What it does mean is that I want [Cequent's managers] to run it for material productivity. I want them to run efficiently from a working capital perspective and to be effective in generating good cash flow out of the business. Whereas in the aerospace business, it might be a situation in which I say: I want you to go get bolt-on acquisitions. And I’m willing to put money on the table because I know that I’ll get requisite returns. So it’s a matter of prioritizing how you’re going to deal with those businesses.
Was the switch from a holding company to an operating company a legal or organizational change?
There was no need to change the legal structure of the company; this was an organizational discussion. For example, Cequent has a set of five businesses, which were run by five presidents, five divisional finance officers, five sales and marketing staffs, five production staffs…and I’ll stop there. There are now three teams. We have a consumer-oriented one and an industrial-oriented one and one that’s overseas. Those teams now operate with the customer: instead of having five different places you might call for your product, it’s one. It’s one invoice, one customer call, one commercial program, one pricing structure. The simplification wouldn’t have happened as just a holding company with a bunch of small companies. We’re driving those together to play and act like an operating team.
What changes have you made in terms of cash dynamics?
That was one of the reasons I came to the company. I saw a balance sheet that was ripe in terms of its inventory and asset turnover, and it was something that we needed intensity on. I saw it as a real opportunity for the inventory to go from less than three turns to more than six.
Our operating working capital was down to $153 million for the total corporation [for the second quarter of 2009] from $176 million the previous year. We’ve chased working capital as a percentage of sales down, but we’ve also changed process along the way. The reorder points and the metrics have all changed, such that we should be able to maintain that lower level of overall working capital with lots more improvements ahead of us.
In terms of the cash-flow dynamics, we also looked at acquisitions. We’ve got some older properties that don’t deserve to be part of the organization, and they’re part of discontinued operations. We’ve also talked about the operating profitability of the company, and the productivity that we’re going to generate is also generating more cash flow.
So what we’ve done in the first half of the year is generate the same amount of cash as we did all of last year. We’ve done that through inventory reductions, managing out payables a little better, better collections, and the repurchase of debt at a discount. Through every technique that you could possibly point at.
If you think about the $30 million profit-improvement plan that we put in place, there was some restructuring that happened there. And we’ve done things that you’ve seen across industry: layoffs, furloughs, wage reductions. We’ve tried to do it with a heart in mind, though. I’ve realized that one of my tenets as a finance leader is that it’s not just about the numbers. The numbers are sticky, most definitely. But I’ve got responsibility for 4,000 employees [the company's current workforce] and I want to make sure that I’m doing right by those 4,000 families, and that’s what I go to bed with. Ultimately, I have shareholders, too. And those shareholders expect a return and they expect equity growth out of us as well.
Speaking of issues related to human capital, how do you see the health-care debate going? How do you see reform affecting you from the standpoint of benefit costs?
Our health-insurance costs were rising approximately 10% a year up until 2008. And what we heard from President Obama last night will just add more pressure to that short term.
I didn’t hear anything in his speech that would tell me that I naturally have a productive answer today. I have faith. I’ll wait to see if there’s proof in the pudding in terms of how he wants to change it. But I think that we’re going to see continued health-care-cost pressures.
How will the reforms increase your costs?
If indeed you have no limits [on catastrophic insurance payouts] and you have preexisting conditions as part and parcel of your basis, that’s got to get paid for somewhere, and today it’s not paid for. That’s not to say we don’t have a meaningful amount of health-care coverage for our employees, because we do. But those costs will increase reinsurance rates. There are downstream effects that I think we as a nation are still figuring out.