More than seven months have passed since Itzhak Nissan took up his post as Israel Aircraft Industries Ltd. (IAI) CEO, and he can already afford to smile. Yesterday, Nissan presented the company’s results for the first half of 2006 to the board of directors. These showed that the company had achieved the best performance in its history. The most notable figure of all, was pretax profit, which increased to $51 million in the second quarter, a 500% jump on $8 million in the corresponding quarter of 2005. IAI profit for the first half of 2006 increased 200% to $75 million, from $25 million in the same period of last year.
IAI’s second quarter sales also jumped substantially, totaling $713 million compared to $546 million in the corresponding quarter last year, a 31% increase. Sales for the first half of 2006 rose 18% to $1.3 billion, up from $1.1 billion in the same period last year. Also showing impressive growth was the company’s orders backlog, which rose 26% to $7 billion in the first half of 2006 compared to $5.6 billion in the corresponding period last year.
Part of the credit for the company’s performance must go to the previous IAI management headed by former CEO Moshe Keret, although Nissan also deserves credit for his activities since taking over the helm and the changes he has made in the company.
Perhaps the most important of all Nissan’s decisions is the allocation of $26 million of the company’s profits for the employee early retirement scheme, which was introduced as part of the streamlining program. In doing so, Nissan has opened a new chapter in the history of government-owned companies, especially the defense industries. The recovery program at IAI will be financed from the company’s own resources, rather than from government hand-outs.
Upon taking up his post, Nissan held a series of discussions, a “project marathon” as he called it. He met with managers of all the company’s divisions and factories, who briefed him on all the projects currently in progress, of which IAI has 3,000. Nissan studied all the projects and asked for details on completion timelines and risk factors. These discussions produced decisions on a number of issues.
Cutting costs in New York
One of the first actions he tooks was the restructuring of IAI’s US subsidiary, IAI International Inc., which had two headquarters in New York and Washington. It was decided that the New York office would close, a move which generated an immediate saving of $5 million. Brig. Gen (Res) Uzi Rozzen, until recently VP strategic development, was appointed manager of IAI International, in place of Moti Boness who will retire from IAI.
Also undergoing restructuring is IAI’s management backbone. The company’s management forum, comprising deputy CEOs, division and section managers was reduced from 17 to 14 members. Nissan made also forced the other candidates for the position of CEO to retire, or moved them to other jobs. Most notable of these were assistant CEO Ovadia Harari and Elta Systems manager Israel Livnat, who left the company. Veteran Bedek division manager David Arzi was moved to the post of deputy CEO for commerce and aviation relations development. He will be replaced by former executive jet production manager Danny Kleinman.
Nissan considers this a natural process, similar to the one in the IDF where the unsuccessful contenders for the post of chief of staff retire from service. He appointed nine new members to the management forum but made it clear to all of them that they would be judged by their performance. Anyone who does not meet the required performance target will not continue in his post. Thus, Nissan brought in new blood, brought down the average age group of IAI management and also secured a firm political power base for himself within the company management.
Problematic profit
Nissan feels that IAI’s toughest problem is its low profitability, which “harms the company’s economic strength and is not in line with the benchmark in the sector.” This is an area that was neglected by the previous management under Keret. Compared with the dramatic increase in the orders backlog, which has doubled since the beginning of the decade, IAI’s profit has a statistical deviation range of 1-2%.
The key problem that the previous management was reluctant to tackle was hidden unemployment. The concept was that the government was the one that should provide the resources needed to streamline operations. As CEO, Nissan adopted the management methodology that he applied at the missile and space division. His first step was to deal with the internal problems that were weighing down on the company’s profitability. First on the agenda was the turning around of IAI’s loss making factories.
It has been known for years that the company has a problem with its three non-high tech factories: the aircraft maintenance plant in the Atarot Industrial zone in Jerusalem; the SHL (hydraulic engineering services) plant in the Ben Gurion Airport Complex, which manufactures undercarriages for civil aircraft, and the Ramta factory in Beer Sheva, which builds Dvora patrol boats and assembles railway carriages.
These factories employ more than 800 people. Nissan knows that sackings is considered a vulgar word at IAI. Therefore, he talks in terms of “lowering overheads, and adapting them to market changes.” He has drawn up a plan “which will enable the retirement of employees whose contribution has decreased.” Most important of all, every action must be carried out in full cooperation with workers committee chairman Haim Katz.
Retirement Plan
In the meantime, it has been agreed that the first people to retire will be employees aged 60 and upward with tenure in excess of 30 years. The retirement plan will cost NIS 1 million per employee. 120 employees in all will leave under the retirement plan, to which Nissan has allocated $26 million. The previous IAI management waited in vain for the government to provide a budget of NIS 500 million - 1 billion to finance the redundancies. Nissan has decided not to wait any longer and the streamlining at IAI will be financed from company profit.
Parallel to the retirement of inefficient staff, plans are in place for an intake of 2,000-2,500 employees, mainly software and systems engineers, by the end of the decade. IAI’s workforce currently stands at 15,000 (including an intake of 2,000 since the beginning of the decade). This will reach 16,500 by the decade’s end, once the streamlining and new employee intake programs have been completed.
It should be remembered that Nissan is operating in a business environment that is much more accommodating than the one that the previous management had to face. In June this year, the binding agreement between a consortium of five banks that had weighed down IAI expired. Under the agreement, originally signed in 1996, IAI received a $360 million loan from the banks, after it found itself without any working capital. Since then, the company’s equity has gradually increased, from $78 million in 1997 (a capital to balance sheet ratio of 4%) to $473 million in June 2006 (a ratio of 17%).
Breaking free from the banks
This was the dowry that Keret left Nissan. With the ending of the banking arrangement, IAI is no longer required to deposit cash receipts received for projects that were secured with bank finance in closed deposits. The former yearly allocation for repayment of bank debts will now be added to the company’s net profit.
Following the discussions on projects and company targets, Nissan drew up a strategic program, which was presented in April this year at a meeting of the management forum. Nissan has called for IAI to be based on interdisciplinary military systems (systems of systems), which he classifies under the mega-project group. These will integrate the full spectrum of the company’s research and production capabilities in avionic platforms, missiles, command and control systems. These are projects in which IAI has an advantage and they also have the potential to yield revenue and profit of hundreds of millions of dollars.
IAI will base its business in the coming years on the following growth engines: unmanned aircraft; surveillance, task and early warning aircraft; radar systems (airborne, land, and balloon carried); attack and defense missiles; satellites and satellite launchers; conversion of aircraft for use as cargo carriers; executive jets; intelligence and homeland security systems.
For many years, IAI’s production for the defense sector has totaled $40-500 million a year. 78% of its production is traditionally designated for export and Nissan plans to increase this to 90%. IAI’s main export destinations are the US and Asia, while the volume of exports to Europe are extremely low.
Nissan feels that to strengthen its marketing ability, IAI needs to acquire two companies with annual sales of $200 million in Europe and the US, which will serve as key anchors for its activity. To this end, IAI will make a first issue of marketable bonds during the first half of 2007. The issue, which will raise $250 million, will be carried out in two stages.
At the management forum, Nissan set four targets to be reached by 2010. He expects annual sales to rise to $4 billion and orders backlog to increase to $9 billion, with pretax profit at a rate of 8% and $250,000 in sales per employee.
Published by Globes [online], Israel business news - www.globes.co.il - on August 10, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006