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A Turnaround Journey: How Secured Finance and Article 9 Restructuring Saved Heavy Duty Radiator

The story of Heavy Duty Radiator (now JMP Industries) is one of resilience, turnaround and reinvention. It is a story that was made possible through an Article 9 Restructuring, creative financing solutions, and a hands-on approach with critical contractors.

Once on the brink of failure and liquidation, Heavy Duty Radiator was able to shed its unsupportable debt, retain all of its employees, and reposition itself in a new market segment with long-term growth potential and higher margins.

Background and Business Model

Heavy Duty Radiator, previously operating as Detroit Radiator, was founded in 1999 with the purpose of manufacturing radiators and radiator cores, supplying them to large auto manufacturers in the U.S. However, as the domestic auto market began to shrink, Heavy Duty Radiator was forced to shift focus to supplying third-party repair shops with replacement radiator cores for vehicle repairs.

At its peak, the Michigan based company generated $7-10 million in annual revenue, employing between 30 and 60 across its U.S. facility and a subsidiary in Mexico where labor costs were lower. Heavy Duty Radiator’s initial success was tied to the American automotive industry, but significant changes in the market would set the stage for distress and create the need for change management and reinvention.

The First Pivot: From OEMs to Third-Party Repair Shops

Heavy Duty Radiator thrived in the domestic auto manufacturing boom, but by 2008, the automotive industry faced drastic changes. The recession, a collapse in demand, and increased foreign competition led to a significant reduction in American-made cars, which had a direct impact on Heavy Duty Radiator’s business. Foreign manufacturers such as Toyota and Hyundai entered the U.S. market, but they did not source radiators from Heavy Duty Radiator, instead relying on their own supply chains.

In response to dwindling demand, Heavy Duty Radiator pivoted to selling its products to third-party repair shops. These shops primarily serviced older cars, but this shift would prove unsustainable as a long-term strategy. As older cars comprising this market aged out, the demand for Heavy Duty Radiator’s products would continue to decline over time.

Opportunity in Reinvention: Government Contracts and Military Vehicles

Recognizing the looming expiration of their third-party repair business, Heavy Duty Radiator set its sights on a new market, this time aiming for contracts with the Department of Defense (DoD) and the Defense Logistics Agency (DLA). The plan was to produce radiators for larger military vehicles such as Humvees and tanks, which still required traditional radiator systems.

However, entering the defense market was no easy task. It required obtaining ISO (International Organization for Standardization) certification, ITAR (International Traffic in Arms Regulations) compliance, and other specialized qualifications. Heavy Duty Radiator successfully navigated these steps and became eligible to bid on government contracts. Yet, the timeline to win such contracts is unpredictable, and securing funding for upfront costs became a serious challenge.

In the meantime, the company was rapidly burning through cash. They had downsized their U.S. workforce, shifting more production to their Mexican subsidiary, but the downsizing came too late. They had already taken on debt to support their high-cost U.S. labor while preparing for their anticipated government contracts. By the time they were certified to bid, they were financially stretched thin.

Mounting Debt and Financial Distress

To cover operational expenses and finance the transition to defense contracts, Heavy Duty Radiator took on Merchant Cash Advances (MCAs)—high-interest short-term funding products that provided immediate working capital but exacerbated the company’s financial strain. Their debt situation spiraled as government contracts were delayed.

The company had anticipated securing its first major contract for Humvee radiators in the fourth quarter of 2023, but the contract was delayed until April 2024. Without cash flow from contracts and no ability to secure additional financing, Heavy Duty Radiator began to default on obligations, including rent, utilities, and the purchase of essential raw materials like copper, a critical component for radiator production.

At the peak of its distress in December 2023, the company was facing imminent default with creditors, including Gulf Coast Bank, the senior lender secured to the company’s contracts and accounts receivable. Additionally, Heavy Duty Radiator’s balance sheet was further weighed down by $4.5 million in additional bank debt and over $1 million in high cost MCA liabilities.

With only two weeks’ worth of copper left, the company faced the prospect of halting production entirely.

The Turnaround Plan: Article 9 Restructuring

In early 2024, Heavy Duty Radiator, facing imminent default and unable to meet its operational needs, contacted Second Wind Consultants. After a full assessment of the company’s financials and trajectory, an Article 9 Restructuring plan for the company was developed.

The first step was to approach Gulf Coast Bank, which held the first-lien position on accounts receivable and government contracts. Leveraging its working relationship with Breakout Capital, Second Wind was able to source financing to facilitate a note purchase from Gulf Coast Bank at par, exiting the bank for the full value of its senior note. Next, the prepackaged Article 9 sale transaction would transfer the assets of Heavy Duty Radiator to the new purchasing entity that would operate the business moving forward, free and clear of all previous liabilities junior to Gulf Coast Bank.

After the Article 9 sale closed in February 2024, the business, now operating under the new name JMP Industries, had a clean new balance sheet, but was in a tenuous cash-flow position.

Second Wind and Breakout Capital Get Strategic

Financing Gulf Coast Bank out of Heavy Duty Radiator and restructuring the current balance sheet was only the first challenge. While the new operating entity was no longer facing the unsupportable debt service of approximately $5.5 million in shed liabilities, it was now faced with the need to finance raw materials purchases and long procurement lead times. Substantial working capital would be required to get the business through this critical next phase.

Having previously been part of successful Second Wind turnarounds, Breakout Capital was willing to commit an advance of $500,000 in working capital to ensure the company could purchase essential raw material. This was a critical lifeline, as without sufficient copper supplies, the company would have been forced to stop production entirely, jeopardizing its ability to fulfill newly won government contracts. The $500,000 was specifically allocated for procuring copper, which has a lead time of approximately five weeks, creating a significant cash-flow gap and making the advance absolutely critical for continued operations.

Next came the supply chain challenge. While JMP Industries was now able to finance raw material, a five-week lead time on copper shipments meant they would face three weeks of production downtime. This created a unique and critical challenge, as fulfilling their first government orders on time was crucial to securing JMP’s future contracts with the DoD and DLA. Given the critical nature of defense contracts, communication was instrumental in alleviating government concerns about potential delays. The DoD and DLA depend on reliable suppliers, while any disruption in JMP’s production could have resulted in penalties or even loss of contracts altogether.

Second Wind and Breakout recognized the importance of maintaining clear lines of communication with both the Department of Defense (DoD) and the Defense Logistics Agency (DLA) during this sensitive period, providing updates on JMP’s production capacity and turnaround progress to ensure the company was still in good standing for contract fulfillment. Proactively addressing concerns with these government agencies helped secure the company’s position as a reliable partner.

Moving toward stability and growth, a longer term cash flow solution was needed and anticipated. At this point, as raw material was being converted into product and ultimately accounts receivable, Breakout Capital established a factoring line for the business. As a critical cash flow solution, factoring allowed the company to receive advances on government invoices immediately, rather than waiting the standard 60-90 days for payment from the DoD. It also allowed the business to pay down the initial working capital line used to purchase raw material.

The New Buyer and Post-Sale Operations

The buyer of Heavy Duty Radiator’s assets in the Article 9 Restructuring was the General Manager and COO of the previous operating entity. The new owner had worked in the Mexican subsidiary for over 15 years and had deep knowledge of the business, and believed that with a clean balance sheet, the company could be successful again.

The previous owner retained a role in the new company with potential performance-based opportunities to earn back a minority stake. Additionally, his personal home, pledged as collateral to the SBA, was saved from foreclosure.

With JMP’s operations and financials stabilized, transformation was all but complete. Though challenges remain, such as upfront costs for new contracts, JMP Industries is now on a solid path toward profitability, driven by high-margin defense contracts and a leaner, more focused operation. JMP is now projected to generate $8-10 million in revenue over the next 12 months. With significantly higher margins in their military contracts (over 400% higher than the margins in their previous third-party repair business), the company, once limited and bogged down by an industry in decline, is now poised for long-term sustainable growth.

 

Originally published on ABL Advisor on October 2, 2024

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