Newcor, Inc.

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Newcor, Inc.

1825 S. Woodward Avenue, Suite 240
Bloomfield Hills, Michigan 48302
U.S.A.
Telephone: (248) 253-2400
Fax: (248) 253-2413
Web site: http://www.newcor.com

Public Company
Incorporated: 1933 as National Electric Welding Machines Company
Employees: 1,583
Sales: $238.1 million (2000)
Stock Exchanges: AMEX
Ticker Symbol: NER
NAIC: 333298 All Other Motor Vehicle Parts Manufacturing; 33518 All Other Industrial Machinery Manufacturing

Newcor, Inc., with corporate headquarters located in Bloomfield Hills, Michigan, is a manufacturing company that is organized into three operating groups. Precision Machined Products accounts for 70 percent of Newcor sales, producing shafts, axles, and other large iron and steel castings for the automotive, medium, and heavy-duty truck, and agricultural vehicle industries. The Rubber and Plastic group makes parts, both cosmetic and functional, primarily for automakers. The Special Machines group designs and builds machines for the automotive, appliance, and other industries to perform such manufacturing functions as welding, assembly, forming, heat treating, and testing. After rapid expansion in the mid-1990s, Newcor has incurred heavy debt, which became a burden on the company as it experienced a series of poor financial results. Losses have not only crippled the price of Newcor stock, but have made the company an inviting takeover target.

Newcor’s Origins Dating Back to 1933

The making of specialty machines was at the heart of Newcor’s heritage. Its direct ancestor was the National Electric Welding Machines Company, incorporated in Michigan in 1933 with a manufacturing facility in Bay City. The company was a welding machine maker for more than 30 years, listed on the American Stock Exchange, and created growth internally, with the exception of the 1946 acquisition of the Smalley-General Company. In 1967 National Electric Welding purchased a Canadian firm, Volta Welders, Ltd. A year later a Delaware corporation was formed to merge with National Electric Welding. On February 14, 1969, the reorganized corporation was named Newcor. Volta Welders would form the basis of Newcor Canada.

The reconstituted Newcor slowly added to its business. In 1972 it ventured overseas, establishing Newcor, N.V., in Belgium. The following year it made an acquisition, paying $1.5 million for the Wilson Automation Company. In 1975 Newcor created Machine Tool Company. Newcor made yet another acquisition in 1977, buying Eonic, Inc., makers of cams and camshafts, at the cost of more than $4 million in cash, plus notes and stock. In 1978 the company founded Newcor Ohio, but closed the unit after just two years. Newcor made a public offering of its stock in 1980 and began trading on the NASDAQ. A year later it bought a controlling interest in Indocomp, followed in 1982 with the $7.1 million acquisition of Dearborn Tool & Machine Corp. In 1985 Newcor continued its strategy of growth through acquisitions by acquiring a 51 percent interest in Arbotech Systems, followed by an 81 percent stake in Rochester Gear, Inc., for which it paid $2 million. Several months later Newcor would purchase the remaining 19 percent of Rochester Gear.

For all its attempts at diversification, which extended the company into seven lines of business, Newcor still relied on the making of specialty machines to provide the lion’s share of its revenues, an area that was subject to downturns. With a sputtering economy in the late 1980s, Newcor was forced to retrench. The Belgium operation was liquidated in 1986. Indocomp was liquidated in 1987. The company’s stake in Arbotech was sold in 1988. By 1989 Newcor retained the firm of Kidder, Peabody to help it explore the possibility of selling all or part of the company’s assets. Late in that year, Newcor entered into discussions with an unnamed suitor about selling off its machine manufacturing group and did not dismiss the possibility of selling the entire company. Early in 1990, however, management announced that it had ended all talks and that it now planned to focus on what it called internal strategies to strengthen the company. Little more than two weeks later, Newcor closed its Canadian operations, citing poor sales of the subsidiary’s custom welding and assembly equipment business. The company’s other facilities were expected to provide enough capacity to support customer demand.

The 1990 Clean Air Act Amendments Spurring Growth

Far more important to the fortunes of Newcor than any belttightening measures were the 1990 Clean Air Act amendments passed in the United States, which created tougher emission and fuel-efficiency standards for vehicles. Newcor was positioned to capitalize on the auto industry’s need to increase spending on engines and transmissions. The company began a run of strong growth. Sales jumped from $79.9 million in 1990 to $98.7 million in 1991, with profits increasing from $1.2 million to $5 million. In 1992 Newcor moved to achieve a better balance between its special machine and precision parts businesses by acquiring the Midwest Rubber Co. unit from Sudbury Inc. for approximately $3.2 million. Midwest Rubber manufactured transmission shift boots and seals, as well as healthcare equipment parts.

Prospects in the auto industry continued to look promising for Newcor in 1993. Car manufacturers began ordering new machine-tool equipment in an effort to increase productivity, cut costs, and roll out new products more quickly. Newcor, in turn, was catching the eye of many investors. By 1994, however, the company was suffering another downturn, which management attributed, for the most part, to cost overruns. Almost 60 percent of its business still came from the manufacture of specialty machines and only 40 percent from precision parts. In February 1995, after several consecutive quarters posting poor results, Newcor named W. John Weinhardt as its new president and chief executive officer.

To help move the company from what he called slow- to no-growth businesses to more stable businesses, Weinhardt added to Newcor’s Rubber and Plastics group, augmenting Midwest Rubber with the purchase of three separate companies: Boramco, Production Rubber Products, and Rubright Industries. The total cost of these acquisitions was approximately $11.6 million. The deals were finalized by early 1996. Shortly thereafter, Newcor sold the Wilson Automation division to ABB Flexible Automation. To further narrow the focus of Newcor, Weinhardt then announced that he was looking to sell off the company’s Machine Tool and Eonic divisions, which he characterized as stand-alone businesses that provided little synergy with Newcor’s other interests. In October 1996, he sold the Machine Tool operation, and several months later divested Newcor of its Eonic division. In the meantime, Weinhardt added to the Rubber Plastics business by purchasing for approximately $8 million Plastronics, Inc., a Wisconsin company with $16 million in annual sales. In essence, Newcor sold off half its sales base, which it replaced through acquisitions. Now 80 percent of Newcor sales came from components, and Weinhardt was predicting that the company could top $300 million in annual sales by the end of the century. He also was talking about even further acquisitions, an ambitious plan given that the company had lost money in 1994 and 1996 and posted a meager profit of $900,000 in 1995. The company would realize record sales of $130.8 million in 1997 and net income of $3.9 million, but Newcor had not shown strong results for a long enough period of time to justify Weinhardt’s optimism.

Nevertheless, late in 1997 Newcor closed on a deal to acquire Machine Tool & Gear Inc., makers of pinion and side gears, output shafts, and rear-axle shafts for auto manufacturers. It also signed an agreement to purchase the Deco Group, which made precision components for cars and trucks. Then early in 1998 Newcor signed an agreement to purchase Turn-Matic Inc., maker of such automotive parts and components as oil-filter adapters, main-bearing caps, and intake and exhaust manifolds. For the quarter ending on January 31, Newcor announced that it would lose more than $1 million, but Weinhardt maintained that a poor first quarter would not have a long-term impact on the results for the year, once all the recent acquisitions had been digested.

Wall Street investors, however, were not as enthusiastic about Newcor as was Weinhardt. The company had incurred heavy debt in acquiring its new acquisitions. As a result, the price of Newcor stock was soft. Its average price in 1994, the year before Weinhardt shifted the company away from specialty machines, was $9.20. During the first six months of 1998 Newcor stock averaged $9.06, and on July 13 dipped to $7.81. Weinhardt insisted that the stock was undervalued and predicted that the company would still post record sales of $250 million by the end of the year, despite a strike at General Motors, one of Newcor’s major customers.

Naming Keith Hale President and CEO in 1998

Newcor failed to meet Weinhardt’s expectations. Losses mounted over the final two quarters of 1998 and the price of Newcor stock fell accordingly. It dropped to the $4 range by October and reached a low of $3.38 on December 2. But by that time Weinhardt was out. According to a company press release, he left“to pursue other interests.” Named to replace him as president and CEO was Keith Hale, who had served as general manager at Deco International before it had been acquired by Newcor. The 58-year-old Hale had originally planned to retire from business, but opted to take the Newcor position after he was approached by the company’s board.

Company Perspectives:

We continue to grow through customer and supplier partnerships, technology, operational excellence and focused acquisitions. Newcor is dedicated to the concept of meeting or exceeding the expectations of its customers. Excellence in customer satisfaction is a key element of Newcor’s operating philosophy. Technology —both in our products and our processes —is an important part of the foundation upon which we are building a sustainable competitive advantage.

Hale quickly set about establishing credibility for Newcor. He admitted in an interview, “Our stock has not performed well for investors. We have not delivered to our bottom line the last several months, and we have no choice but to turn that around. …It is not, however, anything that isn’t fixable.” Some of the changes Hale instituted were minor, such as moving the end of the company’s fiscal year from October 31 to the calendar year ending on December 31. More significantly, he closed a rubber and plastics plant located in Auburn Hills and replaced the head of the Machine Tool & Gear group. Furthermore, he looked to expand sales to Europe and to investigate ways to consolidate and cut costs.

By March 1999 Hale was initiating additional efforts to revitalize Newcor. He announced that the company would invest $7 million to expand production capabilities in the Metals group to support new business that had been captured in the first six weeks of the year. He further announced a stock repurchase plan that would not only acquire shares for a stock option program but also demonstrate that the company had confidence in itself. After Newcor lost $1.15 million in 1998, Hale struck an optimistic note about prospects for 1999, projecting $275 million in sales and a net profit. He also hoped to see Newcor stock trading in the $8 range. In June, as part of an effort to consolidate operations, Hale decided to close the Livonia plant that Newcor had acquired just two years earlier in the Production Rubber Products transaction. The company also elected to trade its stock on the American Stock Exchange instead of the more volatile NASDAQ. Financial analysts, however, remained skeptical about Hale’s moves. Wall Street at the time preferred the stock of automakers over auto suppliers, and money managers favored much larger companies than Newcor. By midyear, Newcor stock still traded below $5. Unfortunately for Hale, he also suffered health problems that led to surgery in 1999. His recovery hindered his effectiveness during a crucial period for Newcor.

In late September 1999, Hale was forced to admit that the company would not be able to meet expectations for the year. Investor response was swift and harsh. The price of Newcor stock reached its lowest point since the company went public in 1980, plunging on October 19 to a low of $1.44 a share. For the year, Newcor would lose $11.6 million, despite posting record sales of $258.5 million. Although the bottom line was weak, the company clearly was generating business, leading many to speculate that with its depressed stock price Newcor might make an attractive acquisition target.

Exx Inc., a Las Vegas-based holding company, began to acquire shares of Newcor stock. On October 18 it bought 50,000 shares at $1.50 each, and another 250,000 the next day when Newcor stock reached its nadir of $1.44. Exx bought 272,000 shares on October 20. Then flying under the radar, Exx acquired stock in much smaller blocks, ranging from 900 to 2,000. By January 2000 it had accumulated 13.25 percent, or 652,200 shares, of Newcor, with Exx’s chairman and CEO, David Segal, owning an additional 24,000 shares. Exx described itself as a company that specialized in turning around depressed businesses. Among its varied interests were an electronics division that made wiring for the telecommunications business and motors for vending machine and floor cleaners; toy manufacturers Handi Pac and Harry Gordy International, holders of the license to make products based on the children’s television show the Power Rangers; and Hi-Flier Manufacturing Co., a kite maker.

Newcor responded to a potential takeover by instituting what it called a“shareholders rights plan” and Exx deemed a“poison pill.” A further deterrent was contained in a bond indenture agreement that would require the immediate repayment of $125 million in debt if any party amassed 35 percent of Newcor’s outstanding stock—a provision that would add substantially to the purchase price. Moreover, once a party obtained as little as 10 percent of Newcor’s stock, the company’s board could trigger its unspecified shareholders rights plan if it judged that the investor was“seeking short-term financial gain which would not serve the long-term interests of the company.” Although Segal and Exx controlled more than the necessary level of stock, Newcor’s board held off, awaiting developments.

In April 2000, Hale resigned because of continuing health problems. He was replaced on an interim basis by James J. Connor, who Hale had brought in to serve as the company’s chief financial officer and who had served earlier as acting president for six months following Hale’s surgery. By the end of the month Exx finally formally declared its intentions by making a proposal that would essentially purchase Newcor at a price of $4 per share. Exx maintained that it had sought to negotiate a mutually acceptable transaction with Newcor’s board of directors but never received a meaningful response. While urging shareholders to take no action until the unsolicited offer was reviewed, Newcor management was clearly under the gun. Exx increased its stake to 15 percent, publicly urged the board not to activate its poison pill provision, and pleaded its case for representation on the board, pointing out that Exx now held more stock in Newcor than all of its officers and directors combined. In August, Exx proposed that it purchase newly issued shares of Newcor stock, which would increase its stake to almost 35 percent, and then acquire effective control of Newcor, by having Segal become chairman and CEO and by gaining control of three board seats. The offer was rejected. A few days later, Exx withdrew its original $4 per share offer, citing the board’s refusal to negotiate or withdraw its poison pill measure. Segal did not dismiss the possibility, however, that Exx might continue to purchase additional shares of Newcor stock in the open market.

Key Dates:

1933:: National Electric Welding Machines Company is incorporated in Michigan.
1969:: Company is renamed Newcor, Inc.
1990:: U.S. Clean Air amendments trigger company growth.
1995:: W. John Weinhardt is named president and CEO.
1998:: Keith Hale replaces Weinhardt.
2000:: Poor health forces Hale to step down.

As the Newcor board removed the interim title to make Connor its president and CEO in August 2000, the company continued to struggle. It announced that it would shut down the Turn-Matic plant, laying off its 75 workers. Year-end results were also disappointing, with another net loss anticipated. By February 2001 the Newcor board finally compromised with Segal and Exx, which now owned 17.5 percent of the company’s stock. Segal, plus a director to be nominated by Exx, would be added to the board, which would increase in size from seven to nine. Newcor also would amend its shareholders rights plan to allow Exx to increase its ownership stake to 23.5 percent by December 31, 2001; 25.5 percent by December 31, 2003; 27.5 percent by December 31, 2004; and 30 percent thereafter. In turn, Exx agreed to forgo any proxy contest through December 31, 2004. With so many variables in its operations and management, the prospects for Newcor would remain uncertaifor the foreseeable future.