Finance on the Front Line

Defense contractors are benefiting from new controls their CFOs have installed.

Efficiencies in The Boeing Co.’s defense programs help improve the overall corporate profit margin. The commercial airliner segment has been deflated by competition and overcapacity. The conventional view among aerospace-industry watchers is that Boeing got a huge boost during Debby Hopkins’s 17 months as CFO, starting in 1998, when she came from General Motors to help shape up the finance operation. (She left for a short-lived term as Lucent Technologies’s finance chief.) Boeing says Hopkins’s efforts to train all executives in finance principles were expanded by her successor, Michael Sears, who was in charge of development and production of military aircraft at Boeing after its merger with McDonnell Douglas.

Paul Nisbet, an analyst who specializes in defense stocks for JSA Research, in Newport, Rhode Island, praises this “new Boeing” for the openness that has evolved under Hopkins and Sears, as well as for its performance. “Boeing never said anything that was the least bit enlightening before them,” he says.

Wowed on Day One

One of the most complete finance reinventions has been at Lockheed Martin, which used M&A to become both the industry’s largest company — its sales will approach $26 billion this year — and for a time its most debt-laden. The quest for scale was part of the problem that came to a head three years ago for Lockheed. With profits punished by troublesome acquisitions, in 1999 CEO Vance Coffman put finance in charge of launching a two-year divestiture plan, something almost unheard-of for Lockheed. In a program led by then-CFO Robert J. Stevens, now president and COO, the company sought to eliminate six lines of business and realign its balance sheet.

“I give the whole management team a lot of credit,” says current CFO Kubasik, who was hired as controller that same year. While selling the business lines was step number one, “number two was to focus on free-cash-flow generation, and number three was to take proceeds and reduce debt.” Today, free cash flow has increased to nearly $2 billion from $873 million at the beginning of the campaign, and the $12 billion debt level of 1999 has been sliced by almost $4.5 billion, with more reductions targeted. Behind those very visible efforts, though, has been the creation of a whole new structure for centralizing reporting to the CFO, rather than within the business units. Kubasik calls it his “early warning system,” and one that gives operating people “a clear understanding of the underlying financial performance of the corporation.”

He remembers vividly his first impression as controller of what lay ahead for Lockheed. “My first day on the job, I just said wow,” recalls Kubasik, who had spent 17 years at Ernst & Young LLP, and had observed Lockheed’s post­Cold War appetite for growth. But Stevens’s plan to streamline Lockheed and begin reducing the debt load soon became a full-time project. Many on Wall Street didn’t believe the company could change course so rapidly. “But we did it, and it really built our confidence,” Kubasik adds. “This was the start of our credibility with the analysts, the Street, shareholders, and our debtholders.”


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