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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.”
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.”
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.