William Flaherty sure hasn’t wasted any time.
Flaherty, if you recall, last week was named CFO of Polaroid, the ailing, one-time Nifty 50 that has spent the past 20 years or so trying to figure out what it wants to be when it grows up.
On Wednesday, the company announced that it would cut about 2,000 jobs, or 25 percent of its global work force, over the next 18 months. Polaroid said the restructuring program should bring total annual cost savings of between $175 million and $200 million by the end of 2003. It also said it would take a series of related charges in 2001 and 2002 expected to total between $150 million and $175 million.
No small decision after only a few days in office. But that is just the first of a series of hurdles that Flaherty must clear in order to get his company back on solid ground.
In less than one month, he must negotiate a waiver from creditors, and by early next year he must come up with $150 million. Oh, and all along, Flaherty must regain confidence from investors, lenders, and credit rating agencies.
The CFO position has actually gone unfilled ever since Judith Boynton unexpectedly resigned in December 1999. Carl Lueders filled the void while the ailing instant photography company searched for the right person to take over the financial helm.
The CFO joins Polaroid with some experience managing companies in transition. Previously, Flaherty served as CFO of Avid Technology, Inc., a maker of digital imaging technology, which he helped restore to profitability, and prior to Avid, he served as CFO of Gibson Greetings, Inc., a manufacturer and marketer of greeting cards, where Flaherty orchestrated a cost-reduction program, and sold an under-performing subsidiary.
He also served as VP and treasurer of Fidelity Investments, and spent 13 years at chemical giant DuPont. Flaherty began his career as an auditor at Price Waterhouse & Co.
But it appears that even a seasoned track record will not afford Flaherty a honeymoon period at Polaroid. He has stepped right into the line of fire at a company that is desperately in need of a big boost.
Polaroid shares have plummeted to $4.16 since reaching a high of nearly $60 just four years ago. In April, the company posted a first-quarter loss of $91 million, or $1.98 a share, including an $80 million restructuring charge, compared to a $1.4 million, or 3 cents a share loss in the year-ago quarter.
Polaroid’s core instant photography business has been in a slump, as one-hour film developing laboratories have become popular. In response, the company recently introduced new digital printing technology, but Wall Street analysts question whether Polaroid has enough time and money to see its digital strategy take hold against better capitalized rivals.
The company also had a go at the teen market with its I-Zone line of cameras, which take tiny instant photos that are printed onto stickers, with some initial success, but the product has largely proved to be a fad.
In the midst of a tough business environment, Polaroid has struggled to cut costs, reduce debt, improve manufacturing efficiency, and trim its product line.
In the first quarter of 2001, it took an $80 million restructuring charge, $50 million of which was related to an involuntary severance program under which 950 employees, approximately 11 percent of the workforce, were let go. Earlier this year, Polaroid also suspended its dividend payment to reduce its net debt, which has been steadily mounting. It stood at $949 million at the end of April.
As of April 2001, Polaroid had $424 million outstanding in long-term debt, with the first principal payment–$275 million–not due until January 15, 2006.
As of May 16, short-term debt was approximately $549 million, up from $525 million on April 1, 2001. Its short-term debt is comprised of an Amended Credit Agreement–a $340 million domestic line of credit from 14 different creditors–a U.K. Credit Agreement of $47 million, $150 million worth of notes that mature in 2002, and $12 million under uncommitted short-term lines of credit.
The Amended Credit Agreement as well as the U.K. Credit Agreement, which mature on December 31, 2001, require the company to maintain financial ratios related to the maximum level of debt to earnings before interest, taxes, depreciation and amortization of 3.30-to-1, and minimum interest coverage of 3-to-1.
But because Polaroid has been unable to meet those requirements, it has had to obtain a series of waivers on the covenants associated with the agreements, the latest of which expires on July 12. The covenants restrict–among other things–the company’s ability to make certain capital expenditures, incur additional debt, and make certain investments or payments for the repurchase of stock or dividends to shareholders.
According to Robert Renck, founder and CEO of R.L. Renck & Co. Inc., a New York-based broker/dealer and investment advisory firm, the first challenge the new CFO faces is renegotiating his company’s short-term credit agreements.
Flaherty has until July 12 to either get another extension on the waiver from its current creditors, or enter into a new credit agreement with a new set of creditors, he says.
The company is currently involved in negotiations with its existing lenders to extend the waivers so that it can continue to implement its refinancing strategy. If, however, it is unsuccessful in its negotiations, the lenders have the right to demand repayment of their loans when the waivers expire, since Polaroid will effectively then be in default. What is more, if the lenders were to demand repayment of their loans, Polaroid would also be required to repay the amounts outstanding under the 2002 notes, as well as the 2006 and 2007 notes when the waivers expire on July 12.
Renck contends that if another waiver cannot be obtained, it is likely that Flaherty will try to secure a new line of asset-backed financing. But because the company’s financial health is still quite weak, Renck believes that the latter option is the more realistic one.
“The bet is that they are going to do an asset-backed financing,” he comments.
It remains to be seen whether Polaroid’ s existing lenders will agree to extend the waivers beyond July 12, or whether, for that matter, the company will be able to raise the required funds to refinance its debt if the lenders demand repayment.
Renck contends, however, that raising the required funds is feasible, but claims that the real challenge will be executing a new agreement on a timely basis with the additional pressures Flaherty has on his back.
“He also has to figure out how to pay down $150 million worth of notes coming due at the beginning of January, ” Renck says. On January 15, 2002 the company has $150 million worth of notes with 6 ¾ percent coupons coming due.
To make matters worse, the rating agencies have been slashing Polaroid’s credit ratings. On March 27, Moody’s downgraded the company’s senior unsecured debt from B2 to B3 and issued a negative outlook on the company. Fitch IBCA, Duff & Phelps downgraded the company’s senior unsecured debt from B+ to B-, and Standard & Poor’s downgraded it from B- to CCC+.
“The company’s public debt is trading like junk,” says Renck, “So [Flaherty] has to deal not only with the banks, but also with the rating agencies.”
Flaherty is also under pressure to produce significant cash flow for non-operating items, says Renck. The company has recently aimed to boost its cash position with two real estate sales, but “their working capital got way out of line,” Renck comments.
Working capital stood at $91 million on April 1, 2001, down from $325 million on December 31, 2000. Cash from operations reached $131 million in 1999, but the company paid out $171 million for property, plant and equipment. From 1997 to 1999, capital expenditures exceeded cash from operations, meaning the company produced zero free cash flow. In the quarter ended March 2001, the company had $87.7 million in cash, down from $97.2 million in the quarter ended December 2000.
“[Flaherty] can’t increase operating cash flow, only the operations people can do that, but he can improve working capital controls. The thing that will help that most is a pickup in business,” says Renck. He believes the company’s core business will begin to recover in the third or fourth quarter, and claims that the growth-oriented business will pick up when the new digital product line becomes commercialized next year.
But at a higher level, Renck contends that Flaherty’s biggest challenge will be to inspire confidence in investors and lenders. In fact, very few analysts even follow the company on a regular basis.
“With operating earnings down from where they should be and significantly under potential, with the balance sheet out of whack and with the company out of the commercial paper markets over the last two years, the new CFO has got to inspire confidence,” he comments.
Given Polaroid’s recent track record, that will surely be a difficult task to accomplish. But one thing is certain, Flaherty will have very little time to figure out how to dodge a couple fast bullets coming his way.