Banner Tool one of many teetering on the brink
It’s no secret that manufacturing has been particularly hard-hit by the economic downturn some experts say the nation is already recovering from.
While first-tier manufacturers — manufacturers of branded products and equipment — in many cases have been affected as retail orders have slowed, it is the small machine shops that build their components and supply their parts and create their molds that have been squeezed the hardest.
The number of bankruptcies locally among machining and tool and die job shops, and the mid-size manufacturers they serve, has been high, according to industry sources. And while one north-side Milwaukee shop — Banner Tool & Engineering — has not yet gone into receivership, the doors of its 29,000-square-foot facility at 7254 N. Teutonia are locked and its parking lot empty.
Employees of a diner next door say Banner Tool employees used to primarily call in orders for carryout rather than dine in – that is until the doors closed February 15. The handful of employees remaining after layoffs in May and November of 2001 contend the shutdown occurred after they confronted owners about bouncing paychecks. At the time, the shop was relatively busy with projects for Kohler Manufacturing, Paper Machinery and Falk Corporation.
Calls to Banner Tool are sent directly into voice mail. Repeated calls from a reporter have not been returned.
A call to the home of Keith Akers, listed as the registered agent for the corporation by the Wisconsin Department of Financial Institutions, was not returned. Nor were calls to the home of David Leist, a stockholder in the company.
According to court documents, several companies have filed claims against Banner Tool, including a December, 2001 filing by the previous owner – Jeff Jonas — from whom Akers had purchased the company in 1999.
Another small claim was filed in March, paradoxically by Jack Goodnow, a corporate turnaround specialist who consulted with Banner Tool’s management last year.
According to the Wisconsin Department of Financial Institutions, Akers is also the registered agent of a Racine job shop, MGM Tool & Die, where Leist is also an owner. As is the case at Banner Tool, the phones at MGM Tool flow into voicemail, and the voicemailbox is full. Small claims suits are being filed against MGM Tool, including a claim for eviction brought by Broughman Inc., the owner of the shop’s facility at 2504 Norwood Court. According to sources within the two companies, MGM shut its doors in January of this year.
Akers and Leist also own A&K Cutting Tools, a business Akers purchased so he could buy cutting tools for his shops from himself. According to a former employee, the investment did not pan out as the previous owner of that business failed to stay onboard as agreed to operate the machines.
As his companies are buffeted from all sides, Akers filed for personal bankruptcy under Chapter 7 of the Bankruptcy Code March 7 which, according to Racine bankruptcy attorney Jay Nixon of Harvey, Nixon O’Neil, would shield him from those who would collect a $650,000 loan he secured through the Milwaukee Economic Development Corp. (MEDC). The loan, from what is now Bank One, was used to purchase the building and facility according to MEDC staff.
Loans through MEDC are made partially on the basis of an unsecured personal guarantee, and personal bankruptcy would absolve the borrower of responsibility. However, MEDC Vice President of Lending David Latona said the organization viewed buy-outs as high-risk loans, and typically made moves to protect itself. But Akers’ bankruptcy would hurt, according to Latona.
"I am not an attorney nor do I play one on TV, but that does alter his responsibility with regard to the personal guarantee," Latona said. "I know their (former Banner Tool owners) debt was subordinated to the bank and to our notes. If they are not getting paid, the only recourse for the seller is to go back and sue to collect on the debt. If they are suing, there is nonperformance in some way, shape or form.
"When MEDC makes loans, we make them on a second-mortgage position. In Banner Tools’ situation, we made a second mortgage on the property, and also had personal guarantees from the lenders."
Apart from the loan from MEDC, Leist and Akers secured additional financing through American National Bank, now Bank One.
"The original project size was $650,000 for building purchase," Latona said. "There was also the purchase of equipment and/or stock for $1.5 million. That was financed by the bank and by the seller. The bank participated in the mortgage on the building with MEDC. The bank was also involved in stock purchase."
Times tough despite management practices
So how does a businessman with decades of experience (prior to buying Banner Tool, Akers was a principal of Municipal Well & Pump before getting into the tool-and-die business) wind up in such a mess?
Many in the industry point not only to the sluggish economy, but to competition for tool-and-die, machining and mold-making jobs from China.
While turnaround expert Goodnow, a Hartland-based partner of the consulting firm COB LLC, could not specifically discuss Banner’s situation, he did indicate that the difficult times facing tool-and-die and machining shops is a real concern for the larger economy.
"I don’t think it is exclusive just to the tool-and-die business," Goodnow said. "Small, medium and large businesses today are facing a lot of challenges. There has been a downturn in the economy. When that happens you have to be very vigilant in all parts of your operation."
But regardless of management practices, tough times hit job shops like Banner Tool hard.
"The first thing is — there just isn’t a lot of work right now," Goodnow said. "You have a lot of companies that are competing to get a much smaller quantity of work. What happens then is that people often compress their margins to get that work. Sometimes they get into a situation where they drop their prices to a point where they just can’t cover their costs."
While quality, long-term relationships and customer service are key in times like this, Goodnow stressed that cuts do have to be made.
"They have to be just as frugal as they can internally by cutting their costs in every area they possibly can," Goodnow said. "One thing a lot of companies do is say ‘I can’t afford to drop employees because when things turn around I will need these people.’ But if you don’t let people go, when it turns around, you may not be able to participate in the more robust times."
Aging receivables a bane to the industry
According to job-shop owners, large companies like original equipment manufacturers (OEMs) are passing on the pain they feel from the hobbled economy by hanging onto their accounts payable dollars longer than usual.
"The big guys haven’t released all the money," said John Gingras, a partner at Multi-Tool & Machine in Milwaukee. "What I hear is that their cash flow is an issue. Whether they are doing this because they have already paid dividends or for annual reporting purposes or some other reason I don’t know."
According to Linda Kiedrowski, president of the manufacturer networking organization Paranet Group, businesses with only a few handfuls of employees and many fixed costs are extremely vulnerable.
"I think that’s an industry practice when the economy goes bad," Kiedrowski said of sluggish payments. "People are taking a hard look at their cash flow and stretching their payments out as far as they’ll go."
The problem can be compounded if a job shop has only a few long-term, major customers.
"If you have two or three customers and if one of their CFOs has declared ‘We need to watch our cash flow so we’re going to move those things out as far as we can,’ the person at the end of the food chain is really getting hurt," Kiedrowski said. "Small tool and die companies might be relying on only three customers to make their payments."
In times like this, larger manufacturers need to consider the effect their accounting practices will have on their smaller suppliers, according to Kiedrowski.
"The smaller you are, the harder it is to survive a lot of the accounting practices of larger companies," Kiedrowski said. "I think large companies have a duty to make sure they don’t kill these little guys. Sometimes they should be aware of the effect they can have in down times. Smaller companies live on cash flow. When you hold up invoices, what seems like a small thing can really ripple into a major event for a small manufacturer. What seems like a small change can have a major effect down the food chain. Even if a customer normally pays in 90 days — if you move out to 120 days that is a problem. A change like that which is not anticipated could be fatal."
When one sneezes …
As aging receivables pile up with Milwaukee job shops, the financial misery is contagious from one firm to the next. Machining, grinding, die making and other metalworking firms do business with each other, so when one sneezes, others get the cold.
Machine Tool Service & Scraping, Inc., Milwaukee, and Sullivan Corp., Hartland, have both filed claims against Banner Tool.
"We rebuild and retrofit machine tools," Jim Livingstom of Machine Tool Service & Scraping said, indicating that in a down economy the firm tends to get repair work rather than jobs involved with new installations. "We usually get involved when new equipment is purchased, but usually when there is a slow economy we are pretty busy. But things are slow everywhere. Nobody is making moves. … Everybody’s slow. This last job we were asked if we could take Mastercard or Visa – which we have never had before. Bankruptcies don’t help us either. I don’t know what’s happening with Banner, but I had another one (bankruptcy) happen in December. I’ve seen four in the last year and a half – companies with outstanding balances. The ones that I have seen in bankruptcies have just been overextended. Money is too easy to get for some people."
Sullivan Corp.’s vice president of sales and marketing, Tom Cowan indicated that, despite the many foreclosures in the industry, his firm is chugging along. Cowan’s firm is headquartered in Hartland, where it employs 30, and also employs about 15 at a location in Statesville, N.C.
"We reprocess metals," Cowan said. "We take them from a bigger size and take them down to an exacting size for things like forgings, side plates, weldments. From week to week it does change. The tool-and-die industry has not performed well certainly in the last year. However, some of the fabrications, forging and weldments have sustained us. A large part of our business is a result of the paper industry, but we do a lot of work in the energy field."
Cowan stressed that companies with high fixed costs are the most at risk in the current economy. Job shops with significant debt have to find ways to stretch out those obligations.
"The worst of it is the tool-and-die," Cowan said. "That is really the foundation of who is getting hit as things are put on hold. You need molds to go forward. I think that, unfortunately, the larger your overhead the bigger hit you are going to take. A lot of the smaller companies with lower fixed costs will do OK. But the banks of a lot of the smaller companies have to be working hand in hand with them because I keep hearing refinance, refinance — you hear it everywhere."
One message that came through from a number of parties was that it is important to communicate frequently with your bankers and your suppliers.
"I think one thing that is particularly important is even if times are tough, it is really critical that businesses maintain good communication with their lenders so they can use whatever assistance provided by their lenders as they confront the challenges that they’ve got," Goodnow said. "It is not a time to keep secrets."
Goodnow advocates meeting with creditors even when times are good.
"This is not about passing on bad news — but just keeping them informed on a monthly basis so the lender doesn’t get surprised — because that’s when they react," Goodnow said.
Ray of hope
Times may be getting better, according to Livingstom.
"We are starting to see things happen — there was a while when the phones didn’t even ring," Livingstom said. "It just started to pick up late in February — but not like it should be."
Livingstom said the company currently has four employees, a number which swells to seven in more prosperous times. Livingstom indicated that much of his firm’s current workload is indicative of branded product manufacturers fixing existing equipment rather than the purchase of new equipment.
"It’s spotty," Livingstom said. "They (job shops) have work for a week and then they wonder what they are going to do. Most of the work we are getting now is out of manufacturers — not out of the tool shops. It seems like the foundries are coming back. When foundries come back, machining comes back."
Several shop owners, however, stressed that their more heavily-leveraged job shops may actually be done in by an economic recovery. As orders roll in, labor and materials costs increase, creating what could be a fatal cash flow crunch.
April 12, 2002 Small Business Times, Milwaukee
