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A.) The recent Great Recession of 2008-2009 has had significant impact on a wide range of corporate performance. What impact would you predict it had on leverage? Would financial leverage have increased, decreased, or remained the same? What about operating leverage? Why? please elaborate and explain

B.) What do you think is the relationship between a firm's operating leverage and its financial leverage? Do you think the two measures are positively correlated, negatively correlated, or unrelated? Elaborate and Explain your answer.

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Collen Von
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26 Sep 2018

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Garnett Jackson, the founder and CEO of Tech Tune-Ups, stared t the window as he finished his customary peanut butter and jelly dwich, contemplating the dilemma currently facing his firm. ech Tune-Ups is a start-up firm, offering a wide range of com- ter services to its clients, including online technical assistance, ote maintenance and backup of client computers through the temet, and virus prevention and recovery. The firm has been 'ghly successful in the 2 years since it was founded; its reputation fair pricing and good service is spreading, and Mr. Jackson lieves the firm is in a good position to expand its customer base idly. But he is not sure that the firm has the financing in place to rt that rapid growth. Tech Tune-Ups' main capital investments are its own powerful mputers, and its major operating expense is salary for its consul- ts. To a reasonably good approximation, both of these factors w in proportion to the number of clients the firm serves. Currently, the firm is a privately held corporation. Mr. Jackson his partners, two classmates from his undergraduate days, have tributed $250,000 in equity capital, largely raised from their nts and other family members. The firm has a line of credit a bank that allows it to borrow up to $400,000 at an interest of 8%. So far, the firm has used $200,000 of its credit line. If when the firm reaches its borrowing limit, it will need to raise ity capital and will probably seek funding from a venture capi- firm. The firm is growing rapidly, requiring continual invest- t in additional computers, and Mr. Jackson is concerned that it approaching its borrowing limit faster than anticipated. 525 Mr. Jackson thumbs through past financial statements and esti- mates that each of the firm's computers, costing $10,000, can sup- port revenues of $80,000 per year but that the salary and benefits paid to each consultant using one of the computers is $70,000. Sales revenue in 2011 was $1.2 million, and sales are expected to grow at a 20% annual rate in the next few years. The firm pays taxes at a rate of 35%. Its customers pay their bills with an average delay of 3 months, so accounts receivable at any time are usually around 25% of that year's sales. Mr. Jackson and his co-owners receive minimal formal salary from the firm, instead taking 70% of profits as a "dividend," which accounts for a substantial portion of their personal incomes. The remainder of the profits are reinvested in the firm. If reinvested profits are not suffi- cient to support new purchases of computers, the firm borrows the required additional funds using its line of credit with the bank. Mr. Jackson doesn't think Tech Tune-Ups can raise venture funding until after 2013. He decides to develop a financial plan to determine whether the firm can sustain its growth plans using its line of credit and reinvested earnings until then. If not, he and his partners will have to consider scaling back their hoped-for rate of growth, negotiate with their bankers to increase the line of credit, or consider taking a smaller share of profits out of the firm until further financing can be arranged. Mr. Jackson wiped the last piece of jelly from the keyboard and settled down to work. Can you help Mr. Jackson develop a financial plan? Do you think his growth plan is feasible? Prepare a 700-1,050 word response, plus Excel spreadsheet, for the Mini-case at the end of Chapter 18 in Fundamentals of Corporate Finance (Brealey). Specifically, the Learning Team will need to follow all assumptions in the Mini-case precisely and carefully to complete the following: a. Identify the steps necessary to financially plan and forecast for 2005, 2006, and 2007, b. Project future years using the growth rate assumptions in the Mini-case, c. Determine what type and amount of financing may be required, taking into account the impact on leverage ratios, d. Determine the impact of rising interest rates on future performance, e. Assess alternative capital structures and impact on debt ratio and return on equity. f. Separately, after completing (a) through (e) above, explain how outsourcing certain cost of goods sold items would impact this planning and budgeting process.


TOPICS: Corporate Culture

SUMMARY: Kimberly Clark was a company characterized as paternalistic. It was a place where you could have a job for life. The company paid above market salaries and avoided layoffs. Low performers didn't face consequences and could hide "in the weeds." That's changed as the company significantly overhauled how it evaluates and tracks employees' progress. The company uses performance management software which can quickly recognize those who are performing well or expose those who are not. The company was proud of its low turnover, but now turnover is twice of what it was a decade ago. The company doesn't view this as a problem because the culture changed. These changes are designed to help the company generate more revenue and profit. Companies are moving away from annual performance reviews to continuous oversight and feedback. The goal is to create continuous improvement. Software lets managers track the progress of workers with dashboards that display goals, accomplishments, attendance, peer feedback and other data. The performance culture which requires setting goals and holding workers accountable seems to result in faster growth, higher profitability and a lower likelihood of bankruptcy. Change can be difficult at a company like Kimberly-Clark because it requires a cultural shift.

CLASSROOM APPLICATION: Instead of focusing on the financial performance of a company, this article focuses on the role of culture and management. As times changed, Kimberly-Clark changed its culture. The company had low turnover because employment was for life. The company had to change to become more competitive. The company now tracks, evaluates and communicates with employees using performance management software. The company culture was paternalistic and avoided conflict. Like many other large companies, Kimberly-Clark moved from annual performance reviews to continuous reviews. The company made changes beginning in 2008. It now recognizes the relationship between its human-resource innovations and the stock price. Changes in human resources practices are mostly invisible to analysts and investors. Other factors including lower commodity prices, cost-cutting and growth in emerging markets also likely explain performance. The company no longer promises employment for life and has reduced its workforce by 2,900. The company has gone from a conflict-averse culture to one where "I care enough to tell you the truth."

QUESTIONS:
1. Explain in detail what the term "corporate culture" means?

2. Describe the culture at Kimberly-Clark prior to the changes it instituted starting in 2008.

3. Review the characteristics of performance management software and how it is used at Kimberly-Clark to improve employee performance.

4. How would you describe the current culture at Kimberly-Clark?

5. Why do you think many larger companies are using or plan to use performance management software?

Corporate Culture Change at Kimberly Clark

Diaper and tissue maker shifts from a paternalistic company to one focused on pushing workers to constantly improve, closely tracking progress and shedding laggards

Not long ago, when Kimberly-Clark Corp. employees gathered for interdepartmental meetings, they prefaced their comments with their names and years of service at the company.

These days, “no one cares,” said Scott Boston, vice president of human resources. The attitude in meetings is “ ‘let’s get moving,’ ” he said.

For generations, having a job at Kimberly-Clark meant having a job for life. The maker of household products such as Huggies and Kleenex paid its employees above-market salaries and avoided layoffs.

Even low performers rarely felt pressure. “A lot of people could and would hide in the weeds,” said Rick Herbert, a sales director who retired in 2014 after more than three decades with Kimberly-Clark.

That’s over. One of the company’s goals now is “managing out dead wood,” aided by performance-management software that helps track and evaluate salaried workers’ progress and quickly expose laggards. Turnover is now about twice as high it was a decade ago, with approximately 10% of U.S. employees leaving annually, voluntarily or not, the company said.

Armed with personalized goals for employees and large quantities of data, Kimberly-Clark said it expects employees to keep improving—or else. “People can’t duck and hide in the same way they could in the past,” said Mr. Boston, who oversees talent management globally for the firm.

It has been a steep climb for a company that once resisted conflict and fostered a paternalistic culture that inspired devotion from its workers.

The changes mirror what is happening inside many large companies, where “performance management” reflects the conviction that a sharpened focus on creating a high-performing workforce is a vital tool to generate revenue and profit.

Some of Kimberly-Clark’s best-known products are decades old, including Kotex sanitary napkins, above in 1949, Kleenex tissues and Huggies diapers. Photo: Kimberly-Clark

In the past year, firms including Accenture PLC and General Electric Co. have dropped annual performance reviews in favor of more continuous oversight and feedback from managers, all meant to drive constant improvement.

Coca-Cola Co. in June approved pushing its new performance-management process from the pilot stage to a global rollout. The new system encourages managers to conduct a monthly “reflection” on every direct report, answering five questions that include “Given his/her performance, would you assign this associate to increased scale, scope, and responsibilities?” and “Is this associate at risk for low performance?”

Adobe Systems Inc., which was one of the first big companies to home in on performance management, scrapped its annual review in favor of frequent “check-ins” in 2012.

Performance management shifts companies away from backward-looking, once-a-year reviews framed largely as compliance requirements—a paper trail for potential job cuts and salary decisions—to a process that is real-time, continuous and focused on helping people meet ambitious goals, or move out of the company faster.

The last recession led many employers to rethink the nearly automatic merit raises they had been doling out, forcing them to do a better job identifying high and low performers when giving raises and bonuses. Millennial workers, meanwhile, demand more feedback, more coaching and a stronger sense of their career path.

Companies spend $14 billion a year on products to help manage employees, including human-resources software from Workday Inc., SAP SE ’s SuccessFactors and Cornerstone onDemand Inc., with about $2 billion of that dedicated to performance management, according to human-resources advisers Bersin by Deloitte.

Those systems let managers track workers’ progress via dashboards that display their goals, accomplishments, attendance, peer feedback and other data.

The company was founded in 1872 by Charles B. Clark, Frank C. Shattuck, Havilah Babcock and John A. Kimberly, clockwise from top left. It initially specialized in top-quality newsprint. Photo: Kimberly-Clark

Executives’ use of phrases like “performance culture” in conference calls with analysts and investors has doubled in the past five years, according to a review of transcripts in the Factiva news database. Firms that set goals and hold workers accountable “clearly outperform,” said Nicholas Bloom, an economist at Stanford University and co-author of a recent paper that used Census data to examine more than 32,000 U.S. manufacturing plants. He said they have faster growth, higher profitability and are less likely to go bankrupt.

Some academics say constant monitoring can feel intrusive and threatening to workers, especially those who value stability. But human-resources experts largely agree that the traditional review process is a waste of time and needs an overhaul.

The shift to a performance focus, which requires consistent oversight and sometimes uncomfortable feedback, can be bumpy.

At Kimberly-Clark, CEO Tom Falk—himself a 33-year veteran—pushed the Dallas-based company onto its new course. “We all talk about how having the best team is the most important difference-maker in your results,” said Mr. Falk, who became chief in 2002. “But we didn’t have the supporting processes to make that sustainable.”

In 2008, with the company’s shares stagnant, few innovations in the pipeline and a belief that costs were bloated, the CEO added human-resources executives to the team putting together the firm’s long-term business plan for the first time.

Holding workers close through good times and bad is “not sustainable” any more, said Liz Gottung, the company’s human-resources chief. “If you look at when we started implementing the big pieces of the company’s people strategy, when you map that to our stock price and our business results, you can see the clear correlation.”

Shares closed at a high of $138.13 in April, and its quarterly dividend, which it has raised every year for more than four decades, hit a high of 92 cents a share in February. The share price has more than doubled since 2008.

Engineers in 1948 worked on product development at a company mill in Neenah, Wis. Photo: Kimberly-Clark

Behind-the-scenes changes to human-resources practices are largely invisible to analysts and investors. Analysts attribute Kimberly-Clark’s rising stock price to declining commodity prices, aggressive cost-cutting, growth in emerging markets and a generous dividend payout.

Big cuts

Since 2009 Kimberly-Clark has laid off around 2,900 mostly salaried workers world-wide, some of the first big cuts in the company’s 144-year history. It currently employs about 43,000.

Remaining employees are expected to work “smarter” and meet regularly raised targets. “We have to routinely shuffle the resources and say, what’s the most important thing we need to do today, this week, this month, to drive this objective?” said Stephanie Martin, an engineer who analyzes new product ideas.

Using the Workday tool, Kimberly-Clark’s salaried employees set goals and report their progress, record accomplishments or mistakes, and solicit and send feedback. (Hourly workers don’t use the system.)

The system collects and archives feedback, which can be seen by employees’ managers. It also holds data on staffers’ strengths and development needs, their performance ratings and the risk they might leave the company.

“It’s certainly more challenging” for employees, said Mr. Herbert, the retired sales director. “If you really don’t have the mettle, you’re asked to get on with your life’s work [elsewhere].”

In 2015, Kimberly-Clark retained 95% of its top performers. Among the employees whose work was rated “unacceptable” or “inconsistent,” 44% left the company voluntarily or were let go. Ms. Gottung said she is “pretty pleased” that low-performer turnover has been rising.

Retired sales manager Jeanne Sanders remembers executives boasting about the firm’s low turnover when she interviewed at Kimberly-Clark in 1987. Stories are told about how during the Depression and in more-recent production interruptions, mill managers reconfigured shifts to avoid layoffs.

These days, leadership has communicated to employees that turnover is a good thing, said Chris Luettgen, a senior research manager who left in 2014 to join the engineering faculty of Georgia Tech. “I saw it as a good move in that we could get some new thinking and innovation into our pipeline,” he said.

Mr. Falk, the CEO, reviews 100 senior managers’ performance plans every year to make sure their goals are ambitious and reflect company priorities. Managers are instructed to begin every meeting with a story about how someone demonstrated one of the six behaviors the company promotes, such as “build trust” or “think customer.”

Training sessions

Regular “culture of accountability” sessions train employees in giving and receiving difficult feedback. When a colleague suggests improvements, “the proper response was ‘thank you for the feedback,’ not defensiveness,” Mr. Luettgen said. Employees also practice reinforcing positive behaviors, such as praising a colleague who had given up a weekend to solve a customer complaint.

More than 10,000 of Kimberly-Clark’s workers used the feedback feature in Workday in 2014, and about 25% of the comments were considered “constructive,” while the rest were positive or neutral, said Sandy Allred, a senior director on the talent management team. Staffers can send feedback to peers or workers above or below them.

Making paper for Scott paper towels at the company’s Chester, Pa., mill in 1917. Photo: Kimberly-Clark

An earlier, unpopular system required managers to rank employees in a nine-box grid according to strict percentages, and then put the lowest performers on mandatory performance improvement plans, often the first step to a termination. In 2013, the company switched to the current, more-flexible system, which uses four ratings, with percentages that are suggested for each rating.

Around that time the company trimmed some salaries and put more workers on a bonus plan, to tie pay more closely to performance.

Dave Bernd, a 33-year veteran whose father was a senior executive at the company, said that when he walked on the Roswell, Ga., corporate campus a few months ago he found the old warmth missing. “It doesn’t feel like the family it once was.”

The former manufacturing director, who retired in 2013, said a decade ago, “whether you knew anyone or not,” employees said hello in the parking lot and engaged in camaraderie typical of a smaller company. Even so, he said he approves of the recent management changes.

One of the firm’s core values is still “caring,” said Ms. Gottung, who joined Kimberly-Clark in 1981. “When I started with the company, we were very conflict-averse, very oriented towards consensus,” she said. “And now it’s ‘I care enough about you to tell you the truth.’ ”

CEO Tom Falk, left, at a volunteer event to clean donated furniture, electronics and appliances for needy families in Ventura, Calif., in April. Photo: Michael Kovac/Getty Images for Viva (Kimberly-Clark)

One former employee said he was initially glad that the company was identifying those who weren’t pulling their weight. Then, after earning top reviews over his decadeslong career, he said he was given a low rating and placed on a performance-improvement plan after missing a project deadline. After that, “no one would talk to me” about other positions, he said.

He said the situation eventually improved with a new supervisor, but he still decided to leave the company last year.

In that instance, “did the system work or not? I don’t know,” said Ms. Gottung. With thousands of performance reviews happening every year, “I wish we had 100% satisfaction, but that’s unrealistic. Overall, our employees think this is a fair and equitable process.”

Basma Osman a 27-year-old product-development engineer, considers herself a beneficiary of the new system. Tapped early in her career as a high-potential employee, she was working on health and wellness products but told her manager she was interested in industrial safety. He soon asked her to oversee a $30 million project in that area. “I was terrified,” she said, but she was also grateful that her manager “understood what I wanted and what I’m good at.”

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________

"Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders.

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events."

Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company.

The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service.

Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level."

Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage."

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services.

The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic.

In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment.

The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence.

And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest.

Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit.

"Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further.

So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

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