Situation Overview

Hollander Sleep Products, LLC (“Hollander”) was a private equity-owned U.S. manufacturer of pillows, comforters, mattress pads, and other bedding products. Hollander was the largest producer of pillows in the U.S. selling to large retailers, clubs, specialty stores, hospitality, and online retailers. In recent years, the Company experienced increased raw material and operating costs, severe service problems caused by the relocation of two major manufacturing plants, and increased competitive pressures. These factors, along with increased debt levels stemming from a 2017 acquisition, led to a dramatic decline in operating performance and extreme liquidity pressure, ultimately leading the Company to file for bankruptcy in May 2019.

Due to its deep expertise with complex business restructurings and operational turnarounds in the consumer products industry, Carl Marks Advisors (CMA) was retained by the Hollander Board of Directors in April 2019 to serve as executive management (CEO, CFO, and VP of Manufacturing). The assignment was to develop a comprehensive business restructuring and profit improvement plan. Subsequently, due to the extreme liquidity constraints and excessive debt levels, the assignment was expanded in order to help lead the Company through a Chapter 11 bankruptcy restructuring and eventual §363 sale process.

Unique Challenges

Hollander’s 2017 acquisition of Pacific Coast Feather (“PCF”) was completed when increasing costs of natural down and feather were causing an end-customer shift to synthetic simulated down pillows, resulting in significant declines in PCF sales. The acquisition significantly increased the Company’s debt levels, synergies were only partially realized, and attempts to integrate the separate business systems proved unsuccessful which made it difficult to operate an expanded network of manufacturing facilities effectively. Turnover of multiple executive positions further added to the Company’s instability.

Late in 2017, the aforementioned significant increase in raw material costs could not be passed through to customers due to competitive pricing actions to gain market share. This was followed by the relocation of two of Hollander’s largest facilities, a result of the expiration of under-market leases, leading to higher fixed operating costs. Poor execution of these moves caused dramatic declines in service levels which led to significant permanent loss of customer sales. The Company also significantly over-ordered raw materials, draining liquidity. Lost business was replaced in part by very low margin business, resulting in insufficient margin to support the Company’s now higher fixed cost structure. Over the six months prior to CMA’s arrival, the sponsor replaced executive management and took efforts to cut costs, but those efforts proved too little, too late.

CMA was then hired as interim Chief Executive Officer, Chief Financial Officer, and Vice President of Manufacturing to assess the situation and generate appropriate business profit improvement plans.

Upon CMA’s arrival, it became immediately apparent that the Company was in a full-blown financial crisis.  Payables to the Company’s critical foreign vendors were extended over 180 days with no liquidity available to pay down balances.  Key vendors had not only stopped shipping, but in large part had already shut down their own supply chains, creating a 6-8 week supply chain delivery gap at the time of the bankruptcy filing.  Immediate, drastic actions were required to avoid a liquidation, which competitors and key customers alike thought was the most likely outcome.

Due to liquidity concerns pre-filing, CMA, the Company’s legal advisor Kirkland & Ellis (plus Osler in Canada), and investment banker Houlihan Lokey had to prepare for a Chapter 11 bankruptcy filing in the U.S. (a Canadian Companies Creditor Arrangement Act “CCAA” filing also occurred in Canada). All parties were faced with a compressed timeline in addition to a lack of centralized records for creditors, contracts, and other key records required for the filing. At the same time, a dramatic operational turnaround plan was developed as the basis for a restructuring in order to save the business and over 2,000 jobs. In addition, separate debtor-in-possession financing agreements were negotiated with ABL and Term Loan lenders. The $32 million size of the DIP financing also required an expedited Chapter 11 process with a compressed four month timeframe for the Company to restructure and ultimately sell the business without a stalking horse, which was successfully completed.

Results

CMA formulated and began implementation of a comprehensive business restructuring plan, including:

  • Multiple initiatives related to rationalization of sales (including targeted loss of low margin sales),
  • Product redesign and price increases,
  • Sourcing procurement expense savings,
  • Significant plant consolidation and overhead cost reduction,
  • IT infrastructure restructuring,
  • Landlord rent reductions, and
  • Significant SG&A savings.

These initiatives were the basis for turning a negative $24+ million EBITDA run rate into a $20+ million pro forma EBITDA, which is being realized today.  The bankruptcy plan provided for a dual track Plan of Reorganization supported by committed exit financing and a Plan Sale Process. This ultimately resulted in the sale of the Company to Centre Lane Partners, who has continued business improvement initiatives to not only achieve, but to exceed, targeted results.

In addition, CMA performed a standard bankruptcy advisory role:

  • Supporting counsel to maintain weekly debtor-in-possession cash flows and assist in the preparation of financial information,
  • Development of the Plan of Reorganization and Disclosure Statement,
  • Support of filings, motions, hearing preparation resolution of issues and disputes, contract assumptions and rejections, negotiations with parties of interest, and other related support throughout the case.

Further, CMA fulfilled administrative duties, such as, preparation of Schedules, SOFAs, monthly operating reports, and liquidation analysis. CMA also led communications and formal updates for the Board, lenders, and unsecured creditors committee advisors.  CMA worked with Houlihan and Kirkland to negotiate and finalize an Asset Purchase Agreement (“APA”), including preparation of APA Schedules necessary for closing. The final result was a dramatic business turnaround/operational restructuring and sale of the business.

Key Takeaways

  • Take swift, decisive action to reduce the cash burn in order to preserve the going concern. Hollander could not afford to keep all 13 manufacturing facilities open while revenue and gross margins were declining. Competitors were producing more efficiently with fewer plants and upgraded equipment.
  • Far too often, underperforming consumer products companies either do not fully understand or underestimate the underlying trends and forces driving their declining financial and operating performance. As a result, they react either too slowly or in an incomplete manner, which does not adequately improve key performance drivers. By waiting too long to seek the expertise and support of financial advisors and restructuring experts, they miss out on opportunities to reset business plans and correct the path toward growth before the Company enters distressed territory.
  • When two businesses are combined a cohesive strategy is needed from the outset to ensure the smooth integration of differing cultures, operations, systems, and processes, supported by an aggressive and measurable action plan to realize pro forma synergies.