From red to black: rebuilding wounded companies; When faced with declines or disasters, a struggling company can cease operations or it can choose to fight, and in the process, turn the business around. Two experts share lessons learned from turnaround situations.

• Author: Castor, Ron

Disaster struck Knowlton Specialty Papers Inc. in 2002 when an explosion at its main plant disrupted operations for more than five months. At the time, management could not know that this was only the first of many problems that would bring the company to its knees and threaten its very existence, the jobs of more than 100 employees and the economic health of a community that had experienced a declining manufacturing base for the last 50 years.

[ILLUSTRATION OMITTED]

Indeed, the series of events that unfolded could have been the end of the paper processing mill. Instead, what follows is an account of how the company survived the explosion, three additional events--each of which alone could have destroyed the company--a management team that wouldn't quit and an all-out effort to save the struggling company and an important community resource.

Knowlton is the oldest continuously operating paper processing mill in the U.S. Located in Watertown, N.Y., it is a leading producer of superior quality filtration materials, friction drive materials and specialty papers, and one of four remaining paper mills in an area where more than 20 were located a decade ago.

Knowlton manufactures products that are highly valued by its customers, and it wins awards for excellence in product innovation and performance. In addition, it has a long, valued track record of working with its customers to develop propriety paper products to the industry.

Following the explosion, the CEO and management team immediately began the needed repairs to bring operations back on line. To their shock, however, when the repairs were completed, the insurers--both Tier I companies--disputed the claims, leaving Knowlton woefully short and forcing payment delays to the contractors who helped it rebuild.

Compounding matters were cash flow shortfalls resulting from a slow economy, a depressed paper industry and three years of weak core business performance. Also, management's attention was distracted from the core business by poor labor relations and integration problems with acquisitions. In short, the storied company was in serious financial trouble.

Management's Response

Knowlton's managers--while highly experienced in paper manufacturing--were not savvy in the skills needed to cure the ailing company. Typical of many small companies of less than $50 million in annual sales, they were weak in management and leadership skills, and lacked the experience to manage the problems they faced. Management's immediate response to the events was to implement temporary cost cuts, believing the cash problems were only short-term.

Others saw a different picture. Knowlton's bankers--concerned about the future of the business and its sizeable, outstanding loans--recommended retaining a turnaround consultant. The verdict from two turnaround firms, several already-involved equity investment firms, the company's attorneys, the board of directors, CPAs and the insurance companies was "liquidate or sell at a heavy discount."

The turnaround firm...