Tom Falk, chairman and chief executive of Kimberly-Clark, said the company's plans to eliminate another 1,600 salaried positions was necessary if the personal care products company was to stay competitive against an increasing threat from private-label brands. If the company's latest recovery plan falters, however, could union workers be next to face the dreaded pink slips?
Unit sales of Huggies diapers, Kotex feminine products, Kleenex tissues, and Scott paper towels declined in the first quarter, losing share to lower-cost store brands sold by retailers, such as Wal-Mart, and other consumer products companies, like Procter & Gamble (Bounty paper towels, Charmin toilet paper, and Luvs diapers).
Given the weak economy and growing threat from competitors, there is little wiggle room for the company to pass along to its customers the rising cost of certain raw materials, primarily energy, polymer resins and other oil-based materials. Management has squeezed cost savings from improvements in manufacturing efficiencies (such as lower distribution costs resulting from moving diaper-making facilities to high-growth regions) and inventory control (the first quarter saw a seven-day sequential decline in inventory levels compared to year-end 2008).
Improved working capital performance, however, is being tempered by poor returns on its defined contribution pension plan assets. During the first quarter of 2009 and fiscal 2008, the company lost $65 million and $370 million on its pension plan assets. In addition, at year-end 2008, plan assets were under-funded by $1.8 billion.
Despite net workforce reductions totaling more than 6,000 in the last three years -- and resulting cost-savings of approximately $385 million annually -- K-C's pension costs continue to climb. As such, management said in April that it would replace its defined contribution plan for all non-union employees and replace it with a new 401 (k)plan, effective January 1, 2010. The old plan would be rolled into the new plan, too. CEO Falk told analysts on the first-quarter earnings call that this action would reduce 2009 pension expenses by about $40 million. Nonetheless, the company still anticipates contributing about $530 million for fiscal 2009 to its pension trusts (versus $108 million in 2008). Unless stock market conditions improve, in my opinion, actual pension expenses could be much higher, as the expected rate of return on plan assets is an unrealistic 8.17 percent for 2009, according to regulatory filings. (For example, each one-percent decline in the expected rate of return on plan assets will increase annual pension costs by about $28 million.)
Management said it would not close any factories as part of its workforce reduction initiative, which should please representatives of the eleven labor unions -- from the United Steelworkers to the Textile, Footwear and Clothing Union -- that deal with K-C. Approximately 30 percent of the company's 53,000 workers are partners to collective-bargaining agreements, according to K-C spokesman Lance Latham. Management claims good employee relations, with only a 9.8 percent turnover rate last year, according to the 2008 Sustainability Report. However, should the economy prove slow to turn around, and if management start slashing union mill jobs -- from timber workers to forklift drivers -- labor problems could supplant Wal-Mart and P&G as the new rash in Kimberly-Clark's diaper.
UPDATE: Rewrote the last paragraph with new information from K-C.