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August 13, 2020 – Arandell Holdings, Inc. and three affiliated Debtors (“Arandell” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-11941 (Judge Dorsey). The Debtors, a commercial printing company and the third largest printer of catalogs in the United States, are represented by Andrew L. Magaziner of Young Conaway Stargett & Taylor, LLP. Further board-authorized engagements include (i) Steinhilber Swanson LLP as general bankruptcy counsel, (ii) Harney Partners ("HP") as financial advisors, (iii) Promontory Point Capital as investment banker and (iv) BMC Group as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Graphic Arts Industry JT Pension Plan ($98.6mn pension plan liability claim), (ii) Graphic Communication Conference ($76.2mn pension plan liability claim) and (iii) U S Small Business Administration ($7.8mn CARES Act/PPP claim).
The Debtors, who note that "recent trends for the balance of 2020 and outlook for 2021 are much brighter for the Companies," look to be prepping for a going concern asset sale process, with a filing in support of debtor-in-possession ("DIP") financing noting that: "Moreover, the Debtors and HP believe that without the DIP Facility, the Debtors’ day-to-day operations would by necessity come to a halt, a result that would be devastating to the Debtors’ attempt to market and sell its assets to maximize the value of its assets for the benefit of its creditors."
The Debtors do not specifically address the $175.0mn of pension obligations; nor do they provide background on why their four outside directors resigned "As the Companies appeared to be headed toward an insolvency proceeding." These resignations leaving a Board of one: President and CEO Bradley Hoffman.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Hoffman Declaration”), Bradley Hoffman, the Debtors’ President and Chief Executive Officer, detailed the events leading to Arandell's Chapter 11 filings. For these Debtors, the slide into bankruptcy seems to have begun with an ill-fated acquisition: the 2018 purchase of an idle printing facility in Kentucky that was hit by numerous mechanical/technical issues, an ice storm and a borrowing base reduction. Then, on the cusp of what the Debtors believe was a legitimate operational turnaround, COVID-19 struck.
In a June 19th announcement as to the closure of the Kentucky facility, the Debtors stated: "Prior to COVID-19, Arandell had been on pace for a strong year and Arandell Kentucky was playing a key role in that growth and success. Unfortunately, the pandemic has had a significant impact on our customers – many of whom have experienced closures, supply chain disruptions and complications from stay-at-home orders. These challenges have affected our production schedules which has led to this week’s difficult decision."
The Hoffman Declaration continues: “The Arandell Kentucky facility experienced significant start-up issues primarily related to equipment failures, competition for unskilled labor in the area and a condensed timetable to begin live production in order to meet customer commitments.
The plant was abandoned by the prior owners and had been idle for about six months. In September 2018, Arandell Kentucky believed that the facility was ready to begin live production to produce the work committed to customers. Unfortunately, numerous challenges were experienced upon restarting equipment that had been neglected for many years. These challenges resulted in significant mechanical and electrical repairs being incurred in connection with the start-up. Additionally, the facility’s air and water systems experienced untimely operating failures requiring emergency repairs or replacements. Not only did Arandell Kentucky encounter numerous significant and unanticipated maintenance costs to repair and upgrade the failing systems, the production downtime caused expensive scheduling changes to produce the committed work, including sending print jobs back to Arandell Corporation, to other printers, or expediting freight charges to make up for lost production time. Adding to the startup challenges, the Northern Kentucky region experienced an unprecedented ice storm in early November 2018 resulting in lost power to the area and a power surge to certain printing presses that took several days to correct.
Also, given the tight labor market conditions, Arandell Kentucky needed to rely on more than anticipated temporary employees. This unanticipated HR issue added significant unplanned labor costs to the startup. At the close of 2018, Arandell Kentucky had posted negative earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $2.7 million. The startup challenges continued into the first quarter of 2019, with Arandell Kentucky posting negative EBITDA of $565,000. A change in manufacturing leadership for Arandell Kentucky that began in January 2019 started to show improvement on operating efficiencies, with Arandell Kentucky posting a negative second quarter EBITDA of $300,000, and further improvement with a breakeven EBITDA third quarter. Arandell Kentucky posted its first positive EBITDA in the fourth quarter of 2019. Arandell Corporation was not immune to its own financial problems in 2018. During 2018, Arandell Corporation experienced an unusually greater than normal insurance “high claim” year with several major medical cases. Arandell Corporation operates its own self-funded health plan.
The delayed startup in Kentucky, coupled with the Arandell Corporation challenges, resulted in covenant defaults to the Companies’ primary secured lender at the end of September 2018. In early 2019, the Companies began to operate under a forbearance agreement that required it to achieve certain EBITDA landmarks, beginning with the second quarter of 2019. The Companies achieved those landmarks. The Companies were also required, in conjunction with the forbearance, to retain a bank-approved consultant who was charged with the responsibility to examine the Companies’ financial projections for 2019 and to issue a report to the Companies and the lender on the achievability of the projections.
During periods of peak production, the borrowing base contains collateral to support a higher loan limit, but that higher loan limit is currently unavailable to cover the Companies’ liquidity needs. Additionally, the reserves implemented under the loan documents have placed other restrictions on accessing the full collateral available.
The fourth quarter of 2019 had many promising opportunities to close out the year with a strong finish to complement an already promisingly strong first quarter 2020 order start. For numerous and varying reasons, each of the opportunities identified for the fourth quarter failed to materialize. As a result, the Companies missed the targets they forecasted for November and December. Recent trends for the balance of 2020 and outlook for 2021 are much brighter for the Companies.
In May 2020, the Companies received notice from its senior lenders that certain collateral located in Kentucky would no longer be considered as part of the Companies’ borrowing base. In July 2020, management determined that it would close the Arandell Kentucky operation.”
About the Debtors
The Hoffman Declaration provides: "Arandell Corporation is, along with its previous iteration, a nearly 100-year-old commercial printing company that is located at N82 W13118 Leon Road, Menomonee Falls, WI.
The facility in Walton, KY, was built by Continental Web Press ('CWP’) approximately 20 years ago.
In 2016, CWP sold the assets of this facility to Trend Offset, a California printer, that subsequently ceased operations in September 2017 and vacated the premises.
Arandell Kentucky acquired the assets of the Walton, KY, facility in March 2018.
Arandell Corporation currently ranks as the third largest printer of catalogs in the United States. It has a strong reputation for production quality and service excellence, driven by a staff of over 600 highly skilled and trained professionals at the end of 2019. The Companies’ workforce has been trimmed to about 500 employees as of the date of the filing herein.
The Companies’ largest customers are blue chip major retailers and recognized brands using direct mail catalogs to promote both in-store and e-commerce sales."
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