DETROIT -- Doug Grimm, CEO of Grede Holdings, follows a strict regimen in running his foundry company.
"At 10:30 every day," he says, "I get my cash position."
As industry volumes pick up and the recession begins to ease, many parts suppliers continue to struggle with tight cash flows.
Grede (GRAY'-dee) was formed by the merger of two companies that had been in Chapter 11 for a combined three times in the past decade. Today the restructured company is well-capitalized, with a diverse customer base. But a look at Grede's recent history shows how relentless the financial strains have been.
Every day that Grede's customers are supposed to pay for parts already delivered, staffers begin calling to make sure the payments are made. If customers can get by with paying one week late, Grimm says, they'll see whether they can delay for two weeks.
Does that sound cynical? A recent study by consultants A.T. Kearney backs Grimm up. The delay in payments from automakers to Tier 1 suppliers stretched out from an average of 50 days in 2005 to 62 days in 2009, the study found.
But that was nothing compared with the delay in payments from Tier 1 suppliers to Tier 2 suppliers. From 2005 to 2009, Tier 1s nearly doubled the delay from 26 days to 47, increasing Tier 2 receivables -- essentially, money that Tier 2s have been forced to lend to Tier 1s -- by more than $8 billion.
"We don't expect the Tier 1s to go back to paying their Tier 2s at that faster rate," says Daniel Cheng, an A.T. Kearney partner and head of the company's automotive practice in North America.
The foundry industry was fairly insulated from imports, and the high cost of setting up a foundry presented a barrier to new entrants. Even so, the sector suffered from overcapacity and cutthroat price competition even before volumes tumbled with the credit crisis of 2008. Then things got worse.
"When Lehman Brothers collapsed, my banks said, 'Take out your GM and Chrysler business, and all automotive, then tell me what positive cash flow you've got,' " Grimm recalls.
Grede, along with other suppliers, attacked costs with a chain saw.
"We cut one-third of our work force and had managers running machines," Grimm says. Three times in 2009, all employees were put on mandatory one-week unpaid furloughs. Grimm left salaries intact, preferring the furloughs because "you get the cash impact right away."
Grede closed or sold plants in Greenwood, S.C.; Wichita, Kan.; Butler, Ind.; Lufkin, Texas; and Grand Rapids and Vassar, Mich. The closures coincided with the downward spiral and eventual bankruptcies of General Motors and Chrysler, which brought another round of scrutiny from banks.
From January though June 2009, lenders pulled back from the auto industry. But Dan Terpsma, market executive for the Midwest region-Michigan market at Bank of America, disputes the view among suppliers that they were treated as "toxic" by their longtime bankers.
"The issue a year ago was not that we were unwilling to lend to an industry," Terpsma says. "It was that any industry with a high degree of uncertainty and a lack of visibility beyond a few months becomes an industry that is difficult to lend into."
During that time, Grimm was CEO of Citation Corp. In February, Citation merged with what was then Grede Foundries Inc. Grede was in Chapter 11 at the time; Citation had been in Chapter 11 in 2004 and again in 2008.
When Grede emerged, it had cut debt to $13 million from $270 million.
It also had a more diversified customer base. Automotive customers represented 55 percent of the former Grede's sales and a quarter of Citation's sales. Now automotive makes up 45 percent of Grede's sales, balanced by 30 percent to the heavy-truck sector and 25 percent to industrial customers. The goal is to split the business evenly among the three sectors.
The restructured company attracted funding from private equity firms Wayzata Investment Partners and Citation's largest shareholder, GSC Group. Unlike the quick-turn funds of the early 2000s, though, this funding is more patient, Grimm says.
That funding, in turn, helped reassure banks about Grede's viability. Bank of America and Wells Fargo Capital Finance provided a new revolving credit agreement of up to $60 million in working capital to fund operations, at a time when banks still shun many suppliers.
But Grimm continues to watch his cash and remains cautious about adding costs or debt.
The biggest issue currently is "managing the volume uptick, understanding the next 90-day forecast," he says.
"Do you put on the second shift, add workers? Bring back the machine idled for a year at $50,000 or wait because you don't need it until September?"