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Modern Casting Article: Prices and Margins – Are you maintaining them relative to costs?

Let’s face it.  Foundries are driven by strong margins. There is no debate.  Are your margins acceptable? Or are your margins and return on sales (net income as a percentage of net sales) lower than you would like them to be? Or have you experienced a negative return due to net losses recently?  In these cases, you most likely have an issue maintaining acceptable product margins through customer price increases as labor, material and overhead costs rise year over year.

As noted, prices, costs, and product margins are really a big deal for foundries. Let us be clear, when we hear “we know our costs” most foundries have a poor track record of really knowing their costs. It is just a fact; they really do not understand their true costs, and thus, product margins. There is constant pressure from customers to “lower your prices” or “we need cost downs”! Its typically “David versus Goliath” and David is reluctant to upset Goliath with price increases in fear of losing him as a customer!  However, your customer needs you to be a profitable and viable business to ensure their supply chain has no “weak links.”  When is the last time you raised prices?

So how do you know if you have a problem with customer pricing and margins?  A macro review of your income statement and some analysis will pinpoint the areas to address.  First, review your gross profit margins (as defined here as net revenue less total actual manufacturing costs) as a percentage of net sales. If that percentage (what we call gross margin) is not anywhere near your quoting profit margins and not at an acceptable level, you need to dig deeper. If your gross margin is not at an acceptable level and has dropped year over year you need to examine why. The first areas to examine are variable and fixed manufacturing costs.  Have these costs as a percentage of net sales increased year over year? If so, which line items and why?  And are you carrying the same level of fixed costs though revenue has declined? Many questions that frankly need answers.

Let’s take materials and supplies costs for example. Most companies will receive letters from suppliers if material costs are going to be increased.  One can assume almost every year the costs of supplies and materials used in production are going to increase on par with the inflation rate.  In recent years, that rate has averaged around 2%. One can also assume manufacturing overhead costs (utilities, rent, etc.) will increase by that same inflation rate.  Labor costs (wages, salaries, and fringe benefits) used in production typically will rise annually as well.  Most companies will target a 2-3% increase in wages to ensure they remain competitive in the marketplace.  Given these annual increases in variable and fixed costs, a company will need to increase its overall customer prices to maintain an acceptable gross profit margin.  If not, you will experience what we call “gross margin erosion” and a real decline in the profitability of your company.  In our foundry consulting work, we have seen many foundries forego increasing customer prices for several years, unfortunately.  Under this scenario, gross margins can erode to single digits and even negative territory, creating an unsustainable foundry business if the situation is not corrected immediately.

Once you have identified a customer pricing problem at the macro level, one needs to drill down on a part-by-part basis for each customer to see what your specific issues might be.  This does require a strong cost accounting system that frankly again, many foundries do not have.

Standard increases in costs do warrant price increases to customers to maintain margins.  However, when reviewing margins on a part number basis, you can identify other issues that cause unnecessary costs and unacceptable margins on a particular part or set of parts.  Or even more common, work is being done to parts that was never quoted.

To ensure you are managing your prices effectively down to the part level, a periodic review (we suggest annual) of certain customers and the parts produced for them is warranted.  This analysis of part prices, costs, and margins by customer is used to identify parts with unacceptable margins caused by inadequate prices or high costs (excessive scrap, labor, rework, poor tooling and molds, poor tooling design, etc.) is necessary to affect your long-term success.  Such an analysis typically results in identified price increases for certain customer parts or potentially abandoning certain customer parts that generate losses for the foundry.  Or you will identify necessary improvements in processes to eliminate waste/costs.

Without a doubt acceptable customer pricing and product margins are one of the most critical areas we review in our foundry turnaround work.  If you are struggling in this area, know that you are not alone, and help is available!

Note: This article is part of a series of columns that will be running in Modern Casting discussing contribution analysis, EBITDA implications versus net income, ownership transition, succession planning, business sales and advisory, how to handle customers, effective price increase strategies and more.

About the Authors

Bob Silhacek and Michael Wise co-founded Turning Point Management Advisors, LLC (www.turningpointmgmt.com), a Minneapolis-based management consulting firm providing turnarounds/business recovery solutions, interim executive management, ownership transitions and sale and acquisition services to companies and their stakeholders that have reached a critical juncture.

Turning Point has received the following awards from the Midwest Chapter of the Turnaround Management Association for its work with clients: 1) 2012 Turnaround of the Year; 2) 2014 Transaction of the Year and 3) 2019 Turnaround of the Year. Two of these awards were casting operations.

 

Filed Under: Featured, News

Case Study – Ramco Innovations, Inc.

May 18, 2011 

Minneapolis, MN. – Turning Point Management Advisors, LLC (“Turning Point”), a leading consulting firm providing business recovery solutions, interim executive management and business brokerage services, is pleased to announce their client, Ramco Innovations, Inc. ((“Ramco”), Des Moines, IA, has sold Humboldt Controls and Fabricating LLC (“HCF”), Humboldt, IA, a division of Ramco, to Voyager Aluminum (“Voyager”), Brandon, MN effective April 30, 2011.

The Seller – HCF was established in 2001 in Humboldt, Iowa as a strategic expansion of Ramco. The division started in a 25,000 square foot facility specializing in the design and fabrication of custom stainless steel material handling and packaging equipment for food stock environments.  The division was envisioned as an extension of Ramco and its controls business. HCF was designed to have the capability, resources and experience to offer certain upgraded levels of both fabrication and controls. HCF operated as a stand-alone entity with large, quality customers, including exclusive manufacturing agreements with companies like Wells Dairy (Blue Bunny) in Le Mars, IA.

Situation – Ramco’s long-term plans for growth and profitability in the HCF expansion and strategic alignment with their controls business did not meet the strategic benchmarks of Ramco.  Ramco’s core business was growing, and therefore, decided to focus resources on that business.

Relationship with Turning Point – Ramco retained Turning Point to advise the Company and determine the best options to optimize HCF’s value to Ramco. Options included selling the Division, continue current operations implementing a viable turnaround plan and/or invest in and grow the business. Turning Point determined the best option to be a sale of the division. Turning Point, through its broad base of contacts, identified a number of buyers that fit the profile.  Voyager was an excellent fit as it was seeking to expand its market base, add product lines and establish a new distribution location.

 

Turning Point Management Advisors, LLC is a leading consulting firm providing business recovery solutions, interim executive management and M&A Advisory services to companies and their stakeholders that have reached a critical juncture, a “turning point”.  Their focus is on restoring business value for all stakeholders, while leading organizations through transition. Their professionals have extensive executive level experience leading companies. Turning Point provides “decisive leadership guiding you through business crisis.”

Filed Under: Case Studies

Case Study – Sivyer Steel Corporation

This story is about Sivyer Steel Corporation, a turnaround that earned us the 2019 Turnaround of the Year Award. Even better, we gained the satisfaction of keeping the business operating throughout and out of a Chapter 11 363 sale bankruptcy.

The turnaround of Sivyer Steel Corporation.

Sivyer Steel located in Bettendorf IA was (and still is) one of the country’s oldest continuously operating steel casting companies. Frederick Lincoln Sivyer founded the company in 1909. It originally served the farm equipment, mining, crane equipment and chain belt industries and was formerly located in the Milwaukee, WI area. In the early 2000’s and into the next decade, the Company grew to $70M in revenue and 400 employees.

What trouble looks like.

Sivyer’ s real troubles started in 2014, when the foundry industry began a sharp decline from weakness in the mining, agriculture, oil and gas industries – a decline that would last for years. With sales dropping and costs rising, Sivyer’ s business began to slide. By May of 2016 Sivyer informed its Banks it has defaulted on its bank agreements due to significant decline in its financial condition. These losses continued with revenues declining well into 2016.  By the end of 2016 revenue would drop to $33M, causing a loss of close to $8M! The Company did not have many choices – either turn things around or close-up shop. We were brought in by the Bank to assess the situation. Our opinion was that things were critical but with a strong customer base and support from the Bank, a turnaround was not only feasible but justifiable.  The ultimate goal for us and their Bank was to preserve jobs plus knowing that a liquidation was neither a good financial option for the Bank nor for the community, employees or all other creditors. Here is our initial assessment:

  1. Cash was in critical condition; difficulty paying suppliers, many past due with the impact to close the foundry down due to insufficient materials; operations were shutting down routinely; barely able to cover payroll
  2. Difficult to find workers, especially skilled (maintenance, tool makers)
  3. Company in a true “turnaround” situation; management has been operating in this situation for over 2 years without success
  4. $10MM in Bank secured debt 
  5. $9MM in unsecured debt was a huge drag on business
  6. Company had deferred over $2M in unsecured creditor trade debt to Notes 
  7. Revenue declined rapidly in 2015 from 2014 then found itself with declining revenues mid-2016 
  8. Actual margins running below 5%; some products at negative margins
  9. The Company had deferred its 401(k) profit sharing contributions by close to $338,000 going back 3 years
  10. Overall inventory levels too high – at around $9M; should have been around $5M to $6M; there was also $2MM plus in “overstock” inventory
  11. “Salaried” workforce already took a 10% salary cut and reduced staff by 30% in September 2016

The turnaround begins.

Our first recommendation to right the ship was as to enter into Forbearance Agreement”, whereas, the Bank agreed to forbear from exercising certain rights. Included in the forbearance agreement were certain provisions requiring the Company to initiate a turnaround “Go Forward Plan” and to appoint a Chief Restructuring Officer. Turning Point Management Advisors LLC (“TPMA”) was appointed to the newly created positions.

The turnaround and restructuring process.

Under the direction of TPMA, the Company put together and implemented a “Go Forward Plan” that was presented and approved by the Bank and a participating Bank in November 30, 2016.  Note that the complication related to the situation was the presence of a participating Bank that needed to also agree to the next steps.

Turnaround activity.

  • We created a Go Forward Business Plan that demonstrated short-term, mid-term and long-term viability supported by believable assumptions about the future of the business including a a 24-month financial projection and a bridge analysis.
  • We negotiated directly with several trade creditors ($9,000,000 in unsecured debt) to assure continued support of supplies and materials. This included additional deferrals of close to $1M. 
  • Many customers received an across the board general price increase and wealso were the main conduit for contact, negotiating and management of customers as necessary. Sometime this included direction “not to ship” until the Company had new P.O’s for the price increase..
  • In November of 2016, I along with other management met with union leadership and proposed a 10% wage reduction for all union employees. Of course, this was aggressive but after a vote of union employees, the proposal was accepted and reduced annual labor costs by over $1,000,000.
  • Other efforts included some other important changes as follows:
  1. Certain prepayments from customers 
  2. We moved Sivyer to a tier two position with several customers; this in effect accelerated sales.
  3. Based on our foundry experience, we directed additional cost reduction items that effectuated a reduction in monthly cash burn which included process improvements (scrap. efficiencies, overtime, labor utilization). 
  4. We did extensive reviews focusing on variable and fixed margins,implemented changes to increase margins or to some extent, exit unprofitable business.

These changes had a positive effect on EBITDA as early as November of 2016 and most of 2017. The Bank’s continued support was instrumental in the process. With the aggressive restructuring initiatives that were undertaken -TPMA and the Company projected positive EBITDA of close to $2.8M in 2017 and $6.3M for 2018. 

What the win looked like.

As noted above, the Company was very successful in 2017 as the Company had $37,161,000 in net revenues and almost $1,500,000 in positive EBITDA.  which was a year-over-year improvement of close to $5,000,000.Sivyer was an “orphan company” of a private equity in Milwaukee, WI as the firm had sold off all the other companies in its investment portfolio. Thus, it had gotten all of it money and profits out of the fund and the fund was basically terminated.  As the Company moved towards substantial improvement in EBITDA and with the hopes to settle out of court with the unsecured creditors (more to come later), it made sense to ownership to try and sell the business. So, in April 2017 the Company hired an investment banker.

The investment banker identified several potential investors with over 700 parties contacted. including strategic and financial investors.  A full data room was established with detailed information about the Company with TPMA, as CRO, the main contact for the Company.

In early fall 2016, after several visits and communications with many investors, a qualified buyer was identified and signed a Letter of Intent to buy all the assets of Sivyer Steel Corporation.

But the critical issue remained – $9,000,000 of unsecured debt.  The potential Buyer did not want to risk litigation from any, or all, of these unsecured creditors thus was willing to fund a pool of dollars that could be used to settle with these creditors. And the deal would be a  a “friendly” foreclosure between the Company and the Bank, the Company and the Buyer.

A negotiation between the Buyer, TPMA and Company, as part of the asset purchase agreement, would agree to fund $1,370,000 to settle out amounts due to them.  The Buyer wanted to be sure that the suppliers would support the business after the deal was closed.

TPMA directed the settlement process given familiarity with the vendors and experience with settling with unsecured creditors.

The process was to be conducted during early 2018 various classes of creditors: key vendors, judgement creditors ,legal and professional creditors etc. The goal was to treat all as equally as possible without significant negotiations.  As we approached the end of February 2018, our projections indicated about a 70% success rate in settlement.

The other key issue was the Company needed to complete a sales transaction as soon as possible as fresh cash was needed thus time was of the essence.

New Direction

In February 2018, we discovered that a key competitor purchased an unsecured creditor’s debt and with the cooperation of two other unsecured creditors that theysolicited, the group forced an involuntary bankruptcy.  

In March 2018, TPMA and Company ownership, engaged Bradshaw law firm, Des Moines, IA as debtors counsel.  Immediately, Sivyer filed a petition for Reorganization under Chapter 11, Title 11. The involuntary bankruptcy filing was dismissed.

Next steps

TPMA was re-engaged as CRO and financial advisors along with debtor’s counsel.  We attended and advised on Court hearings and with Court approval, retained the investment banker. We continued oversight of the Company operations, financial condition and Banking relationships  including DIP financing.

It was agreed between debtor’s counsel, the Company and TPMA to conduct a Section 363 auction and secure a stalking horse bidder. Initially, the potential buyer agreed to stay in the deal as the stalking horse but unfortunately dropped out given the participation of the above competitor. Fortunately, the investment banking process yielded a local buyer as the stalking horse.

Ultimately the Company assets were sold via auction to the local buyer and on July 28, 2018 and all 225 employees were re-employed by the new Company, Sivyer Steel Castings LLC.

The Bank decided to finance the new Company and remains the lender to Sivyer. The Company continues to operate today with an additional approximately $6M in new cash. And no major customers were lost in this process.

Twists and Turns

We experienced many twists and turns in this turnaround but in the end Sivyer Steel is operating with full employment as the 200 plus employees retained their jobs and the Company lost no major customers.  

Filed Under: Case Studies, Manufacturing

Turning Point Wins the 2014 Transaction of the Year Award

The Minnesota Chapter of the Turnaround Management Association congratulates Turning Point Management Advisors LLC, winner of the Chapter’s 2014 Transaction of the Year Award for its work with Mansfield Brass & Aluminum Corporation of New Washington, Ohio. The Transaction of the Year Award recognizes excellence and extraordinary achievement by turnaround and insolvency professionals working with a distressed business in a complex restructuring, sale or other transaction to preserve and realize value for stakeholders.

The TMA Minnesota Chapter will present the award at its monthly meeting on November 20, 2014 at the Minneapolis Club.

www.turnaround.org

www.turningpointmgmt.com

Originally published in Volume 24, Issue 11 of Minnesota Business magazine.

Filed Under: Featured, News Tagged With: news

Case Study – Turnaround Distribution Industry

Situation:

A family-owned, 95 year-old, wholesale distribution business that provided the highest quality brand name supplies and equipment to institutional and industrial launderers and dry cleaners in the upper Midwest had experienced three years of declining revenues along with operating losses. The downward trend in financial results had caused the Company’s lender for over 20 years, to become concerned about the Company’s future ability to repay its $2.0 million asset- based line of credit which was fully collateralized by accounts receivable, inventory and cash surrender value of life insurance policies. As a result of the continued operating losses, the Company was also experiencing cash flow issues. Consequently, the bank indicated to the Company that it may not renew its credit facility unless the Company retained a turnaround management firm to address its deteriorating financial results. Turning Point was engaged to assess the Company’s financial performance and business operations, organization, prepare recommendations and a plan to drive a financial turnaround. Additionally, Turning Point was engaged to develop a cash forecasting process and re-establish the basis from which to renegotiate the current credit facility or seek a new lending partner. Turning Point was selected based on its in depth due diligence of the situation, the Principals’ business experience managing and operating companies through turnaround and their successful track record of renegotiating and sourcing new bank credit facilities.

Challenges:

  • Three years of declining revenues and operating losses
  • Low gross margins in the Supplies business segment
  • Excessive warehouse space and costs due to multiple, inefficient Company-owned locations
  • Unionized warehouse workforce
  • High inventory levels with declining sales
  • Lack of sound financial management including gross margin analysis, inadequate cash flow reporting, minimal key metrics tracking plus no financial plan to monitor actual results against
  • Bank relationship was strained; new credit relationship may be necessary

Our Process:

We completed a thorough review of the Company’s operations and financial performance to date including an analysis of gross margins for all product lines. We analyzed current cash flow and prepared a 13-week rolling cash flow forecast for the Company to operate within.  We completed an organization review to assess the strengths and weaknesses of management and employees. Turning Point then prepared a SWOT (strengths, weaknesses, opportunities and threats) analysis on the Company, generating a realistic operating and financial plan for the upcoming fiscal year with recommendations for immediate action necessary to improve the financial results of the business. Additionally, we prepared a longer range operating and financial plan with specific recommendations to be implemented. The analysis and the short and long-term operating and financial plans along with our recommendations were presented to the Bank.

The Success:

The Bank concurred with our assessment and recommendations for a business turnaround and our short and long term financial/operating plans. The Bank agreed to maintain the current credit facility for the Company until a new credit facility was secured. Turning Point assisted the Company with the implementation of certain recommendations. One of the most critical recommendations was the sale of a warehouse location which converted an under-performing asset into needed cash. The sale of the warehouse location was completed within six months. With an improved balance sheet, the Company secured a new credit facility with lower rates and better terms from a local bank. The Company is now operating successfully and profitably.

Filed Under: Case Studies, Distribution or Wholesale Tagged With: case study, clients, distribution

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Latest News

  • Modern Casting Article: Prices and Margins – Are you maintaining them relative to costs?
  • Case Study – Ramco Innovations, Inc.
  • Case Study – Sivyer Steel Corporation
  • Turning Point Wins the 2014 Transaction of the Year Award
  • Case Study – Turnaround Distribution Industry
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Modern Casting Article: Prices and Margins – Are you maintaining them relative to costs?

Let’s face it.  Foundries are driven by strong margins. There is no debate.  Are your margins acceptable? Or are your margins and return on sales (net … Read More

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