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October 21, 2002

9 Min Read
Where’s everyone going?

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Any economic upturn we may have had this year might be too late for many molding companies. A large, successful molding company recently went bankrupt after being named “Processor of the Year” only three years ago, and this is just one example of the bankruptcy trend affecting the molding industry. No single factor can be identified as the cause of this epidemic, but rather a combination of causes have brought down several once-successful molders.

Excess production capacity still reigns as one of the primary reasons that molding hasn’t returned to levels of the 1990s. When the good times roll, molders tend to buy equipment. This has resulted in a glut of capacity, according to Plante & Moran LLP’s 2000 survey of 115 molders with 163 facilities in North America (data was compiled in 2001; see sidebar below and pie chart above). In 2000, the median equipment utilization of the respondents was 45.75 percent (see Key Demographics chart below), and in 2001 many companies saw capacity levels at less than 40 percent (based on 24/7 capacity availability). This has industry experts doubtful that capacity of 85 or 90 percent will ever return.

Jeffrey Mengel, CPA and CPIM for the Auburn Hills, MI-based consulting firm, says, “The bottom line for the plastic molding business is that excess capacity, lack of differentiation, and operating inefficiencies are causing intense competition for sales, pricing pressures, liquidations, and consolidations.”

Raw Material Management
Daniel Kubes, an analyst with U.S. Bancorp Piper Jaffray (Minneapolis, MN), agrees that there are a variety of factors driving seemingly good companies into bankruptcy. In addition to excess capacity, molders can become highly leveraged to their material suppliers, often to the tune of millions of dollars. The material supplier wants its money in 30 to 60 days, but it takes 30 days to run and ship the parts, and another 30 to 60 days—with luck—for the molder to collect from the customer.

Kubes cites Courtesy Corp.’s leveraged buyout by Hicks Muse earlier this year as an example of this predicament. “From the get-go the business was operating in a highly leveraged environment,” he says. “I would suspect the change in the economy, as well as other fundamentals of the business, caused a change in cash flow. They found themselves in a situation where there was more leverage than the business could support. Each situation is unique, but certainly rising material costs coupled with the changes in the economy have made it very difficult for molders.” (Courtesy has since been purchased out of bankruptcy by Precise Technology Inc., headquartered in North Versailles, PA, for $130 million.)

Low inventory turns also account for some of molders’ financial problems. Raw materials purchasing practices often lead to too much material sitting on the warehouse shelves and too few finished goods being shipped. OEM customers expect molders to carry the finished goods inventory, tying up the molders’ money rather than their own. Molders often find it easier to run two or three orders at one time and hold the parts in finished goods inventory than to make three separate runs, which add setup costs and other startup expenses.

Arle Rawlings, president of Mastercraft Cos. (Phoenix, AZ), says that it’s difficult for molders to make material buys based on orders when the orders fluctuate so badly. “We might get an order for 500,000 parts per month, so we get in material based on that,” explains Rawlings. “Then the customer calls and pushes orders out so we’re stuck with our money tied up in raw materials.”

In some cases, Mastercraft runs expensive engineering thermoplastic resins such as Ultem PEI, which is not cost effective to buy in small quantities. Whether it’s raw materials or finished goods sitting on the molder’s shelves, Mastercraft’s cash flow is strangled. Getting customers to buy the materials is one solution, but is typically unsuccessful as long as the customer can force the molder to carry the expense.

Some resin salespeople say their companies are getting tighter with credit for molders and are keeping a watchful eye on receivables that exceed 90 days. Most major resin suppliers have suffered losses through the bankruptcies and closures of molding companies, though none would talk about exact details. One creditor, a moldmaker who ended up on the creditor’s committee for a Chapter 11 filing of a large molding firm, noted that the molder’s largest creditor was Dow Chemical Co.: $2 million.

Although some molders encounter problems collecting payment from their customers, Mengel says that “molders have been getting paid in relatively good time.” In fact, Plante & Moran’s survey shows a median collection period of 48.73 days. “That’s pretty good unless a customer goes bankrupt, like Kmart did with StyleMaster,” Mengel says of the Chicago molder’s high-profile victimization by the giant retailer’s financial crisis.

keyDemographics.gifAcquisition Situation
A look at who’s buying molding companies might give some clues as to why there are so many bankruptcies. “A lot of financial buyers went into plastics because it’s an industry ripe for consolidation,” explains Mengel. “There’s too much overcapacity, but they figure if you tie a few turkeys together, maybe you can fly like an eagle, or economize through consolidation. That strategy still works, but not when the industry is down on its knees.”

Often it’s the financial buyers who find themselves in trouble. There have been numerous cases in which these buyers purchase a molding company and then sue the former owners for essentially selling them a pig in a poke. Understanding the molding business is critical to maintaining the success of the original owners. Most financial buyers can’t achieve the level of understanding of the original owners, who usually have been in the industry for years.

“Anyone who acquires a company needs to be involved in the business from top to bottom at all levels of management,” says John Conley, VP business development for Xpectra Corp. (Niwot, CO), who has been involved in building two contract manufacturing firms. Xpectra is the third. “Whatever you’re doing, you have to understand the business. You can’t be some guy sitting in an ivory tower pushing buttons and expect it to succeed. Management must understand the business they’re in. I don’t think you succeed in a business unless you become emotionally involved, and if you don’t know the products and the people, you don’t become emotionally involved.”

Financial buyers typically have different expectations from the original owners who built the business. Often these owners had a higher tolerance for tough times because they loved the business. That meant they were willing to take pay cuts or forego buying that new car until things got better. Financial buyers, on the other hand, focus on the bottom line 24/7.

“I’m sure there were expectations on the whole that were different from the reality,” says Kubes. “Changes in the aforementioned things caused actual performance to be meaningfully different from projected performance. Then you get to a point where the financial people look at it and say ‘we’re better off giving the keys to the bank than investing more into the business.’”

WHAT IS (OR ISN'T) THE ANSWER TO PROFITABILITY?

Plante & Moran’s survey determined that no single factor led to a company’s failure, and the same can be said for a molder’s success. “It appears,” Mengel says in his summary observations of the study, “the recipe for success is not in the ingredients, but rather in the combination of ingredients—just like a good meal. Companies that succeed appear to know for whom they are cooking, price it right for the customer, and provide the total atmosphere for a tasteful meal. The customers recognize the difference and not only come back for more, but are willing to pay slightly more for the experience.”

Surprisingly, commonly held beliefs about what promotes profitability are debunked in the following survey conclusions by Mengel:

  • Sales growth. Sales growth does not correlate with return on sales or assets; it consumes resources (time, money, and talent). Growth needs to be part of your strategy, not your solution for lack of profits.   

  • Value-add per employee. Value-add did not correlate to return on sales or assets.  Although value-add is an excellent measure for comparing companies with different product or process, it does not predict profitability.   

  • Lower wages. Paying a higher starting wage to operators did not hurt profitability. In fact, these companies tended to have a higher return on sales. A stable workforce tends to reduce complexity and enhance profitability.   

  • Higher quality and better delivery. There is no statistical difference between return on sales or assets or sales growth in companies with better delivery or quality statistics. Customers may gripe about it, but they won’t pay extra for higher performance in these areas.   

  • Providing more decoration. A higher percentage of decorated vs. loose parts hurt return on sales and assets. It appears that molders have embraced decoration without adequate process capability and knowledge of ancillary costs of quality and production. In addition, some customers have indicated that there is no additional cost if the decoration can be done within the cycle time; this, too, ignores the additional cost of quality and yield reduction.   

  • In-house moldbuilding. Companies that build molds internally tend to have smaller press sizes, more total active molds, be part of larger corporations (captive), and buy many of the remaining molds from Asia. Building molds internally did not correlate with return on sales or assets or sales growth.   

  • More customers. Companies with more customers tended to be in the packaging industry, built their own tools or bought them in Asia, and had higher productivity in the 700- to 1500-ton presses. While they did have higher sales, they did not have higher profits or asset utilization (even with higher press productivity). More customers did not correlate with return on sales or assets or higher sales growth.   

  • Moving up the supply chain. System integrators or subsystem module manufacturers (tend to be larger-sized parts) had improved sales but not return on sales or assets.

Here are some of Mengel’s other observations:

  • The higher the press quote rate, the higher the earnings as a percentage of sales and return on assets.   

  • Molders with a weak relationship with the moldmaker had lower profits.   

  • Sales to the medical industry had a generally greater return on sales than other industries.   

  • Faster setup times for 700-plus-ton presses correlated with return on sales and assets.   

  • Molders that focused a higher number of presses less than 100 tons and operated at a higher utilization producing smaller parts (less than 1 oz) typically had higher return on sales and assets.

Contact information
Plante & Moran LLP, Auburn Hills, MI
Jeff Mengel; (248) 375-7334
www.plantemoran.com
[email protected]

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