The Die Wasn’t Cast After All
At 65 and under pressure to retire from money-losing Cimco Inc., founder Russell T. Gilbert fought back and came up with a plan that kept his original plastic-molding business intact and saved more than 350 jobs in Orange County.
In the process, Gilbert withstood a boardroom battle that he describes as “the worst nightmare I ever went through” and returned the company to profitability.
As part of his rescue plan, Gilbert struck a deal to sell Cimco for $32.6 million--$10.50 a share--to M.A. Hanna Co., a Cleveland maker of specialty plastics and polymers. Hanna also assumed about $18 million in Cimco debt.
Hanna acquired 97.4% of the shares in a tender offer last week. Next week, it will sell the plastics molding operation, which Gilbert started in 1959, back to Gilbert, key executives and an employee pension plan.
The price for the molding business was not disclosed, but Gilbert will retain a 51% stake in the new privately held company, which keeps the Cimco name and will operate three plants in Costa Mesa and one in Dayton, Nev.
About two dozen corporate staff members who were needed in a public company but not a private one will lose their jobs in the sale and repurchase transactions.
Gilbert, a low-key, slender man who speaks in quiet tones, is clearly proud of the deal with Hanna. Cimco’s sale gives shareholders twice what the stock was selling for a year ago and well more than its low of $3.375 a share at the end of June.
“I was really blindsided when they tried to get me off the board” at the end of May, he said about the boardroom fight. “If they had been successful, we would not be seeing shareholders smiling on the way to the bank with $10.50 a share.”
Two directors who quit in August after Gilbert refused to retire recognized the job done by Gilbert and the remaining directors. A week after the deal was announced, they cashed in options to buy more stock at $7 a share.
“No one called to say they were wrong, but it took guts to come in here with checks to pay for their shares,” Gilbert said. “They made $17,500 each off a beat-up old chief executive they couldn’t get rid of.”
With a clean bill of health from his doctor, Gilbert said he’s prepared to remain at the helm for five years and then sell his shares to the employee pension plan. “They’re the people who built this company,” he said.
Gilbert said he will concentrate on improving management and expanding the business of the new Cimco, which now makes about 200 products such as asthma inhalers, syringes and telephone shells for some 100 customers. With annual sales of plastic molding products running at about $35 million now, the company should grow 15% to 20% a year, he said.
“Our Nevada plant is doing really well making air bag components and other plastic parts,” he said. “We have to get our Southern California operations settled down and making money again.”
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Cimco started as a simple business, producing plastic controls for wall thermostats, hot water heaters and furnaces for General Controls in Glendale. The company soon began expanding, forming plastic parts for a television manufacturer, and pulling down other contracts.
New technology allowed Cimco to offer such diverse products as temporary dental caps and shells and covers for the young computer industry. In 1980, Cimco formed its Compounding Technology Inc. subsidiary to make specialty plastics and plastic fillers, which add qualities like strength and fire resistance. In recent years, CTI has been the fastest-growing, most profitable part of Cimco--and the segment that stays with Hanna in Cleveland.
Cimco decided to go public in 1986.
“It was an ideal time to go public,” Gilbert said. “We were profitable, growing and had good contracts. We were supplying the high-tech companies, and that industry was doing well.”
Cimco then had sales of $26.2 million, and the extra $6.75 million it raised in its public offering made it more competitive and helped it post annual sales growth every year. Revenue hit $83.2 million for fiscal 1995, which ended April 30, and was running at an annual rate of $112 million through the first six months of its current fiscal year.
But a series of setbacks in recent years sent Cimco reeling and almost killed the long-profitable company. It lost $2.7 million over the last two years. In addition, the company’s earnings for 1992 and 1993 sagged considerably, giving directors four years’ worth of financial woes to make them wonder if Gilbert was still up to the task.
In the early 1990s, Cimco’s biggest customer, Minnesota Mining & Manufacturing Co., which accounted for 56% of its business, began taking some of the molding business in-house. In addition, a number of 3M’s patents had expired, opening it to more competition and reducing sales of products that Cimco helped to supply.
The St. Paul, Minn., giant’s contribution to Cimco’s revenue fell to nearly 10%. Cimco then decided to shut down its molding operations in Corona and build a plant in Dayton, Nev. But it miscalculated the cost of the move by about $1.5 million, putting the company on the ropes and contributing to its $1.2-million loss in 1994.
Cimco needed a major customer--a “big kill,” Gilbert said--to recover from the two jolts it suffered. The customer it picked up was AST Research Inc., the now-struggling Irvine company that in 1994 was the world’s sixth-largest computer maker.
Their contract called for Cimco to supply the shells for AST’s new Ascentia notebook computers. Cimco spent more than $1 million getting production going in late 1994--and never got a chance to recoup it.
“We had two months of good operations, and then we were cut off,” Gilbert said. “AST closed its Fountain Valley plant [in January 1995] and took its notebook production to Taiwan. I had to lay off 150 people, but we still had big overhead costs to absorb.”
Cimco, meantime, was being pushed by directors James L. Doti, president of Chapman University in Orange, and Kenneth E. Hendrickson, a Western Digital Corp. executive, to split itself up and sell the parts.
“Ken and I felt strongly that the value in the separate parts of the company was greater than the value of the company as a whole,” Doti said.
They and other directors also thought that Gilbert was taking too long to revive the company.
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Gilbert decided in May to retire as president and chief executive, reducing his role to chairman of the board. When the company revealed his plans, however, shareholders as well as the company’s investment banker, PaineWebber, urged Gilbert to remain until operations stabilized or the company was sold. He withdrew his retirement.
But Doti, Hendrickson, and, for a while, other directors on the seven-member board tried to hold him to his promise during innumerable meetings.
“Every time I turned around, there was a move by outside directors to replace me,” he said. “You’d win a battle and then get ready for them to hit you again.”
Gilbert finally won a showdown in mid-August. Doti and Hendrickson, the only two who voted against him, resigned.
The company returned to profitability in its second quarter, which ended Oct. 31, but Gilbert said the recovery could have occurred earlier had he not been so distracted.
As it turned out, Doti said, the board did just what a board should do: look out for shareholders’ interests and focus on a long-term approach for maximizing shareholder value.
“Sometimes you have to put a chief executive, especially one with a large interest, under the gun,” Doti said. “I think the board put appropriate pressure on Russ and at just the right time.
“I’m thrilled we moved in this direction,” he said. “This is pretty much a doubling from the stock price a year ago. The entire board, including Russ, should be congratulated.”
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Man With a Plan
Russell T. Gilbert, wheeling and dealing at an age when most men are looking forward to retirement, engineered a plan to sell the company he founded 36 years ago and buy back a portion of it. Not incidentally, it will keep more than 350 jobs in Orange County. A look at the man and the company:
Title: Cimco president and chief executive
Age: 65
Education: Bachelor’s degree in mechanical engineering, University of Arizona, 1953
Background: Designed guided-missile hardware for Hughes Aircraft from 1953 to 1958; then joined UFE Inc., his father’s Minnesota-based injection molding business; returned to California in 1959 and founded Cimco Inc.
Personal: Married, four children, five grandchildren
Plans: “Cimco has some rebuilding to do in terms of image and profitability, and I plan to devote myself full time to that”
On turning company over to employees: “This is a tough business and they are the ones who are responsible for its success. They deserve to wind up being the owners.”
Cimco Inc. at a Glance
Headquarters: Costa Mesa
Business: Industrial and medical plastics
Founded: 1959
Purchaser: M.A. Hanna Co. of Cleveland
Purchase price: About $33 million
Employees: 589; 438 in Costa Mesa
Market: Nasdaq
52-week stock high: $11
52-week stock low: $3.38
Last closing price: $10.25 on Jan. 26*
* No subsequent trading due to sale of company
Earnings Fall Despite Sales Increase
A 13% increase in sales last year was offset by rising manufacturing costs and the loss of a major contract, leaving Cimco with a net loss for the second consecutive year. Sales and net income, in millions:
Sales
1991: $64.5
1992: $70.1
1993: $76.9
1994: $73.9
1995: $83.2
Income
1991: $2.6
1992: $1.1
1993: $1.5
1994: -$1.2
1995: -$1.5
Source: Cimco Inc., Bloomberg Business News; Researched by JANICE L. JONES / Los Angeles Times
