Ladish Co., Cudahy, Wisconsin

Situation:

Seven days prior to Robert Amter’s appointment as Chief Executive Officer of $210 million in sales Ladish, the company had defaulted on the interest payment for its $110 million in subordinated bonds. The default was forced by Ladish’s bank because of its rapidly deteriorating operating and financial condition.

Ladish had two manufacturing businesses and 1,900 employees:

Cudahy Forgings Division with a 1.7 million square foot plant in Wisconsin.  $160 million in sales of highly technical forgings sold to jet engine, aerospace and missile original equipment manufacturers.  9 unions.  Division was a heavy money loser and negative free cash flow business.

Industrial Products Division with two 300,000 square foot plants in Kentucky and Arkansas.  $50 million in sales of corrosion resistant valves and butt-weld fittings sold to pipe, fitting, and industrial mill supply dealers.  Division had a positive cash flow and 12% operating income margin.

Problems:

Losing $2.2 million in operating income each month for six consecutive months.

The forgings division’s performance was poor with high delivery delays, costly preproduction engineering and manufacturing mistakes, and high rework and scrap costs.

Prior management had offended the management of General Electric’s Aircraft Engines Division, a $24 million per year forgings customer, resulting in Ladish being terminated as its jet engine component supplier more than one year earlier.

Other customers were concerned with Ladish’s default and were threatening to terminate contracts.

The collapse of the jet engine market had resulted in excess forging capacity and ferocious price competition.  Ladish was not the low cost producer.

The NASA and military budgets declined reducing missile and rocket sales by almost 50%.  These were Ladish’s most profitable products.  Prior management had alienated the heads of NASA’s and Lockheed’s ASRM (Advanced Solid-propellant Rocket Motor) project.

Employees were demoralized: Salaried employees had been subjected to a penal colony style of management. Hourly employees in Wisconsin were organized into 9 unions.  Prior management had alienated union members by not being credible for several years. Unions were hostile.

There was no strategic focus.  Managers were working on 47 priorities  –  most of which were trivial and not central to the company’s core and turnaround. The company was managed through systems.  It did not have a hands-on people, customer and product manufacturing orientation. It had under spent annually in capital expenditures and equipment maintenance.

Corrective Actions & Results Achieved:

In June 1992, just three months after being appointed Chief Executive Officer, achieved a positive operating profit after 6 straight months of losses

Actual (000$)         Total for Prior 6 months         Average Month              Month of June 1992                 Month of July 1992  

Sales                                      $94,891                                   $15,815                           $18,029                                   $19,601

Operating Profit (Loss)      (13,537)                                    (2,256)                                  512                                         1,256

       % of Sales                          (14.3)%                                   (14.3)%                                 2.8%                                      6.4%

The primary action taken to turnaround the company was the development of “teamwork and coordination of the operating functions”. Open two-way cross-functional communication was the catalyst in developing synchronized, coordinated operations. But the elimination of the penal colony culture was just as important. We developed a metric but rational atmosphere with candid, open give-and-take communication at all levels. People who just months prior had their noses rubbed in the dirt were working feverishly to fix the company.

We were insolvent and might go out of business. We did technical things such as installing synchronous manufacturing. And purchasing sub-scale equipment to eliminate scrap by testing highly complex forgings prior to full-scale production. Intensely worked to get General Electric back as a customer. But the change in communication, the culture and attitudes was critical.

The cost reductions we effected:

» Reduced salaried employee headcount by 125 and 26%. Reduced direct labor content 6%.

» Closed the California forgings plant for a $1.4 million annual overhead reduction.

» Reduced forgings division’s scrap and rework costs 26%.

» Reduced selling, general and administrative expenses 23%.

Improved working capital:

Actual  (millions $)                                             1992                1993                % Improvement

Average, month-end working capital              $69                 $39                      57%

               % of Sales                                                30%               19%

Inventory was reduced 13%. Accounts receivable days sales outstanding were reduced from 44 days to 41 days.

Realigned the forgings division’s organization:

» Assigned the best engineers to the Forge Shop.  These engineers had been working in non-engineering administrative jobs.

» Moved the cost accounting department to the manufacturing floor. Its offices had been located on the third floor of Ladish’s office building with little involvement with manufacturing supervisors and engineers.

General Electric Aircraft Engines Division. After several meetings and conversations with GE’s Division management, it was certain that Ladish would not be reinstated as a supplier. We next met with a Wisconsin Congressman who was Chairman of the House Armed Services Committee. Our presentation emphasized that Ladish was not asking General Electric to give it any business. We advised that Ladish was justified in bidding for GE business because:

First, we are only asking to be permitted to submit a competitive bid for the business  –  on an equal basis with other manufacturers.

Second, we are the lowest cost Isothermal forging manufacturer.

Third, we are the only manufacturer with zero quality defects and no in-service failures. This was particularly important to single engine military jet aircraft.

Ladish regained General Electric as a customer. Our first opportunity to bid for forging orders resulted in a $31 million award to be shipped over three years.

Started developing new sources of sales with higher profit margins:

» Just 45 days after Ladish defaulted on its bond interest payment, purchased shear forming equipment to begin the development of a new jet engine product  –  thin wall turbine cases.  In addition, put a $250,000 deposit on $3 million of used shear forming equipment needed for production.

» For the Industrial Products Division, started to expand sales coverage in existing and into new channel segments.  Hired commission manufacturers’ reps that specialize in the pipe, fittings and industrial mill supply channel segments.  In the past, the division relied solely on six company employed salesmen which was not effective sales coverage.

The best strategic alternative that management proposed to the new owners was to have merged Ladish with the $125 million in sales Cameron Forgings Division of Cooper Industries.  This would have been a complementary merger of Ladish’s titanium technology and hammer equipment with Cameron’s nickel and press equipment. It would have given Ladish a dominant supplier position with aircraft engine manufacturers.

The owners could not be convinced of the merits of this merger. Subsequently, Wyman-Gordon Company, a large forgings competitor, merged with Cameron.

Achieved the improvements at Ladish without bringing in new management:

» By regaining managers’ self confidence.

» By installing the management process that emphasizes cross-functional communication.

» By developing disciplined strategic focus using an organized approach to complete a limited number of priorities.

The officers and managers of Ladish are some of the finest educated and experienced forging engineers in the world. Although fixing Ladish was difficult, partly due to the lack of cash but also because of the conflict between bondholders and equity holders, this very talented management group made it somewhat easy to effect the operational improvements.

Ladish was not able to cure its debt default. To force one large bondholder who would not voluntarily convert from debtor to equity owner, we used a prepackaged Chapter 11  bankruptcy resulting in the following net worth:

Actual (000$)                             1992           1993   

 Net Worth                              ($22,141)      $32,657

 

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