Recticel North America, Inc. (“Recticel NA”) and its subsidiary, Recticel Interiors North America, LLC (“Recticel Interiors”), filed bankruptcy on October 29, 2009 with the express aim of terminating the automotive parts supply contracts with its two largest customers – Johnson Controls, Inc. and Inteva Products, LLC. According to the debtors’ affidavit filed with the petitions, due to pricing issues, the supply contracts with these two customers alone had caused the debtors’ to incur “losses, on average, of approximately $600,000 per month on account of the Johnson Agreement and approximately $265,000 per month on account of the Inteva Agreement… .”
The following post provides basic identifying information about the bankruptcy, summarizes the debtors’ business, describes the debtors’ corporate structure, and gives a brief initial assessment of the direction of the bankruptcy.
The Bankruptcy Petitions
The bankruptcy petitions were filed under chapter 11 of title 11 of the Bankruptcy Code in the Eastern District of Michigan. The case number of Recticel NA filing is 09-73411. The case number of Recticel Interiors filing is 09-73419. The debtors have moved for joint administration of the two cases under the Recticel NA filing. The case has been assigned to Judge Phillip J. Shefferly.
The statistical information in both petitions is identical: 1,000-5,000 creditors, estimated assets of $10,000,001 to $50 Million and estimated liabilities of $100,000,001 to $500 Million.
The address given for Recticel NA is in Auburn Hills, Michigan and for Recticel Interiors’ is in Clarkston, Michigan.
Counsel for the debtors signing the petitions is Robert S. Hertzberg of the Detroit office of Pepper Hamilton LLP. Arthur H. Vartanian, as President, signed the petitions on behalf of each of the debtors.
The debtors’ petitions and the first day motions are supported by the declaration of Derek Strehl (the “Strehl Declaration”). Mr. Strehl is Director of Finance and Accounting and Senior Controller of Recticel Interiors, and the Secretary and Treasurer of both Recticel Interiors and Recticel NA.
The Business of the Debtors
The Strehl Declaration included the following description of each debtor’s business:
[Recticel Interiors] is a leading manufacturer of polyurethane sprayed skins and components for car interior trim including dashboards, glove boxes and door panels. The interior trim manufactured by [Recticel Interiors] is utilized in various premium car models including the Mercedes-Benz M-Class and R-Class, Cadillac STS and Buick Enclave, as well as various models of heavy-weight trucks.
[Recticel NA] is a manufacturer of light-stable polyurethane Colofast® compounds, which are sold in part to [Recticel Interiors] for use in its manufacturing process. In addition to sales to [Recticel Interiors], the compounds produced by [Recticel NA] are sold to the German company, BASF SE (“BASF”) for use as a basic material in the manufacture of car window encapsulations. In late 2008, BASF acquired Recticel’s worldwide compounds business for polyurethane systems glass encapsulations. As a result, BASF now sells the Colofast® compounds to certain of [Recticel NA’s] former customers.
Recticel Interiors further is described as the “sole source” supplier to Johnson Controls and Inteva Products. The Strehl Declaration states that these two companies are Recticel Interiors’ largest customers and collectively responsible for approximately 80% of its annual revenues.
Both debtors experienced substantial losses in 2008 and 2009. The Strehl Declaration summarizes the debtors’ operating results for those periods:
[Recticel NA] reported gross revenues of $19,635,000 for 2008 and $7,601,000 for the first three quarters of 2009, generating net income/ (losses) of $6,544,0022 and ($1,473,000) for each of these respective periods. [Recticel Interiors] reported gross revenues of $50,026,000 for 2008 and $20,673,000 for the first three quarters of 2009, generating net losses of $13,765,000 and $8,348,000 for each of these respective periods.
The Debtors’ Corporate and Capital Structure
The lead Debtor, Recticel NA, is the sole equity holder of Recticel Interiors. All of the stock of Recticel NA is owned by a Delaware holding company, RUS, Inc., which is not a debtor. The ultimate parent of all of these entities is Recticel N.V./S.A. (“Recticel NV”). Recticel NV is a Belgium-based company engaged in the production of foams and synthetic compounds that are primarily used in the automotive, bedding, and building industries.
At the time of filing, the debtors’ had no institutional secured indebtedness. Their losses had apparently been funded primarily by intercompany advances.
The debtors’ have moved to authorize debtor in possession financing of $10,000,000 from Recticel NV.
Targets of the Bankruptcies
The Strehl Declaration unequivocably identifies two objectives of the bankruptcy: the rejection of the supply contracts with Johnson Controls and Inteva; and the rejection of costly severance agreements with nine former employees. The petitions are accompanied by two motions to reject these executory contracts pursuant to section 365(a) of the Bankruptcy Code. If these motions are granted, the contracts will be deemed to have terminated as of the date of filing of the bankruptcies.
Many automotive suppliers will empathize with the reasons cited in the Strehl Declaration for the losses under the supply contracts with Recticel Interiors’ two biggest customers.
At the time of the entry into their customer relationships with Johnson Controls and Inteva, the Debtors underestimated the material cost and number of employees required to produce consistently high-quality components. Additionally, for planning and pricing purposes, the Debtors had anticipated significantly higher sales volumes under these customer relationships than that actually experienced due in large part to the precipitous decline in the sale of automobiles over the last couple of years.
Recticel Interiors’ claims that it tried to renegotiate pricing with Johnson Controls and Inteva but the negotiations were unsuccessful. The debtors note that Mercedes, as one of the ultimate customers for its products, had made accomodations “with respect to funding certain of [Recticel Interiors’] losses associated with the Customer Agreements … .” The debtors go on to explain, however, that without pricing concessions from their two biggest direct customers, the accommodations made by Mercedes were not sufficient to stem the losses.
Direction of the Bankruptcies
Based on the initial filings, these bankruptcies have a clear direction. The old contracts with Johnson Controls and Inteva will be rejected and new contracts will be signed. The costly severance agreements with former executives will be terminated. A plan of reorganization will be filed based on additional funding from the parent.
Accomplishing supply contract pricing renegotiation in bankruptcy is very expensive. The same result could have, and likely should have, been accomplished outside of bankruptcy. It is reasonable to assume that someone on one side or the other of the negotiations made a gross misjudgment. An out of bankruptcy restructuring would have saved everyone a lot of time and money.