Automotive molder Newcor Inc., which underwent a leadership shake-up less than two months ago, is in financial trouble, unable to make a $6.1 million interest payment on schedule.
The Bloomfield Hills, Mich.-based firm already was on shaky ground and had to borrow money to make its last interest installment payment, according to analysts with New York-based credit rating agency Standard & Poor's.
It simply did not have the cash for its Sept. 4 payment, Newcor officials said in a written statement released Aug. 31.
``The company reported that presently it does not have available funds to make a payment without causing a default under its bank credit agreement,'' the release stated. ``The company also indicated that it would continue to actively explore available alternatives to access the funds to meet its obligations.''
Newcor officials did not respond to requests to comment further.
Their options, though, likely may include negotiations to extend the length of time Newcor will have to make payments on its loan, noted Jeff Mengel, a partner with consulting company Plante & Moran LLP in Auburn Hills, Mich.
The interest payment was due for senior subordinated notes related to a $125 million loan now due in 2008. The company may be trying to alter the terms to allow itself more time to adjust its cash flow. The operation is not necessarily on its last leg, he said, but the inability to make the payment on time is a sign of the extent of the company's problems.
``It's not to say that [Newcor is] in dire straits, but it's not helpful,'' he said.
Meanwhile, Standard & Poor's lowered Newcor's credit rating to D on Sept. 5, less than a week after S&P lowered it to CCC from B. Newcor is facing the constraints of carrying an extensive debt load at the same time business has dropped off, analysts said.
``These smaller auto companies are highly leveraged, and that doesn't help,'' said analyst Dan DiSenso.
The business has gone through a significant decrease in sales, which slipped 30 percent in the first six months of 2001, the S&P report noted. Demand in all of its end markets has declined, and two of those industries - agriculture and heavy truck - see no sign of an immediate recovery.
Newcor posted $238.1 million in sales in 2000, down from $258.5 million in 1999. About 19 percent of its sales come from plastic and rubber processing, making functional parts for the auto industry. Its injection molding operation produces clips, brackets seals and components used in fluid recovery and vacuum control systems. Its other holdings turn out machined metal parts and equipment.
Sales have continued to drop this year, according to financial statements filed with the Securities and Exchange Commission. Newcor had $96.1 million in sales through the first half of 2001, down from $136.8 million in 2000. It also posted a net loss of nearly $6.5 million for the six-month period, down from a profit of $76,000 a year ago.
In a May 10 newsletter on lean manufacturing published by the Society of Manufacturing Engineers, Newcor Chief Executive Officer James J. Conner noted that his company was seeking new business to offset the industry slowdown and was looking at ways to trim production costs.
``Our challenges for the remainder of the year will be to continue our aggressive implementation of lean manufacturing principles throughout the organization, eliminate waste and improve our cost structure,'' he stated in the online newsletter.
The fiscal shortfall comes as a new power base settles in at Newcor.
In late July, executives connected with EXX Inc. took over the Newcor board of directors, completing a takeover attempt first launched more than a year earlier.
EXX is a Las Vegas-based holding company that gambles on its ability to acquire or invest in underperforming or distressed businesses with a view to turning them around financially.
Back in April 2000, EXX, which is operated by David A. Segal, offered to buy Newcor for $4 per share. Newcor's board rebuffed the attempts but altered company rules to allow EXX and Segal to continue buying shares on the open market.
By August 2000, EXX had dropped its offer, but the company and Segal continued buying shares as Newcor's value on the stock market decreased, buying stock at prices ranging from $1.88-$2.38. Shares sold for $1.30 on Sept. 4.
By February, EXX and Segal jointly held nearly 17.5 percent of Newcor's stock, and he and Barry P. Borodkin, another EXX representative, were named to the board.
On July 23, six members of Newcor's board resigned, leaving only Segal, Borodkin and CEO and President Jim Conner. In their place on a smaller board were three EXX-backed members. EXX now holds more than 30 percent of Newcor's stock.
A company undergoing a massive management change typically seeks out ways to reshape the entire operation, Mengel noted.
Newcor has some strong parts, but has lacked a cohesive strategy that could tie together all of those production capabilities, Mengel said. In the competitive automotive industry, a company must find a way to stand out.
``They've made some bold moves to change the board, change ownership, and that's fine and probably necessary, but it still hasn't resulted in improved cash flow,'' Mengel said. ``They need to negotiate with the debt holders and make certain they make the necessary moves to create cash flow.''