Van's Air Force
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Van’s Bankruptcy: How Did They Get Here? By Marc Cook
- Thread starter DeltaRomeo
- Start date
Where was the CFO?
"Net income, as described in the declaration, was $2.6 million in 2019, $3 million in 2020, but dropped to $2.1 million in 2021 as investments to increase capacity began to appear in the financials. In 2022, Van’s net income turned red, with a loss of $3.3 million; it lost $1 million through the end of August this year against revenues of $43 million"
So once again, Vans knew they were in financial trouble as early as 2022 but continued to take kit orders that they could not fulfill.
In Vans June 2021 update the management changes were announced. Clearly there was a failure to manage finances since then. Selling kits below the price it takes to produce them is a simple math failure. Paying $2500 for containers that used to cost $500 without passing that cost on to the consumer is preposterous. I'm not saying any one person was responsible but the entire management team should have known the financial state of the company. It appears they did not or worst case, they knew and chose to do nothing about it.
IMHO Vans needs to take accountability for what has happened to rebuild trust that has been completely shattered. COVID made us do it because all of you wanted more airplanes. The primer wasn't our fault, it was those workers in the PI. The LCP issue was the fault of that outside supplier we hired. I see it as a complete failure of management to supervise these outside vendors and provide any semblance of quality control before it was too late, yet I see no mea culpa message coming out from Vans. I would hope that folks in charge are held accountable for the mistakes that were made. If no changes are made, then we'll just see this repeat itself downrange. Like Albert Einstein said, the definition of insanity is to keep doing the same thing over and over and expect different results.
This process is going to be painful not only for Vans customers but for their employees, outside vendors and suppliers. All will lose $$$, the question is how much? The business will be rebuilt within a few years, the trust will take a lot longer to return.
"Net income, as described in the declaration, was $2.6 million in 2019, $3 million in 2020, but dropped to $2.1 million in 2021 as investments to increase capacity began to appear in the financials. In 2022, Van’s net income turned red, with a loss of $3.3 million; it lost $1 million through the end of August this year against revenues of $43 million"
So once again, Vans knew they were in financial trouble as early as 2022 but continued to take kit orders that they could not fulfill.
In Vans June 2021 update the management changes were announced. Clearly there was a failure to manage finances since then. Selling kits below the price it takes to produce them is a simple math failure. Paying $2500 for containers that used to cost $500 without passing that cost on to the consumer is preposterous. I'm not saying any one person was responsible but the entire management team should have known the financial state of the company. It appears they did not or worst case, they knew and chose to do nothing about it.
IMHO Vans needs to take accountability for what has happened to rebuild trust that has been completely shattered. COVID made us do it because all of you wanted more airplanes. The primer wasn't our fault, it was those workers in the PI. The LCP issue was the fault of that outside supplier we hired. I see it as a complete failure of management to supervise these outside vendors and provide any semblance of quality control before it was too late, yet I see no mea culpa message coming out from Vans. I would hope that folks in charge are held accountable for the mistakes that were made. If no changes are made, then we'll just see this repeat itself downrange. Like Albert Einstein said, the definition of insanity is to keep doing the same thing over and over and expect different results.
This process is going to be painful not only for Vans customers but for their employees, outside vendors and suppliers. All will lose $$$, the question is how much? The business will be rebuilt within a few years, the trust will take a lot longer to return.
Here's the cliffs notes. Van, being an older gentleman stepped back. A new management team comprising of three people was put in place. That management team tried to scale out operations in response to a spike in demand during social shifts during COVID.
That scaling was done poorly across the board with subpar engineering practices (LCPs), subpar accounting practices (as we learned in first day of bankruptcy court), and subpar communications (again - admitted in court filings at this point).
Consequently areas that are managed by the new management team.
We learned in court that the CFO is already presumably out and Van's lawyer replaced him with someone he said was "very good". Hopefully that aspect of the business gets shored up.
Separately, another aspect of this that's not currently covered is that the spike in demand that triggered all these events is not durable. i.e. while during COVID everyone was sitting at home and suddenly decided to order a plane, now that we are all able to go outside again, the natural level of demand will go back down to a historic mean level - and not just in planes - all industries are rapidly returning to pre-COVID environments. This means Vans likely needs to shrink to be a sustainable company.
That scaling was done poorly across the board with subpar engineering practices (LCPs), subpar accounting practices (as we learned in first day of bankruptcy court), and subpar communications (again - admitted in court filings at this point).
Consequently areas that are managed by the new management team.
We learned in court that the CFO is already presumably out and Van's lawyer replaced him with someone he said was "very good". Hopefully that aspect of the business gets shored up.
Separately, another aspect of this that's not currently covered is that the spike in demand that triggered all these events is not durable. i.e. while during COVID everyone was sitting at home and suddenly decided to order a plane, now that we are all able to go outside again, the natural level of demand will go back down to a historic mean level - and not just in planes - all industries are rapidly returning to pre-COVID environments. This means Vans likely needs to shrink to be a sustainable company.
Jonnyb
Well Known Member
They were in financial trouble in 2022, I’m not sure they knew it though.
I think that only hit home earlier this year.
I doubt they did. It is squarely on the CFO, who is supposed to observe all of that financial activity and report on looming issues like those that should have been quite apparent to anyone that knew how to look a year or two ago. We hire CFOs to help us non $'s guys to highlight the otherwise hidden financial consequences of operational and strategic decisions and keep us withing the financial goal posts outlined in our plan or mission. Unfortunately Van put the guy in charge and that is on him. Clearly, he is paying for that error now and I feel for him. Good CFOs are especially important in times like Vans experienced during Covid, where the status quo just doesn't work. THeir role is CRITICAL when the company hasn't otherwise put in software programs to manage financial issues and from the recent public disclosures it appears they had almost none.
So if you have no systems to manage where all the money is going as well as point in time reporting, coupled with a CFO not doing any of that on his own, it seems quite likely that Van or the other exec's did not see this coming, sad as it is to say. A good COO would force a financial review when things don't look or feel right, but pretty sure that guy didn't have enough experience either. A simple and basic operational review would have shown that products were being sold below cost. THe only way to explain why it was being done is that nobody bothered to look and therefore the entire exec team was oblivious to the fact that it was happening. Pretty much NOBODY in business knowingly sells products at a loss without some strategic purpose in doing so. Pretty much rule #1
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Let's be honest. They were taking orders in 2020 that they knew they couldn't fulfill. Once the lead times were counted in years, they were selling beyond capacity.
1001001
Well Known Member
Based on the comments that were made by Van's counsel in the hearing yesterday, I'd believe that they didn't know it, because adequate accounting methods were not likely in place, which is certainly a responsibility of management. Not a statutory responsibility, perhaps, but to a reasonable observer, a prudent activity for those with fiduciary responsibilities.
Running a company without robust accounting practices (particularly cost accounting) and systems is like flying in the mountains IFR without navigation instruments. Eventually, you fly into the side of a mountain. Sounds like they didn't have anyone involved with any financial sense. The apparent incompetence is just astounding.
PaulvS
Well Known Member
VAN’S AIRCRAFT ANNOUNCES MANAGEMENT CHANGES
There was too much focus on engineering and design and not enough focus on operations and delivery and financials and that is how they got to bankruptcy, on the back of an increase in orders that exceeded their manufacturing capacity. The management change that was made more than 2 years ago didn't work out and nothing was done about it from above until now, so late, so many people affected, it's very sad.
There was too much focus on engineering and design and not enough focus on operations and delivery and financials and that is how they got to bankruptcy, on the back of an increase in orders that exceeded their manufacturing capacity. The management change that was made more than 2 years ago didn't work out and nothing was done about it from above until now, so late, so many people affected, it's very sad.
(emphasis mine)
Phyrcooler
Well Known Member
As others have posited, I truly don’t think that there were any ill-intent or criminal behavior on the part of management. I think that what occurred happens in both private industry, and governmental services - which I am well acquainted and have witnessed. As a service or business grows, employees - whom may well be very competent in their previous position - get promoted to new or broader management positions… often realistically exceeding their skill sets and knowledge. More than once I’ve seen very competent supervisors and lower level managers move into administration and find themselves in over their heads. It’s called “promoted to their highest level of incompetence”. Often, a major qualifier in those promotions is time in grade (experience) versus a tested or articulated specific skill set. Some recognize their shortcomings and seek guidance and training. Others are sadly unaware of their incompetence. Specifically the old adage - “You don’t know what you don’t know” I think holds true here. Occasionally, in true demonstration of malfeasance, some have some level of recognition that there is a problem, but think they can “fake it till they make it”.
While this is not a Fortune 500 level operation, Vans HAD reached a size that required a high level of business management knowledge and manufacturing acumen. To say nothing of financial and accounting proficiency and expertise. They outgrew the “mom & pop” shop so fast that it caught them flat footed and ill-prepared.
I only know a little bit about the backgrounds of Van’s recent management. I will only summarize that I do believe that we are seeing the results of an unfortunate perfect storm of Covid, supply issues, massive sales demands, a wholly inadequate QC program, and last, but probably most critical, a management team that got in way over their heads. I do believe they were trying to meet the demand, but made some bad decisions in the process.
I am still a huge supporter of this company, and wish them, and all employees the best in the fallout of this disaster.
While this is not a Fortune 500 level operation, Vans HAD reached a size that required a high level of business management knowledge and manufacturing acumen. To say nothing of financial and accounting proficiency and expertise. They outgrew the “mom & pop” shop so fast that it caught them flat footed and ill-prepared.
I only know a little bit about the backgrounds of Van’s recent management. I will only summarize that I do believe that we are seeing the results of an unfortunate perfect storm of Covid, supply issues, massive sales demands, a wholly inadequate QC program, and last, but probably most critical, a management team that got in way over their heads. I do believe they were trying to meet the demand, but made some bad decisions in the process.
I am still a huge supporter of this company, and wish them, and all employees the best in the fallout of this disaster.
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This is called the Peter Principle and was described in a book by Dr Laurence Peter in 1969. Should be mandatory reading for anyone in a growing business or organization. In essence, unless actively addressed, organizations will all eventually fail due to the Peter Principle. We are witnessing the impact on Van's. Take home is that it is bound to happen unless very savy management is in tune to it and takes active steps to prevent succumbing to it. Problem is many organizations fall to the self full filling prophecy of the Peter Principle before they even know they have a problem.
JJR
One question I have is whether using customers' deposits to run operations is legal. It seems clear that much of the money is gone. For people who paid a deposit towards a Lycoming engine, was it legal to treat these funds as assets and not liabilities?
I am thinking about similar scenarios, like the FTX debacle. They used customers deposits to run their business and have been found guilty of misappropriation of funds. Even if the Van's execs didn’t mean to do something that smells like that, was it legal? Is there a lawyer here who could clarify the US law in this regards?
And if it was only just potentially illegal, why is Van's not taking precautions and investigating the execs? Shouldn't this be basic due diligence, if only to prove that the execs did nothing wrong? I am really struggling to understand.
I am thinking about similar scenarios, like the FTX debacle. They used customers deposits to run their business and have been found guilty of misappropriation of funds. Even if the Van's execs didn’t mean to do something that smells like that, was it legal? Is there a lawyer here who could clarify the US law in this regards?
And if it was only just potentially illegal, why is Van's not taking precautions and investigating the execs? Shouldn't this be basic due diligence, if only to prove that the execs did nothing wrong? I am really struggling to understand.
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rocketman1988
Well Known Member
Because lawyers make everything better, right?
In my view you're barking up the wrong tree. You make an order from a manufacturing company, they accept your order and ask for a deposit which you pay. Some parts are bought in/made to satisfy your order, the ratio is immaterial. Company goes bust before you take delivery, you lose your deposit and feel sore - reasonable reaction. There was no intention to not deliver when your order was accepted, your order was overtaken by events. Because Van's is trying to trade its way out of bankruptcy I do see the situation is much different. You may get some of your deposit back.
While clearly there were operational errors made it would be unreasonable to accuse the management of underhand behaviour. No point in paying for more lawyers, they rarely add any value, just make you feel better.
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Kyle Boatright
Well Known Member
Unless they told you the deposit was being held in escrow (they didn't), it is perfectly legal.
In any small business cash is king and it is fairly typical to use cash/progress payments from one project to fund the next one. Also small businesses can struggle to get loans on reasonable terms which makes it worse and large businesses stiff small businesses all the time on payment terms. There is a big difference between owners equity and cash when it comes to making payroll. Sad situation for a company that I believe was trying to do the right thing for its customers at the time.
Figs
Sometimes, yeah. It's lawyers who will be getting them out of the mess they put themselves in, don't forget.
No need to bash the legal profession. Some of my best friends are lawyers
.Sometimes, yeah. It's lawyers who will be getting them out of the mess they put themselves in, don't forget.
No need to bash the legal profession. Some of my best friends are lawyers
actually it is the courts (in conjunction with the laws they are working under) and the turn around consultants that will get them out of this. Sadly court proceedings pretty much require attorneys, so their presence is critical. However, lets not confuse facts and state that the attorneys are fixing this. Not dumping on attorneys here, just clarifying details.
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ccarlson
Well Known Member
Sometimes, yeah. It's lawyers who will be getting them out of the mess they put themselves in, don't forget.
No need to bash the legal profession. Some of my best friends are lawyers
Accurate. Many of my friends are lawyers as well. I think it is a shame this situation degraded to the point where legal proceedings were necessary, but the fact that it did is not the fault of the lawyers.
Let’s not forget that VAF member Ben Ellis is a lawyer, and he has (IMHO) done a fantastic job of explaining various aspects of the process to this community. (Thanks Ben!)
Yes, it's terrible that legal issues require people who are specialists in the law, isn't it? If only it were simple, like, say aerodynamics or engineering...
KRviator
Well Known Member
I'm not actually sure that's the case...
From a purely accounting point of view, there are specific standards and requirements to be applied to various income, cash on hand and monies received in accordance with internationally-agreed rules. I would have thought a customer deposit for something like an engine or prop being sourced from an outside vendor would be considered a Restricted Financial Asset - it (the deposit) was paid to Vans for the specific purpose of being a deposit (part payment for) on a product they would then purchase from an outside vendor.
That Vans was using these deposits to run the business, rather than towards the cost of each customer's engine or prop says they certainly weren't[ considered RFA's and that's one for the accountants to look into to determine whether there's any financial impropriety going on, but at first glance, it doesn't seem kosher from a Beancounter's POV...
rapid_ascent
Well Known Member
I have no idea of what actually happened at Van's but I can see a scenario where Van tries to move into a sideline position as he has become older and intern allowed control of the company to be put into the hands of folks that it appears were not capable of dealing with the challenges they were presented with.
The period of the pandemic was a large challenge for any company that was/is manufacturing products. I know from first hand experience since the company that I work for had many challenges. We saw our standard parts delivery go from 4-6 week lead-times to 52-60 weeks. Oh and the prices went up too. We paid many expedite fees to get our parts during this period. On the other side of the equation our customers were asking for the units to be delivered but we have to push out delivery times because we just can't get all the parts to put everything together. We can't build our full production forecast, but we build what we can. We have our production team searching the world for stock of materials. We had one supplier of fans that was unable to build their fans so we helped them find the required parts. We had our engineering team looking for alternate part sources and redesigning if needed so that we could produce our products. In one case we even redesigned a circuit card that actually didn't end up being used since at the last minute a vendor comes up with some of the original parts that we needed. I still have parts that we will not use for that design.
I say all this because I think it is difficult for anyone who didn't go through this experience to realize just how difficult it was to navigate. I work for a large well funded company and we had to work very hard to keep our customers happy and manage our expenses.
Of course none of this excuses this apparent mismanagement. It just shows that it would be very easy to loose track of things when the sky is falling.
The period of the pandemic was a large challenge for any company that was/is manufacturing products. I know from first hand experience since the company that I work for had many challenges. We saw our standard parts delivery go from 4-6 week lead-times to 52-60 weeks. Oh and the prices went up too. We paid many expedite fees to get our parts during this period. On the other side of the equation our customers were asking for the units to be delivered but we have to push out delivery times because we just can't get all the parts to put everything together. We can't build our full production forecast, but we build what we can. We have our production team searching the world for stock of materials. We had one supplier of fans that was unable to build their fans so we helped them find the required parts. We had our engineering team looking for alternate part sources and redesigning if needed so that we could produce our products. In one case we even redesigned a circuit card that actually didn't end up being used since at the last minute a vendor comes up with some of the original parts that we needed. I still have parts that we will not use for that design.
I say all this because I think it is difficult for anyone who didn't go through this experience to realize just how difficult it was to navigate. I work for a large well funded company and we had to work very hard to keep our customers happy and manage our expenses.
Of course none of this excuses this apparent mismanagement. It just shows that it would be very easy to loose track of things when the sky is falling.
Probably the difference between the small to mid size businesses that succeed and those that fail. This even harder to do when you are a very customer focused company and You want to do anything you can to make/keep your customer happy.
Dugaru
Well Known Member
Well…
I’ve been litigating commercial disputes in the US for 30+ years. The apparent financial incompetence is, indeed, very disappointing. But I can assure you, sadly, it is NOT astounding.
I’ve been litigating commercial disputes in the US for 30+ years. The apparent financial incompetence is, indeed, very disappointing. But I can assure you, sadly, it is NOT astounding.
Actually they are a privately held company. They don;t have to do any accounting if they don't want to.
Privately held company - US GAAP accounting rules dont necessarily apply. most small companies like Vans are run more on a cashflow basis than solid business accounting principles.
Not uncommon at all to use customer 'deposits' as working capital. I'm fairly certain that the management team Van put in charge did NOT include a CFO. Also not uncommon for small private companies to not want to invest in financial systems - rather invest in a LCP process to make products....
Add in Poor QC and QE manufacturing processes...
Not uncommon at all to use customer 'deposits' as working capital. I'm fairly certain that the management team Van put in charge did NOT include a CFO. Also not uncommon for small private companies to not want to invest in financial systems - rather invest in a LCP process to make products....
Add in Poor QC and QE manufacturing processes...
Au contraire, see post #2 link, Vans June 2021 update appointing a CFO.
"Mitch Lock has shifted from his prior role as president of the company to the newly-created role of Chief Financial Officer, bringing greater focus to the critical work of managing the company’s financial operations and investments into the future."
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NavyS3BNFO
Well Known Member
While he may have been the CFO in name, he may not have had the background in finance and accounting to handle the situation Vans found itself in. Mitch was the east coast demo rep in St Mary's, MD for a while. He gave me a demo ride in his RV-8. He was also the president of Vans for a while then was moved over to CFO.
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When orders went thru the roof, a well run company looks at it to determine if the orders are an anomaly or normal growth. Why build out production if the orders will fall back to the normal growth path in a year or so.
As people were getting higher and higher prices for completed RVs, Vans should have raised their prices to slow orders down instead of building out production for something that wouldnt last. By not raising prices, lead times kept getting longer and longer.
The US is littered with the carcasses of former great companies that were managed into the ground... the machine tool industry for example. The management at Vans likely wasnt criminally-minded but were certainly criminally-incompetent.
We are in a huge aviation bubble right now and it wont last. This bubble will pop just like it has several times over. We are supposed to learn from the past, not repeat it.
As people were getting higher and higher prices for completed RVs, Vans should have raised their prices to slow orders down instead of building out production for something that wouldnt last. By not raising prices, lead times kept getting longer and longer.
The US is littered with the carcasses of former great companies that were managed into the ground... the machine tool industry for example. The management at Vans likely wasnt criminally-minded but were certainly criminally-incompetent.
We are in a huge aviation bubble right now and it wont last. This bubble will pop just like it has several times over. We are supposed to learn from the past, not repeat it.
