CAUTIONARY BANKRUPTCY TALES: Busines Plan of PTC Seamless Tube May Not Have Been “Seamless”

co-authors: Daniel Hart and Salene Kraemer

The story behind the Chapter 11 filing of PTC Seamless Tube Corporation (Seamless) is a cautionary tale for Steel Valley businesses, both big and small, as to the dangers of overexpansion and the importance of business planning.  Here is what you can learn from it:

On April 26, 2015, Seamless filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Pennsylvania.  Seamless estimates its assets to be between $50-100 million with liabilities between $100-500 million.

Seamless is a subsidiary of PTC Group Holdings Corp..  It manufactures steel tubing, tubular shapes, bar products, fabricated parts, and precision components.  In 2013, Seamless invested more than $102 million to reopen a manufacturing plant in Kentucky.  This project involved the acquisition of a large manufacturing facility, property adjacent to the existing site, re-working the layout of the facility and the installation of manufacturing equipment.

After the initial wave of enthusiasm, Seamless faced problems which eventually led to the bankruptcy filing.  Just a year and a half after initial construction, Seamless was forced to lay off nearly twenty-five percent (25%) of its workforce.  These layoffs were part of a slowdown at the plant as the company was forced to re-bid on the installation of costly equipment and a miss-estimation on the price of oil.  Seamless substantially underestimated costs.   The opening also was eight months behind schedule.  Thus, Seamless tripped restrictions in its credit agreement, leaving it unable to borrow more money.  The operations of the KY plant never were in full swing before Seamless declared bankruptcy.

It appears that the filing for Chapter 11 relief occurred, at least in large part, because of overexpansion into this new Kentucky facility and not performing sufficient due diligence regarding the price of equipment and oil.  Also, as of late March 2015, Seamless was also named as a defendant in lawsuit.  As with many Chapter 11 debtors, the filing of this lawsuit likely also played a part in the decision to file for bankruptcy.

PTC Group Holdings Corp. is fortunate that Seamless’ bankruptcy has not yet affected the business of its other, much more profitable subsidiary, PTC Alliance.  As separate entities under the parent business, Seamless and PTC Alliance operate distinctly as separate businesses.  Thus, PTC Alliance is still operating and producing strong results.

LESSONS LEARNED:

•  CAUTIOUSLY EXPAND.  Expansion in business can be a great thing.  It shows that your business is in a growth stage.  However, a business at the expansion stage must thoroughly vet forecasts of future demand for  product.  By performing the necessary due diligence, a business can plan for the proper expansion of its business and all the details that go into an expansion, i.e. size of new business location, needed number of employees, costs of equipment, supplies, utilities, etc…
• TWO DIFFERENT BUSINESSES; TWO DIFFERENT BUSINESS ENTITIES.  Take note also regarding PTC Group Holdings Corp.’s business model.  By strategically place two different businesses into two separate business entities, PTC Group Holdings Corp. avoided dragging its successful subsidiary, PTC Alliance, into the murky waters of Seamless.

BUSINESS OWNERS:  Think Before You Leap.  Before you make a material business decision, thoroughly vet the project with a board of directors, trusted advisors, accountants and/or lawyers.    Obtain impartial advice.  Discuss the advantages/disadvantages.  Contemplate and be prepared for worst case scenarios.