Plastics molder faces money crunch

Financial challenges
  • Newcor Inc. says it can't make $6.1 million interest payment on time.

  • Company had to borrow money to make last interest payment.

  • Standard & Poor's lowers Newcor's credit rating 2 notches within
    2 weeks.

  • Newcor caught in squeeze between declining sales and high debt levels.

  • Automotive plastics molder Newcor Inc., which underwent a leadership shakeup less than two months ago, is unable to make a $6.1 million interest payment on schedule.

    The Bloomfield Hills, Mich., company had to borrow to make its last interest installment payment, according to analysts with Standard & Poor's. It did not have the cash for its Sept. 4 payment, Newcor officials said in a 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," it stated.

    "The company also indicated that it would continue to actively explore available alternatives to access the funds to meet its obligations."

    Its options may include negotiations for loan payment extensions, said Jeff Mengel, a partner with consulting company Plante & Moran LLP. The interest payment was due for senior subordinated notes related to a $125 million loan due in 2008.

    The company may be trying to alter the terms to allow Newcor more time to adjust its cash flow.

    The operation is not necessarily on its last legs, 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," Mengel said.

    Debt ratings lowered

    Meanwhile, Standard & Poor's lowered Newcor's credit rating to D on Sept. 5, less than a week after the credit rating agency 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 Standard & Poor's analyst Dan DiSenso.

    The business has experienced a significant decrease in sales, which slipped 30 percent in the first six months of 2001, the Standard & Poor's report said.

    Demand in all of its 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 manufacture machined metal parts and equipment.

    Detroit Diesel Co., Ford Motor Co., American Axle & Manufacturing, and Deere and Co. were Newcor's largest customers in 2000, according to the company's 10k report.

    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.

    Ownership overhauled

    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 an attempt launched more than a year earlier. EXX is a Las Vegas holding company that gambles on its ability to acquire or invest in "underperforming or distressed businesses with a view to utilizing its turnaround strategies and expertise to improve operations and financial performance of the business, resulting in an increase in value." In April 2000, EXX, which is operated by David Segal, offered to buy Newcor for $4 per share. Newcor's board rebuffed the attempts but altered the 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 ranging from $1.88 to $2.38, as Newcor's value on the stock market decreased. 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 Borodkin, another EXX representative, were named to the board. Last week, Segal was named co-chairman.

    On July 23, six members of Newcor's board resigned, leaving only Segal, Borodkin and CEO Jim Conner. In their place on a smaller board were three EXX-backed members. EXX holds more than 30 percent of Newcor's stock.

    Newcor has some strong parts, but has lacked a cohesive strategy that could tie all of those production capabilities, Mengel said. In the competitive automotive industry, a company must find a way to stand out.

    Said Mengel: "They've made some bold moves to change the board, change ownership, and that's fine, but it still hasn't resulted in improved cash flow."

    You can reach Rhoda Miel at rmiel@crain.com

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