The Turnaround Tycoon

Four years ago, Ed Ewing set out to revive Nashville's 64-year-old aviation manufacturing plant. He was going against the odds, but that's what he always does.

Striding across a spotless plant floor where workers are assembling airplane wings and tail assemblies, B. Edward Ewing is given the reception of a rock star. At each workstation along his path, employees at the Aerostructures Corp. factory beam as the tall Indiana native reaches to shake their hands. The genuine affection and respect for their chief executive is unmistakable.

For Ewing, it’s an excellent demonstration of what he calls one of his “Ewingisms” – Don’t tell others how good you are; get others to say so.” For the 1,152 workers, it’s testimony to more than Ewing’s celebrity, it’s evidence of the spirit of inevitable success he injected when taking over management of the company four years ago.

In 1999, nearly twice as many were employed in the two-million-square-foot facility. But the company, whose origins go back to the manufacture of World War II dive bombers and is still sometimes referred to locally by former names Avco or Textron, was sinking under heavy debts and a cost structure rising faster than revenue. Ewing would have none of it. Another Ewingism: Your costs and your debt as a percentage of sales must get better.

Today, as one U.S. airline after another seeks bankruptcy protection, those left at the Vultee Boulevard plant are thankful the veteran defense executive delivered on his promise of “value creation.”

“Had we not gotten competitive and paid down our debt, after Sept. 11, bankruptcy would have been a certainty,” says David Walker, Aerostructures’s general manager for operations here, in California and Washington State.

Instead, a financially stable Aerostructures is scheduled to be acquired July 1 by Dallas-based Vought Aircraft Industries, a company three times its size and owned by the same corporate parent. Though a ding to Nashville’s national business profile, the merger should allow the company to lower costs further still.

That Aerostructures attained fiscal soundness is an enormous accomplishment given such a dreadful industry environment. But when one also realize that Aerostructures has been just one of multiple reviving companies simultaneously led by Ewing, one understands why the 58-year-old is one of the nation’s premiere corporate turnaround artists. Always a big personal investor in his projects, he presides over an empire that spans aerospace, automobile parts, private equity and real estate.

As with the Aerostructures headquarters here, he manages each venture with a visit every 29 days from his family compound in Rancho Sante Fe, Calif. Quickly sussing out changes in each venture’s financial performance from the previous month, Ewing transmits his mixture of high expectations and encouragement in a powerfully fervent style rarely seen outside the motivational speaking circuit, of which he has been a part. My philosophy is changing behavior, not people.

He’s no Matt Foley, the enthusiastic but down-on-his-luck motivational speaker portrayed by the late comic Chris Farley. Until a year ago, Ewing also was chief executive of Norfolk, Va.-based United States Marine Repair. That five-year project — cobbling together tattered, money-losing shipyards on both coasts, cleaning them up, planting palm trees, lifting employee morale and turning the yards into cash cows — ended May 2002 with a $316 million sale. Ewing pocketed $44 million.

But life has not always been so prosperous for Ewing. Growing up in the town of Jasper, Ind., he was raised by parents whose manual labor didn’t generate enough income to spare the family periodic evictions or the necessity of heating water on a coal stove. “We were both pretty poor,” says childhood friend Jack McCune, who has remained in Jasper. “You could look around and understand why Ed always had an inner drive to succeed.”

Unlike most competitive kids who measure their success in touchdowns and runs scored, the 12-year-old Ewing invented a new game, one that defines his professional life to this day. “I decided then to play the most sophisticated, complex sport in the world, and that’s capitalism, free enterprise.” Dividing his future into 10-year blocks, Ewing set ambitious goals for himself. His ultimate goal by the time he reaches “the end of the fourth quarter” at age 65: a spot on the Forbes list of the world’s richest people.

“In the game of free enterprise, that is the metric for the ‘best ever,’” Ewing says. “There are billions of people in the world, but fewer than 500 are billionaires, and of those, 250 had it given to them.”

Ewing had nothing given to him. High school drafting teacher Wes Settle got him his first job because the teenage Ewing “was a workaholic and I was sure he wouldn’t embarrass me.” Less than a year into working as a draftsman for furniture maker Kimball International in Jasper, he entered the Air Force, took a few college classes, and began buying ramshackle duplexes and repairing them on the weekends. “It nearly killed me,” Ewing says. That was the beginning of a company later formalized as Ewing Properties, a Jasper-based developer of duplex communities, all built without debt. I hate debt. Temporary debt is okay, but you need to get out of it in a hurry.

“Ed’s philosophy has been to borrow the minimum amount, don’t live off the income the properties generate, and put more of the cash flow into debt retirement because debt is risk,” says Ewing Properties’ Todd Womack. Now comprising 11 subdivisions in Indiana, Kentucky and Illinois, the company has grown on the strength of the properties’ meticulous upkeep and condition. Echoing an earlier Ewingism, Womack says the boss “wants people who live in the communities to be his best promotion, and for city officials to speak well of them, which is unusual for rental properties.”

However successful it may be, real estate has always been Ewing’s sideline. The defense industry is where Ewing has made his national reputation. Beginning at International Harvester in the mid-1960s, he quickly rose from draftsman to head of materials for IH’s truck unit. Seeing that the farm equipment-maker’s best days were behind it, Ewing set his sights on General Dynamics. Rebuffed six times for lack of a college degree, he succeeded on his seventh interview. Over the next 15 years, he turned around the defense company’s tank program and oversaw manufacturing of F-16 Fighters.

While he was working for General Dynamics in St. Louis in the late 1980s, tragedy struck. Young daughter Erin was diagnosed with leukemia. His response was classic Ewing. Instantly, he poured himself into the Leukemia Society of America’s St. Louis operations. Before long, he led the national organization’s efforts to bring in large sponsors for the nationally televised fundraising event.

“Ed was our stem-winder,” recalls Pamela Edelstein, now national director of media and fundraising events for the Leukemia & Lymphoma Society. “And he was fantastically successful.”

The same management techniques he learned turning around defense companies were on display in his fundraising efforts. Breaking the fundraising staff into teams, handing out a “Barnacle Award” to those who missed their targets, Ewing made once-a-month visits to the Manhattan headquarters that were met with moans and groans— and a greater focus than the staff had ever known. “God help us if there was not improvement, and Ed was a volunteer,” Edelstein laughs.

(Erin Ewing enjoyed a lengthy remission from her illness, then died suddenly in 2001 on her 21st birthday.)

After 15 years in Michigan and St. Louis with General Dynamics, Ewing left in 1993 to run the Texas operations of its F-16 unit upon its sale to Lockheed. Four years later, he was recruited to Southwest Marine and San Francisco Drydock, decaying shipyards whose owners were eager for help. When The Carlyle Group of Washington, D.C., bought a majority stake in the company several months later, Ewing found himself perfectly positioned to start his “fourth quarter.”

Carlyle, a $16 billion private equity firm, supplied the capital to acquire other shipyards. It also partnered with Ewing two years ago in acquiring bankrupt auto parts maker Key Plastics in Detroit. Now, having reduced staffing nearly a quarter, opened the company’s books to workers, paid generous bonuses to the rank-and-file when incentive targets were met, Ewing’s Key Plastics has expanded into Key Automotive. It acquired Soo Plastics in December and closed in May on the buyout of $1 billion-in-sales Breed Technologies for a reported price tag of roughly $300 million. In characteristic fashion, within days Ewing announced that Breed’s $50 million annual cash burn was unacceptable, that costs would be cut by $200 million, and that 3,500 employees — more than a quarter on the Breed payroll — would be gone by the end of 2004.

“Ewing’s position at Carlyle gives him entrée to shake things up as he sees fit,” says Jay Korman, a principal with aerospace and defense research and consulting firm DFI International. He notes that Ewing’s unorthodox style “never really meshed with the conservative culture at the larger companies.”

Heading a new $590 million Carlyle Management Group fund from offices in Dallas, Ewing has a mandate to find bigger and more lucrative turnaround situations. Referring to Ewing’s “almost maniacal focus on costs, cash flow and debt pay-down,” Carlyle founder and managing partner Bill Conway says, “Ed and his team pick their spots very carefully, and in those situations there’s nobody better.”

Conway saw that in action in “an unintentional turnaround” in Nashville. Finding Aerostructures in far worse shape than it thought when it bought the company three years earlier, Carlyle in 1999 “was looking for some help when Ed raised his hand and said ‘Put me in, coach.’” Since then, despite a 20% decline in annual sales to $300 million, costs have been cut so sharply that Aerostructures’ $300 million of debt has been slashed by two-thirds. (“Ed does not allow us to define anything as a fixed cost,” Aerospace general manager Walker says.) Carlyle, only four years ago worried about the return of its $100 million of invested capital, now can concern itself with return on capital.

Walker knows exactly when the turnaround began. “August 13, 1999 — everyone here remembers the date,” Walker says. That’s when Ewing delivered to roughly 50 Aerospace decision-makers his trademark “inoculation,” or “vaccination,” a mental boot camp he inflicts on anyone who can prevent his companies from being profitable. These sessions, delivered immediately upon acquisition, have been known to include Ewing throwing things across the room. In one instance, an employee, so swept up by the meeting’s intensity, vomited there on the spot.

“It convinces you that life as you know it has changed forever,” Walker says. Certainly, life at Aerostructures has changed. On the front end, many employees lost their jobs, something Conway regrets but says was inevitable due to previous management allowing costs to get out of hand. Today, in the arms of Vought and aided by recently extended contracts for the Gulfstream IV and Lockheed C130, and ongoing work for the Airbus A320, Aerostructures is out of financial harm’s way, Ewing says, and its handiwork was on prominent display in the Iraq War. It made the tail assembly for the C130 that was the first American airplane to land at Baghdad International Airport. And the B1s, whose bunker busting bombs were targeted on suspected hideouts of Saddam Hussein, flew with wings made by Aerostructures.

“The job done here in Nashville at Aerostructures, in a declining industry, where workers don’t have to worry about their paychecks bouncing or the company being taken over” in a fire sale, has been “a Harvard Business School case study,” Ewing says. “It all goes back to this: People always do the right thing when they know doing the wrong thing is not an option.”

Aerostructures workers and executives knew that cutting costs and paying down debt was the right thing. The business’ very survival was at stake.

For Ed Ewing, the right thing is to continue resuscitating endangered businesses. Every time he succeeds, he contributes to the vitality of the American economy by saving a large employer and by teaching his time-tested approach to others. And, yes, he gets quite a few more coins in his purse. Early into his fourth quarter, Ed Ewing is keenly aware of what it takes for him to do the right thing. Because he knows better than anyone else that failing to be Dubois County, Indiana’s first billionaire on the Forbes list of the world’s richest people simply isn’t an option.

The World According to Ed

On his "Employees First" credo
Put the employee first, the customer second, and the shareholders third. This is where (W. Edwards) Deming and I somewhat differ. He said, "Customer first." I say employees first. If you get the employees to say and believe that you’re good at what you do, people have a tendency to do a better job, which in turn leads to customer satisfaction.

On sharing financial information
You should work for a company with the philosophy: First you make money for the company, then it should share the money with you. I share all my financials with all my workers. I tell them, "You make money for me first, and I’ll share it with you second."

On cost control
How do you cause a company and its people to be more financially successful tomorrow than today? It’s simple. It does not require some cum laude from Wharton. You cause your revenue to go up and your costs to go down. You focus on costs-as-a-percent-of-revenue to be better every day, every week, every month. And you teach all the key people in your organization that basic principle. Management should understand that the true product is cash, their game is capitalistic free enterprise and their means is the product they produce. The end is money. That basic focus along the way is where people get confused.

On unprofitable operations
You’re my customer. The industry’s going down and I have to build this table at a loss. Now I have a choice of doing a dollar’s worth of work and selling it for 90 cents—whoops. In order to support my overhead instead of reducing overhead, I need to keep the 90 cents. Who in finance invented the term "contribution to margin?" It’s a polite word for "somewhat losing money." How did we ever come to believe in the free enterprise capitalist system that doing business for a loss—paying to work—is good?

On being CEO of five companies
It’s not how many things you do at once. It’s how well you solve problems during that time. Fixing things rather than piddling with them. Last year, 2002, I was the chairman and CEO of five companies in five industries at the same time. How? Pick good people, teach good people, depend on good people, treat people with dignity and respect, and hold people accountable for performance.

On the plight of airlines
The users of the airplanes are broke. They need to restructure not just their debt, but the way they do business. They have too many different kinds of planes, too many types of employees, kinds of training, fuel usages, costs per mile, etc. The financial box that they have built is so rigid it cannot withstand fluctuations in revenue. But the laws of economics don’t care. In my view, the airline industry is five to ten years from recovery, if the U.S. airlines ever recover. Why? Debt. All of the major U.S. airlines are bankrupt, either officially or unofficially, with the exception of Southwest Airlines. Southwest is not because they started with a new paradigm. They use one plane, one crew size, and they only perform on routes that are profitable. They installed financial discipline and built a flexible cost structure.

On the characteristics of attractive acquisition candidates
I model industries that are in a decline or are at the bottom of the trough. Then I find companies within those industries that are out of favor. An out-of-favor industry and an out-of-favor company with good products, good technology and good people, but viewed on Wall Street as not being very good at extracting shareholder value. I buy these companies at low EBITDAs (a measure of cash flow) and low multiples, and then if we can improve the operating performance, we’ll do well, even if the industry does not recover. And if it recovers and goes from a four multiple to a seven and EBITDA is doubled, your probability of making money is even better.

On the outlook for the auto industry
I like the automobile industry, which is down and somewhere near the trough. If you model it the past 50 or 60 years, it goes down and stays in the trough from two to five years, and then it comes back. The industry is down because it has rigid cost structures and has to produce a high volume of cars because of having taken on so much debt. Car makers took on debt betting that the revenue would always go up. But anybody who creates a balance sheet that depends on the economy continuing to grow in order to make its bank covenants is probably making a mistake.

On why one should invest with Ed Ewing
With me, you can invest with a guy who has the Carlyle Management Group to find companies, an analytical group to make the plan, and an operational group to teach the plan. You have a guy who teaches the treating of people with respect and dignity and is focused on having more cash tomorrow than today. A guy who believes that, regardless what happens, the revenue-to-costs have got to get better and who teaches this to his management teams. And I am also the single largest investor in every deal. Where would you put your money?