Baker said Tuesday that Ramirez went through a rigorous search process and is “exactly” what the MBTA needs.
“Somebody
who’d been a leading manager in a major heavy industry corporation who
could do the work that’s associated with what I would call proactive
planning and investing in the system, and that’s what we need going
forward," Baker said. "I’m quite confident in his ability to do the
job."
Secretary
Pollack, in the statement to WBUR, said, “It is now more than two years
since Luis and Global Power mutually agreed to part ways. While the
company has faced challenges since, my focus was on his performance
while he was the firm’s President and CEO. As confirmed by the company,
his resignation had nothing to do with issues that have since emerged.”
“I
think it’s fair to look at least early days at a company after a
person’s departure and see what happened, but I would be careful about
using all that information,” said Vollmer, the UVA securities expert.
“Because things can change that that person did not know about or put
into place and it would be unfair to attribute some development at the
company to the former CEO or former executive.”
But Bradshaw, the accounting chair at BC, said it’s essential to examine Ramirez’s record and its aftermath.
“What’s
happening now is a direct outcome of what happened then,” he said. “The
things they’re having to do are a function of the wheels having spun
out of control during his watch.”
With additional reporting by WBUR's Steve Brown
This segment aired on August 22, 2017.
If the MBTA thing doesn't work out maybe a job as Templeton TA will be offered..............Another hack hired to manage a failing agency,.
ReplyDelete