Milacron Inc. dodged the bankruptcy bullet five years ago with an 11th-hour refinancing. But the clock ran out on March 10, when Milacron filed for Chapter 11 — facing today's caustic combination of a global recession that cut demand for its machinery and the credit crunch that dried up alternative financing sources.
Milacron “faced a severe liquidity crisis” by the end of February, the company said in court documents.
Two investor groups that hold 78 percent of its senior notes — Avenue Capital Group and DDJ Capital Management LLC — will provide the company with $80 million in debtor-in-possession financing that will give Milacron $40 million in new funds.
The company also has received a $55 million debtor-in-possession revolving line of credit from General Electric Capital Corp.
Under the agreement, Avenue Capital and DDJ Capital would become the preferred, or “stalking horse” bidders to buy Milacron in a court-run auction. The agreement is subject to terms including bankruptcy court approval, and Milacron will solicit competing bids from other potential buyers.
The acquisition would “permit Milacron to continue as a going concern with substantially less debt,” the company said in a news release.
Milacron filed for protection in U.S. Bankruptcy Court in Cincinnati, Ohio.
David Lawrence, Milacron's president and chief executive officer, called the Chapter 11 reorganization and a financial restructuring under new owners, “a positive step that is in the best interests of the company, our employees, customers, suppliers and other constituents.”
“This process will allow the business to withstand current economic conditions as part of a new enterprise with a healthy balance sheet,” Lawrence said.
Milacron is the largest U.S. maker of plastics machinery — injection presses, blow molding machines, extruders, mold components and structural foam molding machines. Milacron also makes industrial fluids used in metal cutting.
Milacron said the Chapter 11 filing covers its U.S. and Canadian operations, where the company listed total assets of $523.3 million and liabilities of $752 million. The company also has filed a reorganization action in Canada.
The bankruptcy filing should not affect its businesses outside of North America — including those in China, India and Europe.
Right after the March 10 filing, Milacron officials began contacting customers, suppliers and employees to assure them that operations will continue worldwide. Milacron employs about 3,000 around the world.
“We also wanted these people to know that our commitment to them and our industry remains unwavering, and that Milacron will be here for years to come,” Lawrence said. He added that people Milacron contacted offered support and encouragement.
Several creditors contacted by Plastics News said Milacron has been paying its bills on time.
“They've been one of our better payers in these times,” said Paul T. Colby, president of Spirex Corp., a screw and barrel maker in Youngstown, Ohio. “I have faith in the core group of people that are there and I think they're going to be successful, and I wish them the best,” he said.
Colby said Milacron owes Spirex less than $20,000.
Hard financial times are nothing new for Milacron. The last year the company turned a profit was 2000.
Starting in late 2000, Milacron and other plastics machinery makers suffered when U.S. sales of injection presses dropped 40-50 percent. Milacron responded by pursuing growth in India and China.
But now that the global economy has slowed, capital spending for plastics machinery has dropped around the world. Milacron blamed “severely reduced sales and orders in recent months — precipitated by the ongoing credit crisis and deteriorating global economic conditions.”
Analyst Eli Lustgarten said Milacron has become more global, but “right now the world isn't cooperating.”
“This is a global economic downturn, in which virtually no industrialized market is unscathed and even the emerging markets have slowed to a crawl,” said Lustgarten, who covers the equipment sector for Longbow Research in Independence, Ohio.
Lustgarten said Milacron has a future, thanks to its strong reputation and a good product line. But the company has to narrow its focus.
“Ultimately, one would think there's a way to pare down this company, particularly with a clean balance sheet, and make it profitable,” he said.
Milacron's 2009 forecast, filed in the bankruptcy documents, shows a bleak sales outlook but a positive cash flow for North America, which accounts for about half of total sales. For North America, the company forecasts 2009 sales of $300.9 million, a decline of 36 percent from 2008 levels, and a net loss of $81.2 million.
The operating loss is expected to be $24.2 million, which includes a non-cash pension expense of $9.5 million for its defined-benefit pension plan. Milacron said its pension plan was hurt by the declining stock market and economic climate. The Pension Benefit Guaranty Corp. is the company's largest unsecured creditor, although the bankruptcy filing said the amount of its claim is unknown. The North American results also include the entire cost of corporate overhead for global operations. Officials project positive operating cash flow from North American operations this year, taking into account both of those items.
Court documents list several moves to cut North American costs in recent years, including cutting 242 full-time positions, eliminating its 401(k) match, reducing medical benefits, imposing rotating furloughs and wage freezes, and relocating its headquarters from an office building near downtown Cincinnati to its factory in suburban Batavia, Ohio.
Echoes of 2004
Recent events at Milacron are reminiscent of the financial trouble Milacron experienced in 2004. Facing a cash crunch and a deadline to pay off $115 million in bonds, bankruptcy was a possibility. But just before the deadline, Milacron issued new bonds convertible to stock.
At the time, a Japanese bank and a Swiss natural resources company took major ownership stakes in Milacron. Both sold their shares within a few years.
The Chapter 11 filing spells out the company's current financial problems. Milacron was hurt by high oil and resin prices in 2007 and 2008, the shakeout among molders supplying the U.S. Big Three automakers, reductions in capital spending by manufacturers around the world and the slowdown in home building.
The economic deterioration “resulted in a sharp decline” in sales and orders. The resulting shrinkage in accounts receivables and inventory hurt Milacron's ability to borrow under its asset-based line of credit from GE Capital, the primary source of cash to fund operations.
“By the end of February 2009, Milacron faced a severe liquidity crisis,” the company said in court documents.
Milacron executives decided they had to restructure the company. They started discussions with Avenue Investments L.P., part of New York-based Avenue Capital Group, and DDJ Capital of Waltham, Mass.
Milacron expects to complete a purchase agreement with the two firms no later than April 9.
Avenue Capital Group focuses on distressed debt and undervalued securities, including companies in bankruptcy, reorganization or liquidation. DDJ Capital specializes in high-yield securities and investing in special situations.
One question not addressed in the bankruptcy filing is the company's plan for NPE2009 — a question bound to be asked because of the recent decisions by some competing machinery companies to cancel their show plans.
In an e-mail response to questions, Lawrence noted that Milacron “understands the importance of NPE to the industry,” and has been a long-time supporter.
“We'll be evaluating our level of participation for the upcoming show over the next few weeks to determine our best course of action,” he said.