Corporations: Closing the Profit Gap

While many businessmen groan about “profitless prosperity,” one manufacturer of everything from manure spreaders to nose cones has reversed the trend: profits are rising despite slipping sales at New York’s Avco Corp. Last week Chairman Kendrick R. Wilson, 48, a onetime Wall Streeter told a luncheon of securities analysts that Avco’s earnings for the first nine months of its fiscal year jumped 20% to $8,800,000, though sales slumped 3% to $234 million. As soon as Wilson sat down, his good friend, President James R. Kerr, 44, got up and explained how Avco turned the trick: “We have done so by liberally sprinkling financial realists in with our scientific dreamers.”

Costs v. Results. This successful formula stems from a key management decision of five years ago. In 1956, when Avco washed out of the hotly competitive appliance business and swung heavily into defense work, it vowed to pass up flashy Government contracts that offered more publicity value than profit potential. Avco figured that it lacked the know-how in liquid rocket engines to bid for the upper-stage Centaur booster, lacked the size to manage the complex Dyna-Soar space vehide. Instead, it bid successfully for products that Avco itself developed: gas-turbine engines for helicopters, height-finding radar, missile re-entry systems. Avco currently wrings 65% of its sales out of products that came off its own drawing boards in the past decade, and it is the prime contractor on 90% of its defense work. Says its top research man, Dr. Arthur Kantrowitz: “We bid only on contracts in which we have a solid ad vantage over the competition.”

While Chairman Wilson makes policy and handles finances out of Manhattan, cost-conscious President Kerr bosses operations around the country. He has assigned accountants to ride herd over every research project to help determine whether expenses exceed potential results. Two weeks ago, with accountants’ recommendations, Avco dropped one developmental program, assigned another to a licensee and beefed up a third with more money —all within three days. “Money means nothing to scientists,” says one management spokesman, who happily recalls the occasion when one budget watcher snagged a scientist’s purchase order for an $8,500 digital ohmmeter, told him to borrow one from another Avco division. (He did.) At the same time, Avco has cracked down on high-stepping traveling executives, advises them to fly tourist class and stay at inexpensive hotels recommended by the company. (They do.)

Money in Mufti. With smart bidding and shrewd economy, Avco’s pretax profit margin has more than doubled since 1957. from 3.4% to 7.6%. “But you can trim costs just so far,” admits Wilson. For the future, Avco intends to boost earnings by swinging into more profitable civilian goods, altering its defense-to-civilian sales ratio from the present 60-40 to 50-50. To help achieve this target, it is banking on a rise in industrial use of such products as its turbine engines and heat-shielding devices. “In our forecasts for coming years,” says Wilson, “profit increases are dependent upon increased sales.”