Debt trips up a venerable yacht maker

¬†Southwest Harbor, Maine — David Rockefeller Sr. ordered a new boat last year, a $3 million, 16-meter powerboat.

Rockefeller, now 94, may not have needed a new boat. It was, after all, the sixth he had bought from Hinckley Yachts in Southwest Harbor. But Hinckley Yachts and its workers certainly needed the order — and providing them with work was part of Rockefeller’s motivation, his spokesman said.

Hinckley — which has been making boats since 1928 and is known for classically designed, beautifully constructed sailboats as well as sleek, easy-to-maneuver powerboats — is under financial pressure. It has significantly reduced its work force — from about 625 employees at its peak in mid-2008 to 305 at the end of August.

Hinckley’s problems can be traced to its sale to one, and then another, private equity firm over the last dozen years. With each sale, it took on more debt, which became onerous when business slowed. And the culture also shifted from a family-owned business to one controlled by outsiders.

Beginning early this decade, near the peak of demand, private equity buyers poured money into yachting, convinced — wrongly, it turned out — that the business could weather any economic storms because its wealthy clients would continue to buy. Several other boat makers have run into problems, including Ferretti SpA of Italy and MasterCraft Boat Co. of Vonore, Tennessee.

Hinckley may well survive this downturn, thanks to a strong brand name nurtured over decades of family ownership and a loyal clientele, some of whom spend their summers near Bar Harbor.

James P. McManus, who was hired as Hinckley’s chief executive two years ago by Monitor Clipper Partners, the private equity firm that now controls the company, declined to comment on Hinckley’s finances. He did say in an interview that he was optimistic about the company’s future. He said orders had begun to return, and he planned to bring back 85 employees this month.

However, some of Hinckley’s critics say constant pressure on the bottom line by the new owners has left some employees feeling that management misunderstands the customers and the employees.

Ruth Brunetti, who was chief financial officer, treasurer and contracts negotiator during a 20-year career at the company, was dismissed in July. “If they had not had that debt, we could have weathered this,” she said. “We have suffered from a double impact: the economic downturn and corporate greed.”

Because Hinckley is privately held, it does not release details about its profits and losses. But according to people close to the company, its revenue in 2008 was roughly $100 million, and taxable income was about $4 million. This year, for the first time since the mid-1990s, it will have a taxable loss of about $4 million, they said. Several people close to the company estimate that revenues this year could fall to between $50 million and $75 million.

Buyers certainly pulled back, unwilling or unable to pay $900,000 to $4 million for Hinckley’s sailboats or $400,000 to $3 million for its powerboats. In the spring, only three boats were under construction at Hinckley’s main manufacturing plant in Trenton, Maine, including Rockefeller’s.

Bob Hinckley — the grandson of the founder, Benjamin Hinckley — ran the company with his partner, Shepard McKenney, from 1982 until it was sold in 1997. He has fond memories.

“I worked there as a kid,” he recalled. “We always built a high-quality product. We used wild teak, not plantation teak, even though it costs two to three times as much. We used a great deal of varnish. It took us about 10 months to build a 50-foot sailboat.”

Hinckley was running the company in the early 1990s, when the government levied a 10 percent luxury tax on yachts and orders fell. “It was brutal,” he recalled. “Wealthy people don’t like to be taxed on their hobby.”

Hinckley went overseas and sold boats to Germans and Japanese for whom the luxury tax was not an issue. “We never leveraged up the company,” Hinckley said. “We paid down loans. When we sold the company, it had just $1 million in debt.”

Bain Willard Companies, a Boston-based private equity firm, was the first buyer, 12 years ago. It paid about $20 million, equal to about one year in sales, putting down about 25 percent in cash and borrowing the rest, according to several people familiar with the negotiations.

The new owner had the wind at its back. Hinckley had introduced the “picnic” boat not long before — a luxurious powerboat that combined the look of a New England lobster boat with a water jet propulsion system, instead of a propeller, that allowed the boat to maneuver in shallow water. It had been an instant hit.

Bain Willard expanded Hinckley, opening service centers in Florida, Maryland, Rhode Island and other places. In those boom times, the strategy paid off. In 2001, it sold about 51 percent of Hinckley to Monitor Clipper of Boston for an estimated $40 million in debt and equity. Bain Willard executives could not be reached for comment, and Monitor Clipper declined to comment.

In 2005, Hinckley sold its real estate across the country, raising enough money to pay down much of its debt, according to a person familiar with the company’s finances. It leased back the land, replacing interest payments with rent payments. Its revenues recovered in 2006 and 2007 before the economy weakened.

The company has begun to monitor its cash flows aggressively. “We have always watched over receivables,” Brunetti said. But the current measures go further, she said.

One owner, who has had a number of Hinckleys, said he had a lien on his boats for several thousand dollars in storage fees after doing business with Hinckley for years. “If a customer was 30 days behind on payments,” a former employee said, “we had to call. It was just not the way we had done business.”

But McManus countered that asking customers to pay what they owed was simply good business and that relations with clients were good. Still, in a business that deals with the superwealthy, that aggressiveness can antagonize important customers, several former employees said.

“Today, people are worried about doing business with Hinckley because of the monetary situation and their reputation for how they treat their customers,” Brunetti said. “That has taken a toll.”