AAI Corp. pulling out of tailspin

August 07, 1994|By Ted Shelsby | Ted Shelsby,Sun Staff Writer

Nine months ago AAI Corp. was in a death spiral. Earnings were plunging, more than 2,000 jobs had been eliminated, the company's president had resigned under fire and hostile shareholders were demanding that the firm be sold while there ** was something to salvage.

So why would Richard R. Erke neff take the job as chief executive of the Cockeysville-based defense contractor when its parent company, United Industrial Corp., came calling?

"I really didn't know all the details [of AAI's problems]," he says, breaking into a laugh.

Then, more seriously: "I was aware that AAI was caught seriously in the downturn of the defense industry and that UIC was not happy with the management here, but I saw this job as an opportunity and a challenge."

Challenge indeed. AAI, once touted by the state as "a super company of the future," had become a victim of management blunders and the sharp decline in Pentagon spending after the flush Reagan years.

But Mr. Erkeneff, 58, viewed what needed to be done at AAI as an extension of what he had already accomplished as senior vice president at McDonnell Douglas' Aerospace Group, a $400 million operation based in Huntington Beach, Calif.

"When I looked at the job description, it looked like what I had been doing in recent years at McDonnell Douglas. We had to think about how to cut costs. We had to reorganize and we had to improve our processes to be more competitive," he said. With 35 years of service at McDonnell Douglas, Mr. Erkeneff was able to take advantage of an early retirement plan to accept the AAI position.

AAI reached its heyday during the closing years of the Cold War. Feeding on Pentagon orders for products such as a flight simulator to train F-15 pilots and munitions and turrets for the Sergeant York anti-aircraft gun, it was one of the fastest-growing companies in Maryland. It posted annual sales gains, and operating income grew yearly in the 12 percent to 15 percent range. From 1979 to 1987, its work force expanded from 1,500 to 3,500.

But like many defense contractors, its fall came fast and hard as government contracts dwindled. AAI's operating income dropped from $19 million in 1991 to a deficit of more than $20 million last year. Employment has been slashed by two-thirds, to slightly more than 1,000.

"It's been sad," said Claud Asbury, the security guard in the lobby of AAI's administrative building on York Road. "Very, very sad. I've seen a lot of good people go out of here in tears."

Mr. Erkeneff hopes to put that period behind AAI by returning it to profitability.

He's done little things, like turning up the thermostat to 78 degrees to cut air-conditioning costs, and selling a parking lot to a Cadillac dealer.

But there are more substantive things on which the future of AAI rests. Mr. Erkeneff has ordered a major restructuring designed to move the company into new commercial markets, such as building electric trolley buses, to lessen its dependence on military sales.

But first, Mr Erkeneff had "to stop the bleeding" from at least four unprofitable business lines that were draining AAI.

There are signs the plan is beginning to pay off.

"Things seem to be getting better," said Joyce Stroll, an administrative secretary who joined the company six years ago. "We used toring a bell every time we won a new contract. They are doing that again in the finance department. It's a nice thing for people to hear. It seems to pick everybody up. If we keep getting contracts we'll survive."

To keep the bell ringing, Mr. Erkeneff has restructured AAI into five operating units: defense, transportation, weather, firefighter trainers and fluid tests. The move is designed to have the company "better focused on the needs of our defense and commercial customers," he said.

Timothy F. Bepler, an analyst with Value Line newsletter, said the restructuring should have a positive effect on its parent company's bottom line.

AAI accounts for 80 percent of United Industrial Corp.'s revenues.

Mr. Bepler projects earnings to rebound to 50 cents a share this year(compared with a loss of 90 cents a share last year) and 55 cents in 1995. But he recommended that only risk-tolerant investors consider UIC's stock now.

Mr. Erkeneff is nearly as cautious in his own assessment of AAI's future. He sees better times ahead, but not great times. And he admits that he doesn't expect AAI to ever return to the days when it had more than 3,000 workers at its Cockeysville complex.

He said there will be more layoffs -- between 10 and 15 jobs in coming weeks -- before employment stabilizes and starts to go up again. His outlook is for employment to reach only 1,150 to 1,200 over the next couple of years.

Mr. Erkeneff anticipates that AAI will post a modest profit this year with level sales. He sees a slight growth in sales next year, then a return to a 10-percent or 15-percentrise in annual sales.

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