Analysts weigh in, stock flounders
Milacron reported modest second-quarter gains in sales and new orders, although the company missed its earnings target. NPE business will come in the third quarter. Two analysts - Lustgarten and Mark Koznarek - downgraded the stock, based on fundamental reasons that are longer-term than the last three-month period.
For a company struggling to get its share price out of the low single digits, the downgrades sting. From $20 in early 2001, Milacron's shares slipped under $10 in mid-2002, then sank below $5 this July.
On Aug. 26, the stock closed at an all-time low of $2.05 in New York Stock Exchange trading. It closed Sept. 10 at $2.70.
On the second-quarter news, Koznarek of Cleveland-based FTN Midwest Research issued a sell recommendation. He had been neutral. His report said: ``With the fierce headwind that Milacron is navigating through, we do not think it is prudent for investors to go along for the ride.'' Factors he cited include price deterioration, Milacron's NPE numbers, weak U.S. demand and work moving to China.
Lustgarten downgraded the stock to ``monitor'' from ``buy.''
``Our judgment is that, while there's a lot of long-term merit with the company, the uncertainty's too great to own the stock at this point,'' he said in a telephone interview.
What is creating the uncertainty? Lustgarten said Milacron faces ``much higher interest-rate charges'' from its refinancing, which will eat into earnings.
``The whole financial structure of the company comes under pressure as Milacron is having to refinance the debt on the balance sheet. And it has spooked the market because of fear of difficulty in refinancing it,'' Lustgarten said.
Chicago-based analyst Walter Liptak with McDonald Investments continued his ``hold 3'' rating. That means he does not recommend buying the stock. But that could change depending on whether business strengthens.
``If the economy improves and their plastics machinery orders start picking up, it's going to provide confidence to the investors, their bank group and potential buyers of a debt offering,'' he said. ``If the economy gets worse, it's going to make it difficult for the company to refinance.''
Koznarek is not optimistic. ``We believe that machinery-market conditions will remain soft for the remainder of the year, and suspect that it will be very difficult to refinance the debt with profit prospects still very weak,'' he said.
Another analyst, Alexander Paris, is more favorable. ``They are a leader in what they do. Yes, it's a necessary product. Yes, plastics is a growth industry, relative to other materials. It's an industry with a future. The manufacturing sector has already clearly turned up after being depressed for four years,'' he said.
Paris, president of Chicago-based Barrington Research, had listed Milacron as a ``hold,'' his lowest rating. A few months ago, he moved that up to a ``market perform.''
``Essentially by saying that, I'm saying, `Yes, I think it's going to survive,' '' he said.
All four analysts think Milacron will try to sell metal-cutting fluids, a $96 million-a-year business with high margins and the final link to its machine-tool past. That could solve the immediate debt problem, and would follow recent practice. In 2002, Milacron sold its Valenite, Widia and Werko metal-cutting products businesses to pay down about $300 million in debt.
Milacron already has its round tool and grinding wheel businesses for sale, after treating them as discontinued operations last year. On Aug. 29, the company announced it sold Minnesota Twist Drill to several employees backed by an investment group. Terms were not disclosed for the drill maker, which does about $10 million in sales.
``They should be able to survive because they have assets they can sell and they're working to refinance,'' Liptak said. He thinks the stock could rebound to above $10 if Milacron refinances and the economy improves. ``The weak economy is what's hurting this company,'' he said.
Job cuts continue
Responding to the severe downturn, Milacron has cut 30 percent of its plastics-related workforce since 2000 and closed several plants, consolidating work at its main factory in Batavia, Ohio. Hundreds of jobs have been eliminated through layoffs, early retirement and attrition.
The most recent, 300-person reduction includes some big names. The biggest name, Faig, said he has been planning for years to retire early.
``It has always been my desire and my family's desire to retire when I was 55 years old. That has been part of my personal strategy,'' he said.
Three former Milacron employees confirmed that is true. ``Harold has said for a long time that when he reached 55, he planned on retiring,'' said one.
Faig has no immediate plans. He said he may do some consulting.
How does he feel about retiring when Milacron faces such major challenges? ``The time is right because ... we've got the best management team in place, with ... more than enough experience to do the job.''
Faig said he groomed the leaders with an eye toward his retirement.
The operational team includes: Karlheinz Bourdon, vice president of global injection molding; David Lawrence, general manager of D-M-E in North America; Robert McKee, president of global industrial fluids; and Jay Woerner, vice president of global manufacturing and sourcing. They now report directly to Brown.
``I would picture it as four people replacing Harold,'' Brown said.
Brown said the decision not to replace Faig was made separately, after Faig decided to retire. ``It's an effective way to keep our overhead cost structure down, in this environment,'' Brown said.
Jerry Lirette, D-M-E president, also is taking early retirement, Milacron said. He did not return telephone calls for this story.
Barbara Kasting, vice president for total quality leadership, left the company in the middle of the year. Woerner has picked up her responsibilities, which include lean manufacturing and Six Sigma quality initiatives. Brown said she left ``for personal reasons.''
Analysts said they don't think Faig's abrupt departure - coming less than eight weeks after he announced his plans on Aug. 8 - will hurt Milacron.
``All the heavy lifting has been done already on the consolidation of the plastics businesses, so the extra manpower it took to actually do the restructuring is behind them. Now the business can run on an ongoing basis,'' Liptak said.
Brown said Milacron, like other machinery manufacturers, is adjusting its size to the slimmed-down U.S. market.
Milacron itself is about three-fourths the size it was in 2000, when it generated $974.5 million in sales. The company reported 2002 sales of $693.2 million. Through the first six months of 2003, Milacron had sales of $372 million.
``I believe that Milacron's got an incredible reputation and it's not built upon any one individual,'' said Brown, himself a 23-year veteran of the company who rose through financial positions to take the top post in 2001.
As previously reported, several other well-known people are departing in the cutbacks announced July 29. Taking early retirement are M. Barr Klaus, vice president of technology; Robert Kadykowski, general manager of the specialty equipment business; and Chris Hall, director of vertical presses.
Tom Jarrold, manager of marketing services, accepted the early retirement package. Jarrold said Milacron immediately gave him a consulting contract and he continues to perform his same duties.
Conan Miller, who was in charge of Concentric Custom Services, a consulting firm to help processors, also took early retirement.
Brown said Milacron brought Concentric in-house and placed it under the responsibility of Lawrence at D-M-E.
Milacron had a major white-collar layoff in 2000, but most of the announced layoffs since then have been production workers.
In the second-quarter conference call, Brown told analysts the 300 positions are about 15 percent of Milacron's nonmanufacturing labor. One analyst asked if Milacron was ``cutting muscle.''
``We feel it's so important that we focus on what it takes to become profitable. I don't think at this point we are doing anything that's going to risk the future of this company. We're doing what we feel is right in this environment,'' Brown said.