From the December-January 2004 issue of Treasury & Risk magazine

Leaders For The 21st

With the economy showing new vitality and Wall Street making a comeback, CFOs are being asked more than ever to deliver on winning financial strategies. This year's choice of three CFOs was based not only on their own individual records but their companies' resilience--thanks in large part to their contributions--in the face of three long years of brutal markets and regulatory backlash.

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Dennis Powell, CFO, Cisco Systems

Cisco Systems INC.'s CFO Larry Carter was almost 60 years old when the Internet router manufacturer was thrown into a financial crisis after the collapse of the telecommunications market in 2001 and the back-to-back bankruptcies of two of its biggest customers Global Crossing Ltd. and WorldCom Inc. the very next year. Certainly, Cisco was not alone, but in order to weather what turned out to be two perilous years, it would need to keep on top of its financials and have a strong heir apparent to inherit the award-winning finance team Carter had assembled. Fortunately for Cisco, it had the prescience to have Dennis Powell as part of that team.

If Cisco tried, it probably could not have invented a better candidate for 21st century CFO than the 55-year-old Powell. Before joining Cisco in 1999 as its controller, Powell had been a senior partner at Coopers & Lybrand, where he served as a national Securities and Exchange Commission reviewer and was responsible for corporate audit quality assurance.

Once at Cisco, Powell also had overseen the full implementation of the "virtual close" system that, as controller, he had helped create. The system allows Cisco to close its books globally in just four hours, instead of the usual three to four weeks with a manual close. Together with a broader automation of purchasing, invoicing and payment operations, the finance overhaul saved Cisco an estimated $2.1 billion this year--no small matter for a company that had 2003 revenues of $18.9 billion and earnings of $3.6 billion. "This process paid for itself in its first year of operation," says Powell proudly. "Now, we see our orders on a global base and can drill down to theater, country, city and even individual account manager to see where problems are and take corrective action early in a quarter."

Powell says the system, which also will prove useful in meeting new Sarbanes-Oxley reporting requirements, actually helps the company command better prices for its products, while minimizing the need for larger-scale production facilities. How? By allowing Cisco to provide data so customers can better predict their needs. So rather than having all the orders come in at the end of each quarter, taxing the production line and usually prompting anxious Cisco salespeople--trying to pry the orders loose sooner--to offer discount prices, customers are able to stagger their purchases to better reflect their real needs. "It makes for much more efficient manufacturing," says Powell.

With all this under his belt, there was little surprise, once scandal-plagued markets crumbled, that Powell began to be studiously groomed to succeed Carter, who had held the post of CFO since 1995. And analysts say the switch from Carter to Powell has been seamless. In fact, thanks to hands-on financial management from Carter, Powell and treasurer Dave Holland, Cisco rode out the two tumultuous years. While it took its hits early--its stock price dropped from a high of $80.06 in March 2000 to a low of $8.60 in October 2002--the company has managed to keep its shares trading mainly in double digits since the telecom bubble popped and has maintained a relatively respectable market capitalization, in sharp contrast to a slew of its industry colleagues.

So where does Cisco see its opportunities now? Powell describes Cisco as a "growth company," and unlike some other high-tech survivors that now seem content to settle into the business models of more mature businesses, Cisco still sees itself as an upstart techie. For instance, where other high-tech companies have ceded to demands that stock options--once the primary carrot to attract the best and the brightest to high-tech--be expensed, Cisco continues to rail against the practice. Like his predecessor, Powell opposes expensing this form of employee compensation, which the company maintains is an important part of staying competitive in the marketplace for skilled labor. "We don't believe options are an expense to the company," he says. "It is a cost to shareholders in terms of dilution, but the right way to measure that cost is in earnings per share."

Powell asserts that the company's future growth lies, as it has in the past, in acquisitions. This philosophy becomes particularly critical in understanding Cisco's adamant opposition to paying dividends to shareholders, despite the fact that it is sitting on some $20 billion in cash with no debt and that other mature high-tech peers have begun to pay dividends. Cisco does conduct an active share repurchase program; as controller, Powell bought back $10 billion worth of stock over the past two years and has authorization to buy another $10 billion. "This is the preferred route for us to return value to our shareholders," says Powell.

Indeed, much of Cisco's stellar growth over the last decade has been the product of its aggressive $37-billion acquisition program. One warning from the investment community: "I think they need to stop paying so much for some of their deals," opines JMP Securities analyst Sam Wilson.

Actually, Powell agrees, noting that the company is now "driving a mindset that every decision impacts on shareholder value, so in all our investments we want them to be profitable. Our challenge, looking ahead, will be to maintain sustained profitable growth and disciplined decision making."

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James Sawyer, CFO, Praxair

James Sawyer is breathing a little easier these days. In mid-2000 when Sawyer became CFO of Praxair Inc., one of the world's largest producers of industrial gasses, the economy was heading south fast. For the next three years, volume sales of core products fell by 7% as demand from manufacturing customers cooled. But thanks to a thorough reevaluation of Praxair's operations, strict belt tightening and a focus on low-cost expansions, earnings during the period remained solid. These days, with expectations of a manufacturing rebound running high, Praxair's stock is outperforming an expanding market.

Praxair sells to a number of non-cyclical sectors, such as food and beverage producers and health care companies, but much of its demand still comes from old-line manufacturing. One way the company weathered the downturn was by taking advantage of some unusual characteristics of its industry. "Our business model is really focused on establishing long-term relationships with our customers and investing capital only when we have new contracts in hand," says Sawyer, who has been in the finance department at Praxair since it was spun off from Union Carbide Corp. in 1992. On the plus side, those contracts allow Praxair to pass on increases in energy prices, its biggest cost of operation, directly to its customers. On the minus side, the industrial gasses business is capital intensive, largely because of the expense of separating air into oxygen and nitrogen components, the basis of almost everything Praxair does, as well as transportation and storage costs.

Sawyer's financial strategy rests on increasing the company's return on capital by keeping production costs in check, while trying to expand revenue opportunities. Praxair's return on capital rose to 13.4% in 2002, unusually high for its industry and a figure that continues to trend higher. While capital expenditures have been on the rise in recent quarters, they remain well below levels the company saw in 1997, thanks to a selective acquisition strategy that focuses on less capital-intensive operations.

Revenues, however, have been largely flat in recent years. Sawyer argues that although core product volumes have been down since 2000, "we really have made up for that with new business along the way." To do that, Praxair's R&D staff have been charged with working closely with existing customers to develop new technological applications for its products that are aimed at the customers' own goals in areas such as energy efficiency and environmental conservation. "Several of those demand drivers are not directly linked to overall economic growth," says Sawyer.

Praxair's top-line performance should be about to take a turn for the better. Wall Street analysts expect revenues to grow by 7% for 2003, with similar growth in 2004 as the turnaround in the industrial sector takes hold. In addition, Praxair's recent expansions into new lower-cost lines of business, such as home respiratory products, should better insulate it from future swings in manufacturing demand.

Sawyer's ability to delve into the details of Praxair's worldwide operations is enhanced by his background in the sciences. As an undergraduate at Wesleyan University, he majored in geology and environmental sciences. His first job was with Bechtel Corp., where he worked for four years in engineering on large resource development projects. When Sawyer returned to school, it was to MIT's Sloan School of Management for an M.B.A., after which he went to work in the finance department of Union Carbide. At UC, he held several financial management positions in Europe and the U.S. before joining Praxair in 1992 as assistant treasurer.

Aside from surfing the economic downturn, Sawyer's other key efforts in risk management involve overseas currency markets. South America provides 12% of Praxair's overall sales, with a majority of that coming from Brazil, where currency and economic gyrations have cut into its profits. "We are reducing our exposure to Brazil without sacrificing our business there by running the business for cash flow and distributing significant cash flow back to the parent company each year," Sawyer says. The company continues to invest a portion of its profits from Brazil back into the region.

Praxair relies on local employees to monitor the pulse of economic and political changes. "They've done exceedingly well in their hedging in Brazil," says John Rogers, senior credit officer at Moody's Investors Service. "They've managed to be a lot more stable in their earnings out of Brazil than most basic industry companies or other industrial type companies."

To enhance its performance, Praxair relies on several company-wide initiatives, including Six Sigma, which Sawyer says have saved it nearly $100 million per year. "We're constantly looking for productivity improvements with our human and financial capital," says Sawyer. "That doesn't mean making people work harder, but finding better ways of doing things." One example is Praxair's streamlining of its order-to-cash process by making greater use of handheld computers and onboard systems in its fleets of delivery trucks. The systems have improved the accuracy of the billing process, according to Sawyer, and eliminated redundant paperwork since drivers directly input the front end of the transaction. Disputes with customers about billing matters have been reduced as a result.

From a shareholder's perspective, Praxair is also delivering. Its stock reached record levels in early December, helped by a manufacturing rebound and generous dividend policy. Praxair increased its payout ratio from 18% of earnings to 33% in 2003's fourth quarter. The company also followed through on a stock split in mid-December.

With lean times behind him and the economy stabilizing, Sawyer is ready to take Praxair into a new phase of disciplined and low-cost revenue growth. "Every company has to have continuous improvements all the time. We're not really draconian. We just try to make sure that everything counts."

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Alan Graf, CFO, FedEx

Back in 1980 when Alan Graf, the CFO at FedEx Corp.,first joined the high-flying express delivery firm, his intention was to join a company that was small and about to take off. Just 26, Graf had worked brief stints at Marathon Oil and RCA, but wanted to try his hand at something a bit more exciting, and with more growth potential. "I saw an ad in the Wall Street Journal saying Federal Express was looking for a senior financial analyst," he recalls. "I answered it and got the job." At the time, Federal Express, with revenues then of $415 million and only 6,800 employees, was handling just 35,000 packages per day, an amount it might handle now out of one midsize shipment center.

Today, Graf is CFO of a 190,000-employee company, with $23 billion in sales in 2003. But it isn't just the size of the company that has changed. The challenges the company, and Graf, face have grown too.

When Graf joined FedEx, the start-up firm's main competitor was a beleaguered U.S. Post Office, not even in Express Mail at that point. Now, no longer a young start-up, the company faces a reorganized and more nimble U.S. Postal Service, as well as several other major competitors like DHL and UPS in the lucrative express delivery space. That competition has kept a lid on pricing. As a result, growth--particularly in the mature U.S. market--must essentially come at the expense of a rival.

Thus, the past couple of years have been a challenge for the entire express delivery industry, not just for FedEx. The 9/11 attacks made security a major issue, while a two-year economic slump, both domestic and global, cut demand significantly. Indeed, the company frustrated investors by over-expanding just as the economy took a dive, leaving FedEx with high fixed costs at a time when revenues weren't growing. Earnings of the domestic unit actually fell in 2003 by 2.7% to $432 million. "The fact of the matter is that we missed our forecast and oversized the domestic company," says Graf.

The CFO is also still struggling to reverse a recalcitrant negative cash flow. "We've got to keep looking for ways to improve productivity and make sure that when we invest in equipment and technology, it will show a return," he says.

FedEx and Graf's finance department have worked diligently since to cut costs at the company, especially in the air shipment business, which accounts for 73% of FedEx revenues. The goal is to increase the express delivery business profit margin from 3%, where it has been for the past few years, to a double-digit figure within five years. The key to this cost-cutting and margin growing has been a multiyear program of voluntary retirements, which the company expects to produce cost savings of between $130 million and $140 million in FY 2004 and up to $230 million a year in subsequent years. "The initial investment has been expensive," says Graf, "but the return and the increased productivity that will result, will be enormous." The employee buyout packages, which include allowing workers in their 50s to retire with the benefits they would have gotten at age 60 and a severance of $10,000 plus four weeks' pay for each year of service up to six years, will require the company to announce pretax charges of $400 million in fiscal 2004, but FedEx still expects FY04 earnings of between $3 and $3.15 per share.

Graf says the company has been willing to be generous in its buyout offer because, as a service business, morale is critical. "We're proud to have been on Fortune magazine's list of best places to work consistently since 1998," he says, adding that employees who opt to leave are sad to go but happy with their package. The same approach has been taken with pension changes. "We offer a switch to a defined payment option from the defined benefit plan, but unlike places like IBM, at FedEx, it's voluntary," says Graf. The company recently bolstered its traditional defined benefit pension plan with an infusion of $1 billion, but Graf notes that 25% of current employees have opted to switch to the new plan.

FedEx also has cut healthcare costs with an aggressive program designed to reduce absenteeism and workers compensation claims (See T&RM June 2003). Further savings have come from a cancellation of aircraft orders.

"They've succeeded in taking a lot of people out, and between that and the rising economy, they've already managed to get their margin for the Express division up to 5%," says Jon Langenfeld, an analyst with Robert W. Baird Co., adding that he thinks Graf's target of a 10% margin for express services is doable.

Meanwhile, it's not all cutbacks at FedEx. The company has begun a major expansion in Asia, opening a new 1,500-person hub in Shanghai, China. Already far and away the industry leader in express delivery in China, serving 220 cities, the goal is to reach another 100 Chinese cities over the next five years. "China is our fastest growing market," says Graf, "and it's already profitable. It will be a major contributor to our international growth." The China expansion will pose some new challenges: For instance, to enhance its competitive advantage, Graf says that FedEx plans to develop local management to handle marketing and operations, something that other foreign firms have found to be problematic.

While FedEx is continuing with its employee buyout program, Graf, 49, appears to have no plans for early retirement himself. "When I was 26, looking for a company with tremendous growth prospects, coming to FedEx was an easy decision," he says. "And it's been a wonderful ride."

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