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Monday, May 1, 2006

Face to Face With Lynn Tilton

MD Helicopters chief Lynn Tilton takes on the rotorcraft industry's traditions of supply chain management--and Rotor & Wing's coverage of her efforts--in a sitdown at Quad A.

The chairman and acting CEO of MD Helicopters, Lynn Tilton, took issue with the editorial and an accompanying Rotorcraft Report item in our April 2006 issue about her comments on the state of that company and the rotorcraft industry during Heli-Expo 2006. A response by Ms. Tilton and a transcript of her Heli-Expo comments are available at www.mdhelicopters.com. Last month's Army Aviation Assn. of America convention in Nashville, Tenn. provided an opportunity for Rotor & Wing Editor-in-Chief James T. McKenna to sit down with Ms. Tilton and discuss her comments, the state of MD and the position of the company's MD902 Explorer-based bid in the U.S. Army's Light Utility Helicopter (LUH) competition.

TILTON: I'm here to speak the truth and I hope that if you're going to write anything that you will write the truth. You should ask me any question you'd like and you'll get it straight. What I'm going to do is to change this industry so that mediocrity is no longer accepted, late deliveries are no longer the norm and spare parts are no longer difficult to find. That's what I'm doing with my blood, my sweat, my money--globalizing manufacturing. I'm taking the difficult steps that other people don't take. I'm not only investing the Patriarch funds but I'm putting my own money and my own time into this process. My reputation goes far beyond this one company . . . I have 66 other companies around the world that depend upon my reputation. If you think I would stand in front of the generals of the U.S. Army and say, "I can deliver" if I couldn't, then you have not done a whole lot of work getting to know me.

If you think you can raise $5 billion in the marketplace and not be a woman of your word or a woman of great honor and credibility, then you don't know much about business away from the rotorcraft industry. And perhaps before you write about me the next time, you should learn a little bit more about me. So I am here to tell you whatever you want to know.

R&W: You announced at Heli-Expo a number of agreements with suppliers and that you had committed to the Army to meet the delivery schedule for 2006 and 2007 LUH. What, if any, additional steps do you need to do to lock down that supply chain and overcome some of the problems you outlined that were not only MD problems but industry-wide problems? Or are you done?

TILTON: We have long-term agreements with all our major suppliers. We are in the final stages of negotiations with one supplier over long-term agreement pricing, but we certainly have sufficient finished goods and work in progress with that supplier to get us through our LUH commitments. Now, remember, we're only talking about 22 helicopters through 2007 [for the LUH program]. When I talked to you [at Heli-Expo], I was talking about being ready to deliver 26 helicopters. When we recently provided to the U.S. Army a copy of our J.D. Edwards information management system, I think we had in stock, or firm delivery dates, on over 90 percent of all the parts for 2006 and '07. So my answer to you is I have nothing to overcome to be able to deliver all MD's U.S. Army orders for '06 and '07.

R&W: The fuselages you're going to build yourself?

TILTON: The 902 fuselages are being built by Tusas [Aerospace Industries] right now in Turkey, and we have a long-term agreement with Tusas . . . Now eventually we will also run a second production line on the tooling for the 902. We are also in the process of building a second set of tools for both the single-engine as well as the twin engine fuselage and component parts. We are in the process of negotiating the purchase of an aviation facility in China, where we plan to FAA-certify both the single-engine and the twin-engine, and we will have a second set of tooling there as back-up to support our own production. It is my intent over the next 18 months to bring about 80 percent of MD's manufacturing, whether primary or secondary, under our own global roof.

R&W: Meaning the Patriarch roof?

TILTON: Yes, the Patriarch roof, whether it's part of MD or part of our other aerospace companies. The Nanchung, China aviation facility will be purchased by MD, and that's so we can certify (FAA-certify) in China. We would use that facility to deliver to Asia, the Middle East and Africa--where infrastructure is being built.

R&W: You mentioned one of the advantages that the Chinese facility had was that they were doing a better job of acquiring raw materials. What's the status of acquisition of raw materials?

TILTON: I think it's very difficult. I think that, especially with composite materials, you have a lot of issues with military orders coming in in front of you. So where you're dealing with Cytech and Hexcel, who are major composite material manufacturers, the vendors are continually postponing orders because military orders are being placed in front of you.

You can't blame them and there's not much you can do about it. But if you have deliveries where you have made promises to people, those customers don't want to hear that you didn't get your shipment of composite materials and you can't build a tail boom for them because there is a military order in front of you. That is one of the reasons that Patriarch has set up--and we're just at the beginning stages of doing so--Patriarch Partners Direct LLC, which is a raw-material procurement, distribution and logistics platform just for Patriarch companies worldwide. And so what we have decided, and a lot of this I have learned at the knees of MD and will be forever grateful, is that Patriarch portfolio companies together--on a raw-material basis--are such huge consumers that it is much more intelligent for Patriarch to procure and buy, in size around the world, the materials that are needed by the portfolio companies.

R&W: Would that issue be mitigated if you won LUH because you'd have the Defense Dept. stamp on your orders or would that still be an issue?

TILTON: I think that material shortages will be an issue for everybody. I think one of our misunderstandings the last time was that what I stated in my speech was there are supply chain difficulties ahead for all aerospace companies . . . I think the industry is frail and flawed. I believe that, perhaps an intelligent choice at the time, the industry moved in unison toward outsourcing all of its component parts, because where there existed high labor content, there existed opportunity to outsource and save money.

But what has happened, over the last five years, is that we have moved into a more global, variable world where infrastructure has been built in Asia, in the Middle East, in Africa, in Eastern Europe, and it is not U.S. infrastructure. It is country-indigenous infrastructure. There is a battle for raw materials and the one thing that we need to recognize in this country is that it is no longer all about us. Every manufacturer overseas is not building component parts to deliver to the United States.

There's a reason this country does not export. It's not that there are not consumers around the world. It is not that there are not rising middle classes around the world. It is simply that they can buy goods cheaper in their homeland. And since there's production and industrial globalization, there is a shortage--everyone is fighting for the same materials. I do not expect the material shortages to be finite or the pricing to diminish at any time in the near future.

And so when I ask, "Is it going to change for us?" I don't think it is going to change for anybody. You talk to the military, they are not happy. They are not receiving deliveries on time from our competitors and from other aircraft manufacturers. Everyone is suffering under the same burden.

Let us not confuse what I think will be a hindrance to MD in the future with what I think is a hindrance to the entire industry in the future. And what I said at my press conference [at Heli-Expo] and what I will reiterate is that after Patriarch invested in MD, I triaged the MD supply chain.

When I said I used triage, I meant I have reignited the MD supply chain with most of its old supply base and some new suppliers where old suppliers did not come back, but this did not include any of our major suppliers. When I said I triaged it, I did not mean that I failed to reignite it. What I said was that, even by weaving the vendor base together again, it was not a long-term fix, because outsourcing a low-volume, capital-intensive industry is an oxymoron.

What I also said was that I have vowed to take it one step further: to display the courage of conviction to move against the tide of the rest of the industry and to do myself what others could not do in a timely fashion for me, which is to bring the manufacture of most of MD's fuselage and component parts in-house and to find those suppliers who we can and will stand shoulder to shoulder with MD around the world. I think I mentioned Rolls-Royce, Pratt & Whitney and Kawasaki as some of the responsible suppliers with which we would team. And where we could not find that partner in the supply chain, in order to be a responsible OEM that would meet on-time deliveries and would always have spare parts available, we would build it ourselves. And, as we have discussed, I have already started that global manufacture process.

R&W: But even if you did nothing further on that front, as you stand right now you can make the '06 and '07 LUH [deliveries]. . .

TILTON: And all my commercial orders.

R&W: But you're not taking any more commercial orders . . .

TILTON: We have commercial orders we will now be able to deliver in '06 because of the reduction in the needs for LUH in '06 and the timing change. So we will move some of our first-quarter '07 commercial deliveries up to the fourth quarter of '06.

We will deliver five helicopters over the next six weeks to the Turkish National Police, and we have walked through fire to do so. When necessary, we went out and bought our own materials, we sent engineers to the sites of our suppliers, and when needed, we sent labor into the field.

That is the new MD. It is a company that will not settle for mediocrity, one that when we commit to a customer, we deliver. So we would rather not take more orders than we can handle consistent with that commitment. We want to under-promise and over-deliver. But I anticipate that MD in 2008 will be a 300-per-year helicopter company and it will be a global manufacturer. Above all, our deepest commitment is to our operators; we want to have the flow of spare parts available to them at all times.

R&W: You mentioned at Heli-Expo your discomfort at the inability to deliver a flex beam to a customer. I gather from what you're saying that you've resolved that problem and you've headed off that problem in the future, or is that still a challenge that you're wrestling with?

TILTON: We receive new AOGs all the time. We have two flex beams, at this time, that we need to deliver to the U.K. and those will be available next week, with an additional two a week after that. We have 12 flex beams that will be delivered from our supplier in 19 days. I just wrote a return email to one of the operators who wrote to me, "Commitment--how many flex beams do you have in stock?" So I wrote back exactly that which is the MD truth (and I could look it up to confirm but to the best of my recollection), we have zero in stock today [April 10]; we will have two by the end of the week, and MD will have another two the following week. I believe by that time Kaman will be ramped up and we expect, at that point, I believe the number to be 12 in the next 19 days. It is anticipated that, by July, MD will have full flex beam and rotor blade production at Kaman . . . But what is so important to understand, and what I have tried to clearly state is that back in July we started to rebuild a company whose supply chain and production line had been shuttered for the better part of four years.

Of the $40 million of payables that the Patriarch Funds assumed, much of it had been outstanding for over 36 months. MD has no outstanding payables today when netted against prepaid inventory. Now that is not necessarily the most efficient way you want to run a company, but that is how I have had to run this company to ensure that there are no glitches in the commitments made. MD also has established now -- since we have paid off all debts as due -- long-term relationships. We have set net terms with our major suppliers and the only ones that we do not have net terms with are the ones that are strapped and have to operate on MD's cash.

It's a very different world today, Jim. I am the lady with all the cash. I am the one who supports many of the smaller suppliers out in the world and makes sure that we can be responsible to the customer no matter what it takes to deliver. And when I realized that we had to front and purchase materials for many suppliers, that we had to send bodies and engineers to support the efforts of many suppliers and engineers, it came apparent to me that, if this would remain necessary, then it probably made more sense for Patriarch companies to serve as MD's own supply base in those circumstances.

As a Tier 1 and Tier 2 supplier to the automotive industry, an industry where GM produces 25 cars per minute and yet has still put most of its supplier base out of business, the realization affirmed that small suppliers in the U.S. really can not survive long term, unless they have an unique niche or are completely robotic.

And so my gift, in the end, is vision and the courage of conviction to shift paradigms and to change industries. What I have said is that reigniting the supply chain into the vendor base it once was at MD is not enough for me or where we will stop. I will take one step further than our competitors and stand upon the precipice to preach that we need to go back to the old model, to the glory days of Hughes Tools and, once again, depend upon ourselves for production if we make the choice to be responsible OEMs. I will give that time commitment and offer that money commitment to the qualification and certification of parts and facilities for the long-term future of MD because I want not only to be the safest helicopter in the world, but to be number one in customer service.

R&W: On LUH, you've gotten, as the other teams did, the invitation to go into the discussion phase with the Army?

TILTON: Yes, we will be in Alabama the week of May 1. The Army has provided us with a list of items for negotiation (IFNs). That is what we believe is the discussion phase --face-to-face discussions with the U.S. Army in regard to the IFNs for up to six days. We have also provided answers to EOCs, which is a continuous process of questions where the U.S. Army asks for clarification or follow-up on certain issues--financial, operational, supply chain or engineering-oriented as it concerns the helicopter. There have been continued questions that have grown forth from the continual process. We have been involved every bit of the way.

I don't know what is the path walked by any other competitor, but I have assumed that this is also where our competitors stand. I know that I had tried to modify the dates because I had planned to journey overseas, but everybody had their week and there were no changes being made . . ..

It has taken tremendous courage of conviction on my part, from the time this RFP was issued, to lead a company that had been effectively shut down and to bid for a major military contract. MD further disengaged from Lockheed and its credibility, with the sole purpose that MD would meet the pricing that the U.S. Army required. We further toiled to reignite a production line that had been utterly shuttered, prime a supply chain that had been for years on credit hold and build two compliant helicopters that could actively compete during SSPD, at each stage. But I stood with reputation in hand on that ledge for one reason only: because I believed that without a doubt the MD LUH Explorer is the safest helicopter and the right helicopter for the mission.

MD will be a very successful and profitable commercial company with or without LUH. But I am, at heart, a Patriot. I save companies and I save jobs. For me there would be no greater honor than to have the U.S. Army and U.S. Army National Guard pilots fly their missions in the MD Explorer.

This was not an easy task, which is truly why the articles you published were so painful for me and my team at MD. I probably invest 60 hr. per week personally into MD, and the Patriarch Funds own 67 companies. My commitment is my word. My word is my bond. I have recruited rotorcraft legends like Andy Logan and Chuck Viehlow [both MD veterans, with Logan a patent holder on MD's NOTAR directional-control technology] out of retirement to take this magical mystery tour with me, for one reason only -- because we believe in this product. We believe we owe the MD customer, who has waited a very long time for the delivery of parts for the helicopters in which they fly, to earn a living.

R&W: Anything else you wanted to say about LUH or the supply chain?

TILTON: The MD supply chain is up and running. We're taking new orders, and I, myself, am flying around the world to meet with customers who want to place large orders. We are also considering new and additional production in many different countries. I just want to make certain that there is no longer any confusion between the re-ignition of a supply chain that compares to others of the industry, in contrast with my desire to build an in-house supply chain for long-term viability and responsibility that is contrary to the industry methods today. I just want to make sure that this time we are perfectly clear on the line of distinction.

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