Three weeks after the meeting with regulators, the financing plan was approved and Allegheny's turnaround got underway. Recharging the company's finances took longer than Serkes had originally planned, but over the past year he has finally begun to reap some reward from his initial trial by fire. The company's debt is now about 30% lower than when Serkes became CFO; the ratings agencies have raised the company's debt ratings, although not yet above non-investment grade; Allegheny, with $2.8 billion in revenues in 2004, has been profitable on an operating basis for the last several quarters; and investors have endorsed the new management team, pushing Allegheny's stock to a recent high of $31–almost four times what it was when Serkes joined. "The [new management team] stepped into a pretty horrendous situation," says Tobias Hsieh, director of corporate and government services at Standard & Poor's Corp. "Jeff has delivered on his promises on getting the finances processed. Wall Street loves a manager who does what he says he will…and the stock price has reflected that."

NOT YOUR TYPICAL UTILITY HITTER

Although a novice to the regulated utility sector, Serkes has a deep background in financial management, including stints as deputy treasurer at RJR Nabisco Inc. and, from 1995 to 1999, as treasurer of IBM Corp. He then served as IBM's vice president of finance, sales and distribution until 2002. He left to be president of his own real estate investment company, when he got the call from Evanson about Allegheny. What was new to Serkes was being at a company that had so much trouble lining up investors, and that wouldn't change until the company caught up with its financial filings. Allegheny couldn't raise funds in the public markets because it had stopped filing financial statements the year before Serkes joined, and banks refused to lend any more. So its new executives had to turn to hedge funds to meet its liquidity needs, even though it meant taking on financing with a coupon of 11 7/8%. "Nobody was extending credit to us," says Serkes. "There were some nice vendors that still trusted the company, but they wanted to get paid faster, [and] all the gas the company had to buy to put in the ground for the gas business we had to pay [for] in advance." After regulators approved the initial $300 million, the company quickly sold energy trading assets for another $500 million boost. With that breathing room, Serkes and his new finance team took on the overdue financial statements for 2002 and 2003, working closely, again, with the SEC.

But Serkes can hardly put his feet up. His next goal is to regain the company's investment-grade rating by 2007, and an aggressive plan of continued debt retirement and expense cutting is driving the effort. According to analysts, it's possible, particularly after the points he earned with his efforts to cut $1.8 billion in debt between late 2003 and today.

Serkes and his team are also making an impact on environmental issues. S&P's Hsieh was particularly impressed by a recent bill passed by the state legislature in West Virginia that allowed Allegheny to pass on the cost of installing new plant scrubbers in the form of a surcharge to customers. "Jeff took a proactive approach to secure that financing," says Hsieh. Allegheny's improved financials have also allowed it to ramp up its investments in its utilities. "The plants had been underinvested in, and that's the lifeblood of the company," says Serkes. The company plans to invest between $115 million and $120 million in 2005, 2006 and 2007. Serkes hired Thomas Gardner, a former audit consultant, as the company's controller. Gardner led an overhaul of accounting processes and technology. To lead the financial reengineering, overhaul the pension plan and shore up the company's relationship with the ratings agencies, Serkes brought in a former IBM colleague, Suzanne Lewis. Lewis has since been promoted to treasurer, where she oversees typical cash and hedging negotiations, as well as other areas that would be far afield for most treasurers. "What is completely different for me is that I'm brought into all the regulatory issues…negotiating with regulators and describing things to them and filling out testimony and applications," says Lewis. Among the team's accomplishments was getting through the first year of Sarbanes-Oxley Section 404 audits with no material weaknesses. As a sign of how far the company has come, Serkes compares that with a report on internal controls completed two years ago by the company's auditors, in which more than 30 separate material weaknesses were identified.

Although Allegheny is walking again, it has yet to prove it can run. Debt, though much lower than in 2003, remains worryingly high, according to S&P's Hsieh. The company is also fighting an environmental class-action suit led by Eliot Spitzer, the New York State Attorney General, centered on alleged violations of the Clean Air Act at several coal-fired plants. All major issues, but thanks to the stable financial framework that Serkes and his team have put in place, Allegheny is still around to face those challenges one by one.

RICHARD KRAMER, CFO, GOODYEAR
Last September, Goodyear Tire & Rubber Co. triumphantly reported that it had increased its global operating margins to 6.2%, slightly above what it ambitiously set out to do in 2002, when it was struggling with poor returns, a load of debt and excess capacity. Back then, many in the markets predicted that the near tripling in margins would be difficult, if not impossible. But then again, they may not have known how determined Richard Kramer was–and is.

For the bulk of the corporate overhaul, Kramer–today Goodyear's 42-year-old executive vice president and CFO– had served as senior vice president for strategic planning and restructuring and was therefore intimately involved in the reshaping of the $18.3 billion tire maker. And while Goodyear's management had to cut costs, sell assets and bolster sales, the work really began–as Kramer will readily tell you–in finance, with the restructuring of Goodyear's credit facilities and outstanding debt, which bought the company the time it needed to implement its turnaround plan.

In late 2002 and early 2003, concerns about Goodyear's disappointing earnings were compounded by worries about the large debt payments the company had coming due in 2005, 2006 and 2007. Saul Ludwig, an analyst at KeyBanc Capital Markets, says that combination suggested that Goodyear could suffer a liquidity crisis. "Finance convinced investors that [Goodyear] had a plan to improve results," he says. "As a result of that, investors agreed to lengthen the maturities of [Goodyear's] debt, eliminating any short-term liquidity risk."

Over the course of three years, finance engineered a series of transactions that extended Goodyear's debt maturities five to six years. Kramer, who was promoted to CFO in 2004, says the finance team had a lot of convincing to do as it worked with Wall Street and investors to arrange the refinancing. For example, in 2003, when it did the initial transactions, both Goodyear and the tire sector as a whole were experiencing tough times. "We didn't have at that point in time a great deal of momentum as a company, or quite frankly as an industry," Kramer says. And in 2004, when Goodyear delayed its SEC filings amid accounting restatements, "we had to go out and refinance without a current 10-K on file," he says.

Initially, Goodyear had to do secured transactions, in which it pledged various assets as backing for the deals, Ludwig notes. "The fact that they were able most recently to get an unsecured line of credit going out to 2010, that was a masterful job," he says. "Without the short-term risk of maturities breathing down their neck, they have the flexibility and the wherewithal to do what they need to do."

QUALITY NOT QUANTITY

Finance's participation in the turnaround was not limited to the refinancing. It also helped to shift Goodyear's focus from how much business it was doing to how profitable that business was. "The company had been a little bit more volume-oriented than profit-oriented," Kramer says. "It was the finance organization that said, 'Volume doesn't cure everything. Volume at good margins cures a lot. Volume for volume's sake doesn't cure anything.'" The focus on profitability resulted in changes in the way that Goodyear allocates funds, he says.

Finance also deployed its analytic skills on the businesses' behalf. For example, it helped to fine-tune Goodyear's pricing. In the past, the company often raised or lowered prices on all its products by the same percentage, but finance worked with sales and marketing to break pricing down by individual products. "We did very specific analytics by size and type of tire," Kramer says. "It allowed us to do a much more accurate pricing." Finance even played a role in Goodyear's introduction of the Assurance brand of passenger car tires, by helping sales and marketing evaluate the different segments of Goodyear's consumer tire business to see which had gone without a new product for the longest time, Kramer says.

The finance group's ability to influence Goodyear's business units reflects its combination of a command of the financial data with insight into the business, says Kramer, who spent 13 years at PricewaterhouseCoopers before coming to Goodyear in 2000 as vice president of corporate finance. "When you get a finance person who understands the numbers but marries that with a real understanding of the company–the customers, the products, competitors, what's happening to the business–then you gain credibility as an organization and you can get the operations teams to focus on what the challenges are," he says. Treasurer Wells says the department's achievements also reflect the spirit that Kramer engendered by "making sure that finance approached the work it did with a can-do attitude."

Going forward, Kramer says finance will focus on cutting costs and improving working capital management. He's also intent on building a best-in-class finance organization. "Over the last year and a half, we've made over 70 changes in key finance leadership roles around the globe," he says. A new finance quality improvement organization, headed by Wells and controller Thomas Connell, will work on standardizing Goodyear's finance processes around the world and making them more efficient.

And Kramer wants finance to take an even more active role in Goodyear's operations. As business becomes increasingly complex, "financial information is absolutely at a premium," he says. "What our finance organization needs to do is do a better job at providing our company with information it can use to make decisions."

DAVID DEVONSHIRE, CFO, MOTOROLA INC.
When Motorola Inc. announced a $4 billion share buyback this past May, the transaction had a lot more meaning than the typical Wall Street stock swap. The first repurchase in Motorola's 62 years as a publicly traded company, the program–to be completed over 36 months–marked a major turnaround for the once-troubled manufacturer of portable electronic gear. No one had more to celebrate than David Devonshire, executive vice president and CFO since 2002, who put improving the company's cash position and paying down debt at the center of his financial strategy. "Our cash flow was becoming much more predictable on a quarterly basis and we felt quite comfortable," says Devonshire, 60. "We are certainly and [are] always in the acquisition hunt, looking for key companies to help facilitate our growth, but we have excess cash flow generation and the way to create value from our perspective was to return it to shareholders in a share repurchase."

Besides the repurchase, investors also have been enamored of other Devonshire-driven accomplishments. While the $31.3 billion company carried more than $9 billion in debt on its books when Devonshire joined, almost half that amount has been paid off. Operations generate $2 billion in free cash flow annually, many multiples of what they were in 2002. Working capital as a percent of sales is down to 12%, from more than 20% three years ago. "As far as I'm concerned, cash is No. 1," says Devonshire. "That's enabled us to get an incredibly pristine balance sheet, pay off the debt and do a $4 billion share repurchase–and [still have] excess cash to do any deal we want to do."

As far as Motorola has come, the Schaumburg, Ill.–based company still faces challenges. While Motorola has been riding high again with consumers, thanks to desirable products like the ultra-thin RAZR cell phone, some market watchers have concerns about whether the company can continue rolling out winning new products that will allow it to expand market share. "The fight's not over for Motorola," says Mark Sue, director of communications equipment research at New York-based investment bank RBC Capital Markets. "They've made quite a bit of progress, but relative to their peers they have a ways to go." He points out that its gross margins of 32% are still on the low side, as are operating margins, which he estimates at 11.5%. Even so, Sue does not feel that those negatives diminish the balance sheet improvements made already. "David is very good with financial controls," says Sue. "He recognized early what to do with improving cash and the balance sheet. They're heading in the right direction."

Devonshire brought a wealth of experience in financial turnarounds, first as controller and vice president of finance at Honeywell in the early 1990s and as CFO at Owens Corning after that. When he was tapped for the job at Motorola by then-CEO Christopher Galvin, Devonshire was four years into his latest post as CFO at Ingersoll-Rand. "To be honest, I've always thought of Motorola as an icon-type company and so any thoughts of a turnaround I wanted to be a part of. The people were fundamentally great people, just maybe we were doing too many things so we needed to prioritize and focus and make some hard decisions."

Motorola had been struggling for several years before Devonshire arrived. By 2002, it had already been through numerous restructurings, layoffs and strategic misfires. "There was a constant pain [from multiple restructurings] to the street and investors," says Devonshire. "My concept was, 'Let's take one big [charge] and get out of the restructuring business.'" A few months after he arrived, Motorola announced a one-time $3 billion restructuring charge. There would be other charges as well as layoffs, but they have been mainly related to disposals that provided focus for the next stage of growth. It was time for the company to move forward.

The management team has faced tough choices involving the optimum portfolio of businesses, a new management incentive program tied to cash flows and working capital levels, as well as executive upheavals, to reach its current state. (CEO Galvin was replaced in 2004 with former Sun Microsystems COO Ed Zander.) One of Motorola's boldest moves was getting out of the semiconductor business a year ago. The deal to spin off Freescale Semiconductor improved the overall capital profile, adding more than $1 billion to its coffers and removing an operation with a capital expenditures-to-sales ratio of 20%, relative to less than 10% for the rest of the company. In the spirit of continuous improvement (a la Six Sigma), recent attempts to cut expenses have led to an overhaul of supply chain management that are expected to improve gross margins by 1% to 3%.

ON TO THE NEXT CHALLENGE

Treasury is led by James MacLaughlin, a former senior vice president of Motorola's networks business, who replaced 26-year Motorola veteran Garth Milne earlier this year. "Jimmy was very instrumental in helping to kick off the share repurchase program, doing the analytics and looking at our long-term capital structure in terms of where we want to be and how we want to be perceived," Devonshire says.

Devonshire is far from done at Motorola. Although its credit ratings have improved in recent years, he is determined to take it further by winning back an A-minus rating, last seen in 2002. He expects further improvements to Motorola's debt-to-total-capital ratio to be a deciding factor for credit analysts. Given the impressive results Devonshire has helped foster at the company, anyone doubting his determination had better think twice. "We don't only want to be the No. 1 market share leader in the markets that we serve," he says, "we want to be No. 1 in everything we do."