There are two routes to becoming a corporate CFO, says Richard Fearon, vice chairman and chief financial and planning officer for Eaton Corp., a $15.4 billion industrial manufacturer.
Twenty years ago, most CFOs came through the accounting and controller route, recalls Fearon. Today, "you'd probably find a more even mix between folks that have come up through the controller and accounting route and folks that have come up through a more general management route," says the executive, a planner and forecaster cut very much from the latter mold.
Indeed, look into his prior jobs and you won't see a hint of traditional finance. Fearon joined Eaton from Willow Place Partners, a Menlo Park, California-based corporate advisory firm he founded in 2001. From 1995 through 2000, he was with Transamerica Corp., where he was most recently senior vice president of corporate development. From 1990 to 1995, he was general manager, corporate development, for Singapore-based NatSteel Ltd. and vice chairman of NatSteel Chemicals.
Fearon believes his background in strategy has enabled him to foresee which business areas are headed for trouble and which are bound to bloom — and help Eaton act accordingly. For example, before the auto industry completely tanked, he foresaw trouble and pushed for a strategy that went elsewhere; similarly, he foresaw potential in electrical efficiency, and the company is now hoping to parlay that into success and stimulus money in the blossoming environs of energy.
While the finance and planning chief grants that the challenge of building sustainable revenue looms for the company, he thinks the worst of the recession's effects are over. To be sure, the company's third-quarter sales were down 26% from the same quarter in 2008, and net income was $193 million compared with $315 million in 2008, a decrease of 39%.
- "The biggest risk we face is that the economic rebound will be followed by another leg down, where we see that there isn't sustainability in the recovery." — Richard Fearon, vice chairman and chief financial and planning officer, Eaton Corp.
Still, Eaton delighted some analysts by spawning operating earnings of $1.21, beating the midpoint of its operating profit guidance by 26 cents. Even more promising was its operating cash flow of $471 million for the third quarter and $1.6 billion in the past 12 months. On October 21, in a wide-ranging interview just two days after the company's quarterly earnings call, Fearon talked to CFO.com about the outlook for his company and the country — often in strategic terms. An edited version of the interview follows.
How has your strategy background been helpful at Eaton in your role as finance chief?
I've had a great deal of experience in different sectors of the economy that's extremely helpful in making those kinds of strategic decisions. Over the past years, ever since I started in 2002 at Eaton as CFO, we've been pursuing a change in our business portfolio. We're driving at a portfolio that is more consistent in its earnings, has higher returns on capital, and has a higher growth rate. In pursuit of that, we've significantly altered our mix of business, both by industry sector and geography.
We have, for example, very significantly expanded our exposure to the electrical industry. In 2003 our electrical business was 29% of our sales, and in 2008 it was 45% of our sales. And that 2008 number doesn't include the full-year benefit of two very large acquisitions in the electrical space, one of which closed toward the end of February and the other April 1. If you annualize that, the electrical sales would be about half the portfolio.
We also greatly expanded our exposure to non-U.S. markets. Today about 55% of our products end up outside the United States. In 2002 about 30% of our sales were outside the United States. As part of that geographic expansion, we've also greatly expanded sales into emerging markets. Very close to a quarter of our sales are into developing markets.
On the other hand, you've decreased your exposure to the automobile industry.
Yes. That's been a very concerted strategy to really focus in our auto segment only on those product areas where we felt we had true technological advantage and where we believe that we either had or could develop a market position that gave us a clearly sustainable edge over the competition. And so we have selectively sold product lines that did not fit those characteristics. Our automotive business in 2003 was 26% of our sales, and in 2008 it was 12%.
Your auto-industry strategy seems to have been prescient. Did you know something that everybody else didn't know?
Maybe one of the benefits of coming into this position from a strategy orientation is that it was apparent to me and to others on our senior team that the structure of the auto industry was going to create challenges. Fundamentally, you have too many [original equipment manufacturers], very few of which have market positions that are clearly sustainable. You have an incredible amount of competition occurring, and at the same time you have a market that is growing at 1% to 2% a year. That is below global GDP growth. A slow-growth market with customers that have a set of challenges appeared to us to be a recipe for difficulty. However, given our heritage in the technologies that we have developed over the years, we believe that we can create a niche in that industry that can still enjoy good returns.
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