Beta Distribution - behind the numbers

 The move into insolvency and Administration in October 2018 appeared to shock many in the sector, but should it have been a surprise? Were there signs of difficulty in recent years and was there anything that could have alerted those in risk management to better monitor and control risk and exposure?

Outwardly, all seemed fine in October 2017 when the company filed yet another apparently positive and optimistic set of results with sales hitting a high of 186m and profit before tax of 1.2m. All the usual headline financials such as working capital and net worth were sound. Sure, cash balances were substantially reduced to 243K but business reporting agencies were perfectly happy to retain credit rating guides and suggested credit limit.

Understandable perhaps when looking at profit and loss figures such as this:-

		2013	2014	2015	2016	2017
Sales		126,930,885	139,248,014	164,887,622	166,332,587	186,076,920
Profit before Tax		596,957	1,616,637	1,618,071	1,218,717	1,186,832

Or indeed, balance sheet numbers such as this:-

		2013	2014	2015	2016	2017
Working Capital		7,313,577	8,467,564	7,998,659	8,747,191	8,957,499
Net Worth		7,523,838	8,813,334	8,476,645	9,420,362	9,720,394
Cash Balances		1,526,538	703,886	2,627,460	1,830,702	243,621

The 2017 Strategic Review accompanying accounts was overtly buoyant, talking of opening sales offices across major European Countries but was everything rosy and positive or were there underlying issues that perhaps should have indicated difficulties ahead?

It’s vital for those involved in risk management to read behind the headlines and absorb the minutest change or movement in a company’s filed financial statements. Singularly they may not infer risk but appear simply as oddities that can so easily be dismissed when looking at performance generally. Collectively however, over a period of time they can provide sufficient enough warning that outward success may not be as it seems.

Beta Distribution was incorporated in 1985 and had been well known in the sector as a small but growing focussed Distributor and hit the headlines a little more in 2011 when sales passed the 100m mark. Principally, the company was under the control of two owners, one of who had overall control with a 75% stake.

Its public difficulties became known with press articles in September 2018 suggesting Credit Insurers had cut or removed credit lines, restricting supplier credit and the ability to source product. In that same month, the company filed for an extension of its fiscal year end from March 2018 to September 2018. Both factors undoubtedly proved to be the catalyst for its final collapse into Administration on the 2^nd November 2018.

Some private companies, almost invariably owned by one or two principal shareholders and which outwardly have both history and successful growth, can show signs of what may be termed management autocracy or mini-fiefdoms and this is when control and direction often goes awry. They are often characterised by excessive director loans, related party transactions and statement of affairs where pronouns such as “I” and “My” are profligate; “my Board of Directors, “my team and I” are perfect examples. It’s also true that in reviewing prior year statements, plans and projections are rarely achieved. 

Getting to 100m Sales in Distribution is quite a milestone but hitting the highs required to gain traction, more so post 2010 given rampant consolidation where so many medium sized and yet still major Distributors were swallowed up by much bigger players, is an altogether much more difficult thing to achieve.

According to the Joint Administrators report filed in December 2018, Directors reasons for failure were that the company had suffered a cash loss of some 14m on foreign exchange currency contracts and furthermore, a report by the company’s advisors also noted an overstatement in   stock of around 10m. The cut in credit lines and breaching bank overdraft and loan levels almost appear superfluous given the astonishing value of currency loss and stock overstatement.

Administrators report also shows Directors’ loans as per the Statement of Affairs totalled 1.9m and approximately 2.5m of share capital issued by Beta Distribution Plc to the two Directors remains unpaid. As far back as 2013, financial statements made reference to a payment made to Directors for precisely this reason.

The report also shows the Company having only a 90% stake in the Dutch BV but filed financial statements show it to be 100% (unless things changed post financial statements of 2017). The BV Company has also now moved to bankruptcy/liquidation. 

Behind the Headlines

While some points have already perhaps been raised, from a risk management perspective there were more to consider. Operational shifts such as these for example:-

• In 2013 there was a resignation of Auditors. Such an event always merits closer scrutiny
• In 2014 came the first mention of Beta Export Partnership, a foray into Europe
• In 2015 came the formation of the LLP OC396910, a services company into which were transferred all Beta Distribution employees. There was no clear indication in accounts or elsewhere why this was required or necessary.
• In 2016 the first full year figures for the European subsidiary showed sales in the region of 25m with UK sales down
• In 2018 came the acquisition of The Content Wall. Price paid or how purchase was funded was not indicated. (It should be noted here that TCW holding company was not acquired).
• In 2018, the company requested an extension of its fiscal year from March 2018 to September 2018. 

A review of significant accounting and finance movements or changes, also reveal the following:-

• Repetitive historical presence of Director loans and related party transactions
• Auditor resignation in 2013
• Payment to Directors of 1.6m in 2013, Directors agreeing to subscribe for shares. (There was no further reference in subsequent financial statements).
• Lack of clarity in Director remuneration post LLP introduction and ‘clouding’ of Administration costs
• Shift of UK salary costs to the LLP in 2015 which filed abbreviated unaudited accounts
• Unwarranted increase in annual administration costs compared to sales achieved
• Anomalous ratio movement between trade debtors/creditors
• Erratic and Increasing dependence on invoice discounting facility
• Static UK sales and increased European sales in 2016-2017
• Rare and substantial dividend payments of 1.6m in 2015 and 650K in 2017
• Slowness in collection of Receivables
• Financial statements for 2016 lumped invoice discounting and bank loans into one figure. Previously they reported separately.
• In accounts filed for 2015 there is no mention of currency speculations or values yet those filed for 2016 do and make reference to corresponding 2015 currency commitments  
• Audited accounts for 2016 show employee headcount as 6 but those for 2017 reflect back and reference 2016 headcount of 12
• Format for showing cash flow movement changed in year ended 2015.
• Analogous increase in net debt annually. This almost doubled between 2014 and 2017

Financial statements are about movement and performance in the P&L and how much of this is reflected in the balance sheet, which of course is supposed to balance. One needs to keep track of salient movements and note variances or anomalies across both. There are occasions when simple review of balance sheet elements can reveal much more than bold headline numbers. An example in this case would be that of the ratio between trade debtors and creditors, level of borrowing against receivables and increasing net debt.

		2013	2014	2015	2016	2017
Trade Debtors		23,160,000	25,600,000	33,500,000	37,500,000	37,900,000
Trade Creditors		17,300,000	16,900,000	20,000,000	24,000,000	20,000,000
% ratio		74.70%	66.02%	59.70%	64.00%	52.77%
Invoice Discounting		16,300,000	17,900,000	24,300,000	29,200,000	33,400,000
% ratio		70.38%	69.92%	72.54%	77.87%	88.13%
Net Debt		14,757,879	17,232,562	23,806,173	27,331,505	33,093,040

Things appear to go wrong in 2014 when Beta begins its foray into Europe. While revenue there grew quickly from around 9m to 45m in 2017, funding and indeed managing such European growth can prove challenging, more so when one’s core UK business begins to plateau or slide and receivables funding availability dries out. Company’s net debt almost doubled in a period of three years (2014-2017). It is also during this period that the company began to engage more forcefully in foreign exchange derivative contracts in order to mitigate exchange rate risks but quite why it became so extensive is puzzling. Playing the currency risk game requires expertise and above all, a controlled and managed approach, which clearly is not evident given the apparent astonishing loss of 14m. I sense Credit Insurers took note of 2015 and pulled back a little before taking flight in 2017.

Auditing too should be questioned given such a loss and indeed the over-statement of stock to the tune of 10m. This equates to almost 50% of stock value listed in the 2017 results, a level of stock write down I’ve not seen in over 40 years.

Hindsight is wonderful. Looking back at things can reveal mistakes and oversights but ultimately, any significant insolvency of loss merits a look back and review, so that lessons may be learned. 

Give yourself time and space to read through financial statements. If your office environment is noisy or distracting, move yourself to a quit zone with pen, paper and a calculator. Jot down observations, double check and then draft up your own report, even in a summarised format. If you have questions, then ensure you call your client and obtain answers. Companies don’t really topple over overnight; there is either a phased period of decline or one of erratic or selective performance and reporting. Above all, don’t rely solely on either a business report rating/guide or indeed the insured level of cover held.