Monthly Archives: October 2019

Swarfcast Ep. 57 – Jerry Gates on Running Well Oiled Machines

By Noah Graff

Today’s podcast is about reducing friction in our machining and our lives. Our guest is Jerry Gates, founder of Gates Engineered Lubricants, a company near Houston, Texas, which produces metal working fluids, industrial lubricants, and rust inhibitors for a variety of applications.

Scroll down to listen to the podcast.

Main points of the interview

(3:15) Jerry explains the metal working products his company sells such as forming fluids, cutting fluids, corrosion inhibitors, and cleaners. The company’s flagship product, Aladdin 334, is used for deep hole drilling applications such as ejector drilling, trepanning, and gun drilling.

(5:10) Jerry explains the ejector drilling jobs faced by TimkenSteel, one of his company’s significant clients. TimkenSteel drills holes from 2 inches up to 14 inches in diameter through bar stock as long as 60 feet. This requires a mineral oil based product with extreme pressure additives and anti-welding additives because of the long duration of the cut.

(6:15-10:30) Jerry talks about his background. He is the son of a carpenter. He worked in construction but changed his career to selling industrial supplies. He began his training in coolants and lubricants with Master Chemical. Later in his career, Jerry worked for Castrol’s marine division, where he learned more about industrial lubricants.

(10:40) Jerry talks about what led to him founding Gates Engineered Lubricants in 2005. After decades working in the industrial supplies business, he switched careers to sell insurance, but former clients still called him to consult them on their metal working needs. He helped a former Castrol client with its injector drilling problem, which led to him founding his company.

(15:25) Jerry says it is easier for his smaller company to solve customers’ problems because he can focus on executing their specific applications. He says his larger competitors are often set in their ways, using older methods that are less specifically tailored to clients.

(15:55) Jerry talks about improving TimkenSteel’s tool life for injector drilling from 40 feet to 450 feet since Gates took it on as a client 12 years ago. He says his company is usually able to increase clients’ tool life 30-40%.

(16:45) Jerry talks about how Gates’ oil differs from competitors in metal working fluids. His company’s oil based machining products contain no chlorine or animal fats, which he says are still used by 90% of shops. We joke that this makes his oil “kosher.” He says products with animal fats and chlorine are hard to dispose of, bad for the environment, and have been banned by the European Union.

(21:30) Jerry talks about vegetable oil products. Gates offers a few of them, but it focuses more on mineral oils because vegetable oils have the same disposal problems as other products.

(29:30) Jerry discusses the complications that resulted from the Trump administration’s roll backs on environmental regulations. He also talks about the negatives and positives of the Obama administration’s environmental policies.

Question: Are you happy with your tool life?

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A Time to be Bought, a Time to Die

By Lloyd Graff

It seems like it’s the season for a lot of machining businesses to be selling out or auctioned off. I have worked as an advisor on some of these situations as well, so I have had an inside look at buyers and sellers contorting to get a deal done on an operating business. Selling a job shop as a going concern is really tough unless it is a big and growing business, blessed with depth of management and ownership that is clear about what it wants and decisive when an appropriate buyer materializes. Having a limited debt also helps because it keeps lenders out of the negotiations.

There are buyers constantly looking for deals for attractive firms. Often these sellers are businesses that have already been sold before.

A company I am familiar with near Chicago in the screw machine business started more than 60 years ago with three old Davenport multi-spindles. They may still have those Davenports, along with 100 other ones rebuilt several times, as well as Acmes and New Britains, even a few Brown and Sharpes. They have bought out many small players along the way, been highly disciplined on capital equipment purchases, built up a factory in Mexico, diversified their locations, avoided unions, and consistently rewarded their private equity owners. Their reward—being sold every five to eight years to a new private equity company that can take advantage of fresh depreciation to shelter cash flow.

For better or worse, this is the game for profitable job shops these days because private equity firms are decisive and clear about what they are looking for. For profitable businesses over $10 or $15 million in sales, private equity firms are usually vying against other firms like themselves because most other job shop owners do not have the expertise or banking connections to compete with them for clean, nonproblematic companies.

However, some job shop owners like John Habe IV of Metal Seal Precision in Mentor, Ohio, have decided to challenge the private equity guys on deals that are a little too small for them or that are turn around situations.

John has acquired several turned parts firms, most of them under the radar for private equity firms because they lack profitability or size. But they fit into John’s group of companies. They add value that is greater than potential auction value, or they have extra equipment that can be quickly turned into cash.

John has developed internal talent that can dissect the financials of a target like a private equity firm would do, and he has access to consulting firms to augment his own people. He also has his brothers as partners to run the day-to-day operations of Metal Seal.

Most job shops are not easy turnaround candidates or fertile turf for private equity groups. They usually end up as auction or liquidation situations, often dictated by a lender, but not always.

There are no perfect times to sell or buy a job shop. Often owners wait for a market improvement to build up their free cash flow numbers. Private equity buyers and most other potential buyers usually want to buy a job shop for a multiple of EBITDA (earnings before interest, taxes, depreciation, amortization). That multiple is usually 3-5 times depending on the buyer’s perception of the company’s strength.

This is not a rule set in stone. Businesses that are breaking even or losing money can be sold if they have some vital ingredient that other companies covet, like people, location, unique customer relationships, or unusual processes or licenses that are hard to duplicate such as nickel plating or FDA approvals. Sometimes a synergy with a company’s customer base enhances the value of a business.

Yet the sale of businesses as going operations is usually a long contorted happening. Lawyers always slow things down with cumbersome contracts which require other lawyers to untangle. Environmental issues often pop up. Family jealousies derail many deals. Often buyers and sellers dislike one another, and emotions count when family businesses are being sold to outsiders.

When you see the auction brochure of a competitor come across your desk it was probably a candidate for a buyout as a going operation at one time. In the end, at least one important missing piece led to its eventual liquidation.

Question: Will the 2020 election affect your business or job?

 

 

 

 

 

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Swarfcast Ep. 56 – The Screw Machine Guy, Part 2

By Noah Graff

Today’s podcast is part 2 of an interview we did with Wes Szpondowski, plant manager at Wyandotte industries, a 60-year old screw machine shop in Wyandotte Michigan founded by his grandfather.

Wes talks about his aspirations to keep Wyandotte relevant for the next forty years. He also discusses the fatal traps a machining company can fall into if it’s not careful.

Scroll down to listen to the podcast.

Main Points of the Interview

(3:18) Wes discusses Wyandotte’s preferred quantities for jobs. He says the company’s sweet spot is 15,000 to 20,000 pieces, as opposed to million piece orders.

(4:08) Wes talks about Wyandotte’s automotive work. He says the company is Tier 2 or Tier 3. He says that American car companies always try to take every cent they can from suppliers, while Japanese automakers are less greedy and gravitate toward forming longterm partnerships.

(7:20) Wes says the shop has no plans to buy million dollar machines. It doesn’t have the work to justify those machines or the stomach for the risk. He says that the company can’t survive running mostly Acmes, not because of the inferiority of the machines but because it will be too difficult to get the next generation to work on them.

(10:10) Wes says he plans to buy LICO machines for Wyandotte. He says they are like Brown & Sharps that can do more sophisticated parts with a quick setup time. He said LICOs are much faster than typical CNC lathe and he thinks it’s a machine that young people would enjoy running. He thinks that $250,000 to $350,000 is a price range that is sensible for his company.

(17:40) Wes says he likes to examine the course of events that led machining companies to go out of business. He calls it “auction forensics.” He says people often repeat the same story—the grandkids ran the company into the ground and the company bought expensive equipment that did not pay off.  As a grandson of Wyandotte’s founder, Wes says the story gives him extra impetus to work hard and make responsible equipment decisions.

(21:52) Wes talks about his first job at Wyandotte. He had to work his way up from the bottom and was not even given a full-time shift to start. Some of his coworkers liked him, and others felt threatened by him.

(25:50) Wes gives his thoughts on whether or not he will have partial ownership of Wyandotte in the future. He says ownership is a possibility, but in any case, he is grateful for the privilege of working at the company for so long and being plant manager.

(27:00) Wes says he is able to relate to the company’s employees because he started from the bottom.

(28:10) Wes talks about his admiration for his uncle who owns Wyandotte. He respects that he is almost 80 years old and still comes to work everyday.

(30:30) Wes likes his role as plant as plant manager at the company. He sees himself working as plant manager for the foreseeable future because the company does not have a replacement with his skills both for working with the machines and with the employees.

Question: Do you think we’re headed for a recession?

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The Auction Deal

By Lloyd Graff

Today, I thought it was time to write something that I actually know something about.

Why are some of the big players in the machining business selling out or being auctioned off these days?

One of the biggest screw machine sales in years is coming up in November at Triumph Manufacturing in Tempe, Arizona, just outside of Phoenix. Triumph’s owner Chris Mueller went into business in the late 1960s after coming to America from Switzerland as a Tornos employee. Mueller built Triumph into a strong player in long run parts and has been running the company with his daughter in recent years. He has had many ups and downs over the years but always managed to survive because of his technical acumen and resourcefulness. He was on the verge of selling to numerous operating groups but never seemed to get a deal that worked for all parties.

A person who is familiar with Mueller and Triumph Manufacturing told me he thinks Mueller felt an American was probably incapable of running his many Swiss and German screw machines effectively. I have also heard that he preferred Hilco as an auction firm because he liked their prominence in Europe. I believe that Triumph would have sold for quite a bit more money several years ago, but Mueller always believed he would turn the company around—a trap many entrepreneurial owners fall into.

Finally, a few months ago, he made the decision to let go and allow the auction process to proceed. Competitors quickly grabbed all the major contracts. Auction groups formed almost overnight to bid on the project. I chose not to be involved in the bidding because I saw the market weakening in Europe for the Swiss and German machines. With a falling Euro, I did not have the stomach for the risk, but many others did.

From a screw machine dealer’s viewpoint the seventeen 20mm 8-spindle Tornos machines are the key element in the sale. If they go at retail prices the sale will be a triumph. If not, c’est la vie. I wish them well.

Questions:

Do you like buying at Auctions?

Do you feel you are a more disciplined buyer bidding online?

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Swarfcast Ep. 55 – Wes Szpondowski, Screw Machine Guy

By Noah Graff

Today’s podcast is part 1 of a 2 part interview we did with Wes Szpondowski, plant manager at Wyandotte industries, a 60-year-old screw machine shop in Wyandotte, Michigan, founded by his grandfather.

Scroll down to listen to the podcast.

Wes gave me the inside scoop of what it takes to run a high production shop floor. We talked about getting the most out of employees, updating equipment, and his mission to NOT waste the company’s money.

Main Points of the Interview

(3:05) Wes gives history of Wyandotte industries. His grandfather made parts on Acme-Gridley screw machines for the custom fastener market—mainly various types of nuts. The company’s original machines were the Acme Model G machines that were taken from a junk yard.

(5:25) Wes talks about the evolution of Acme multi-spindles that Wyandotte used over the years. The company graduated from Model G to Model R and then to Models RA and RB, which people joked was the Cadillac of Acme.

(6:30) Wes talks about how Acmes were designed to run forever.

(10:50) Wes talks about taking over Davenport screw machine work from one of Wyandotte’s suppliers. He says it is his harder for him to find people with skills to run Davenports than to run Acmes, but he likes the speed of Davenports and likes that attachments for Davenports are more affordable than those for Acmes.

(13:35-20:45) Wes compares the challenges of making fasteners to those of more complex parts Wyandotte produces. He classifies the complex parts as “screw machine parts” such as pins, fittings and bushings. He talks about how Wyandotte’s employees have developed their skills over time, using more attachments and limiting the need for second ops.

(20:50-22:30) Wes talks about the company’s gravitation to using Mazak CNC lathes.

(22:35) Wes talks about when he bought Wyandotte’s first Mazak, fall of 2009.

(23:55) Wes talks about how he saved several hundred dollars on airfare when he traveled to New Jersey to buy the company’s first used Mazak. He says that no matter how rich a company may seem, being cost conscious with a company’s money is the only essential and ethical way to run a business.

Question: Do you think it is nuts to run 60-year-old Acmes?

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Talking to Strangers

By Noah Graff

Not long ago our company made a deal to purchase a significant amount of machinery outside the United States. The deal seemed like a great opportunity, but we thought the sensible thing would be to visit the seller before making any purchase because he was someone who we had never met before.

I traveled a long way to meet him, and we spent several days together looking at machines. He brought his wife along with him for the whole trip. We had dinners together during which they told me about their children. His wife repeatedly acted like a concerned mother when she noticed my runny nose. They seemed like decent people, and they gave us a good price so we made a significant deposit on some machines. In the end, things did not go as planned. The company attempted to pocket the deposit and did not send any machines.

We felt dumb. We asked ourselves, how could we not have realized we were being conned?

I recently finished listening to Malcolm Gladwell’s new book, Talking to Strangers, which sheds some light on our experience. The thesis of Talking to Strangers is that the majority of people are incapable of judging the true character of others based solely on “getting to know” them. The book contains many powerful examples of people who seemed genuine but then turned out to be liars, along with other examples of people who seemed suspicious but turned out to be innocent.

Talking to Strangers - What We Should Know About The People We Don’t Know, by Malcolm Gladwell.Early in the book, Gladwell tells a story about multiple double agents in the CIA who spied for Cuba for many years before being uncovered. The agents who were supposed to be spying on Cuba were in actuality spies for Cuba! U.S. Intelligence agents who were supposed to have been “experts” on judging the honesty of other people were made to look like complete fools.

Gladwell discusses another example of flawed human character assessment in a passage about judges in New York whose job is to choose which suspects should be released on bail and who is too risky to let out of custody. Several elite computer scientists, a Harvard economist and a bail expert from the University of Chicago created a computer program to research the ability of the judges for discerning which suspects should be released. From 2008 to 2013 550,000 defendants were brought for arraignment to the group of New York judges, and the judges released just over 400,000.

The researchers built an artificial intelligence system and fed it the same information that had been given the judges in the 550,000 arraignment cases, mainly the defendant’s age and criminal record. The artificial intelligence system chose its own 400,000 defendants to be released over that time period to see which 400,000 releasees committed the fewest crimes on bail and made their trial date. The 400,000 released by the computer were 25% less likely to commit a crime than those chosen by the judges. The computer program only had the defendant’s age and rap sheet to make its judgment, while the judges also got to hear the arguments from the lawyers and look the defendants in the eye.

Gladwell also writes about Neville Chamberlain misjudging Hitler after meeting him several times. He writes about the people who misjudged Bernie Madoff and sex offenders such as Jerry Sandusky and Larry Nassar.

Gladwell says that the usual inclination of people is to “default to truth.” People want to trust other people because that trust is what makes society function. If the default opinion of a youth sports team coach is that they are a pedophile nobody would let their child play on a team, and nobody would take a job as a coach.

If my default opinion of every person selling machines is they are trying to cheat me, I will never be able to make any deals. Business must go on, and life goes on because I know most people are relatively honest. Going forward I will try to keep my guard up, and I won’t put as much stock into looking people in the eye.

Questions:

Do you trust most people you do business with?

Have you ever been conned?

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