Moorpark Firm’s CEO Learns Lessons From Chap. 11

In late 2008, Moorpark manufacturer Special Devices Inc. faced mounting debt and a customer base in the automotive industry that had severely cut back the production of new vehicles and did not need the small devices to deploy airbags the company makes. On top of that were the 10-year bonds that were coming due in a climate where credit was not available to refinance. So company President and CEO Christopher Hunter made a move fraught with negative connotations and which would later have him calming fears of overseas customers. “We had one option in my mind and that was to go through the Chapter 11 process,” Hunter said. Bankruptcy reorganization is a route no business wants to take and is certainly not one that any chief executive is ready to pursue. It is one of those things that doesn’t get taught at business school. For Special Devices, the bankruptcy filing was a necessary time out to keep the dogs at bay. The company had borrowed heavily during a period of overseas expansion to take advantage of the auto markets in Germany and Thailand. Special Devices sold its aerospace division in 2001 and then re-entered that market a few years later. Development of a new electronic delay detonator product line resulted in formation of the mining and blasting division in 2005. At its peak the company was among the largest employers in Moorpark, which will remain the location of the corporate headquarters. But when the automakers reduced their output as the recession worsened, the writing was on the wall that Special Devices could no longer shoulder its debt. “They suffered along with the rest of the auto providers,” said Hugh Riley, assistant city manager for Moorpark. “When they are making cars, they don’t need airbags. When they are not making airbags they are not making the exploder to pop the airbags out.” Leaner operation The company emerged from its bankruptcy after nine months as a leaner operation with a restructured balance sheet and manufacturing consolidated into a single location in Arizona. The experience was also a new one for Hunter who came away having learned lessons in planning, communications, having the right advisors, and taking control of the situation. While the experience may have been new it was not unique to Special Devices. Some 860 businesses filed for Chapter 11 bankruptcy in the Central District of California for the 2009 fiscal year ending Sept. 30. That is a 39 percent increase from the 620 filings for the 2008 fiscal year. Chapter 11 allows for a company to continue operating as it works out its finances and differs from Chapter 7 bankruptcy in which assets are sold to pay off creditors. In Special Device’s case, a committee representing creditors (suppliers, bankers, bond holders) wanted to convert to Chapter 7 and then sell off the intellectual property. Having to deal with that became a distraction and looking back Hunter would have had a different relationship with the committee. Taking a more active role with the committee would have eliminated confusion that led to asset sale proposal, Hunter said. Open communication Actions that Hunter never second guessed were based on a combination of business school lessons in decision making and a personal philosophy of being open. From the moment of the filing in December 2008, transparency was the rule and when information could be passed along to employees, customers, suppliers, and other stakeholders it was. In a bankruptcy situation people need comfort, Hunter said, and being open prevents rumors that can be distracting and take away from the task at hand. “People may not like the message but I think you get a mutual respect by being open,” Hunter said. Other lessons Hunter took away from the experience were to control and lead the process; manage expectations; and to choose the right advisors. As the executive everyone was watching, he had to be aware of his every word and action and how they could be interpreted, Hunter said. “All eyes are on you so be careful of the message you are sending,” Hunter advised. The time out brought on by the bankruptcy filing put Special Devices into a position to take advantage of additional work when the automotive industry, the company’s main customer base, begins to turn around. While manufacturing positions were transferred from Moorpark, the company headquarters continue to employ about 150 people in administrative, IT and some research and development positions. Where the city suffers the most in the job losses is in decreased spending, Riley said. “Basically any time you lose manufacturing jobs it hurts,” Riley said. “The ripple effect goes through the economy.”