Ambition. Bravado. Bankruptcy. The leaders who lost Pillowtex
07/18/2004 1:07 PM
02/03/2015 6:11 PM
This story was originally published in the Charlotte Observer on July 18, 2004.
A week before Christmas 1997, office employees crowded nervously into the Fieldcrest Cannon auditorium. Their company had just been sold.
In a brief meeting, supervisors told workers at the Kannapolis textile company to return to their desks. If their phones rang, they were told to step into an office, collect a blue folder with severance papers and leave.
Nearly 300 people were dismissed that day - two-thirds of the administrative force. The layoffs began a new era for the century-old towel and sheet maker.
Chuck Hansen, the brash leader of Dallas, Texas-based Pillowtex, had paid $700 million for Fieldcrest Cannon. The cuts he ordered were to save money as he sought to build Pillowtex into a textile superpower.
Three years later, Pillowtex plunged into bankruptcy protection. It finally collapsed a year ago this month, when 7,650 workers lost their jobs - including about 4,800 in North Carolina. It was the biggest mass layoff in N.C. history.
Politicians and textile executives blamed global trade. But the rise of low-cost imports alone paints an incomplete picture of Pillowtex's demise.
In its final three years, Pillowtex had four top leaders and a frequently changing board. Some made critical miscalculations. Others squandered opportunities that might have rescued the company, former employees say.
Saving Pillowtex almost certainly would have meant big layoffs as executives shifted some work overseas. But if those jobs had been moved early, the company might have retained thousands of manufacturing and administrative jobs in the United States, some former executives say.
Pillowtex's downfall is a cautionary tale of an old-line manufacturer that failed to change. It also shows how leaders' personalities can dramatically alter a company's fate.
To purchase Fieldcrest Cannon, for instance, Hansen amassed high levels of corporate debt that plagued the company for years.
He clung to an expensive strategy of making sheets and towels in the United States, even as other textile manufacturers were moving some production abroad.
Leaders who succeeded Hansen would devise secret plans to shift many jobs overseas, but none pulled it off.
Equally important, Pillowtex's board of directors, the group ultimately charged with overseeing top management and protecting shareholders, allowed it all to happen.
"Rather than make a corporate decision to change the company, we piddled it, and we just did it in a small way, " said Ed Hosack, general manager of sheet manufacturing and operations and a 19-year veteran of the company. "We just took stabs at it rather than (do it) corporatewide. You don't lose a company like this without doing major mistakes."
Critics say the mistakes began that December day in 1997 when Hansen slashed 300 staffers - experienced professionals who might have helped him avoid blunders.
The day is still known to some as "Black Friday."
In the world of textiles, Chuck Hansen - 57 when he bought Fieldcrest Cannon - was known as a consummate deal maker. In the lore of those he ruled, he was often bigger than life.
He was hard-driving and combustible but with a magnetic personality, like any good salesman. Subordinates describe him as the kind of guy who could joke with you in the morning, chew you out in the afternoon, then go drinking with you at day's end.
He was not a boss people wanted to disappoint.
Away from work, Hansen played hard.
When he bought a speedboat, he insisted on one bigger than one owned by Ross Perot, the Texas billionaire and former presidential candidate. Hansen's boat was red and could go 110 mph.
"Perot had one a little smaller, and I always wanted to race him, " he recalls.
Around the office, some grumbled about the Ferrari he drove.
"Would it be better if I drove a Chevrolet?" Hansen asked the Observer. "If you're jealous I drive a Ferrari, great. That's your business."
Hansen got his start in textiles in the 1960s, selling lace tablecloths to stores in Chicago.
Pillowtex hired him in 1965. Over three decades, his drive and ambition helped build a small pillow maker into an industry leader.
After 20 years of steady growth and consistent profits with Hansen as president, Pillowtex named him chief executive in 1990, and chairman after the company's longtime chairman died in 1992. Hansen continued to grow the company by acquisitions. All told, he engineered about 20 deals over two decades.
"Sometimes acquisitions sound glorious and a lot of fun, and sometimes they are," Hansen says.
In 1997, his buyer's eye turned to Fieldcrest Cannon. He had admired the company since 1963, when a Fieldcrest Cannon predecessor, Fieldcrest Mills, passed him over for a sales position.
Although Hansen spoke often of that rejection, he says he bought Fieldcrest Cannon for the right reason: It made good business sense.
In one bold move, Pillowtex went from making pillows and mattress pads to one of the country's biggest suppliers of towels and other home-furnishing products. It owned such well-known labels as Cannon, Charisma and Royal Velvet.
Pamela Singleton, a Merrill Lynch analyst at the time, called it a "terrific deal, combining one of the most capable management teams in the industry with some of the best-recognized brand names in the market."
Others were less certain.
Fieldcrest Cannon director Roger Horchow, a Dallas, Texas, businessman, thought the merger odd. He recalls questioning how a $500 million company with a limited product line could swallow an operation as large and diverse as Fieldcrest Cannon, which had annual sales of $1.1 billion.
Horchow voted to approve the sale, he says, because he thought Hansen's offer was the best hope for Fieldcrest Cannon and its workers.
Duke Kimbrell, a Fieldcrest Cannon director and CEO of Gastonia yarn spinner Parkdale Mills at the time, says he swallowed his concerns because he believed Hansen's offer was best for shareholders.
Before Hansen bought Fieldcrest Cannon, his sales force sold pillows cheap, then figured out how to cut costs to make the deals profitable, associates say.
Hansen brought that strategy to Fieldcrest Cannon - with disappointing results.
Shortly after arriving, he directed his sales staff to snatch a J.C. Penney towel contract from Georgia-based WestPoint Stevens by undercutting it on price. But Pillowtex bid so low that the company made next to nothing on the towels, according to former executives familiar with the transaction.
Unlike making pillows, towel production relies on expensive machinery - fixed costs Hansen could not easily cut to enhance profits.
Instead, Hansen and his team tried another approach: They increased the number of towels they made. On paper, that reduced the cost of each by spreading out fixed costs over a greater number of towels.
Hansen says the production increase was not part of a grand plan, but sprang from mistaken sales projections or other errors.
Whatever the cause, Pillowtex's plants were soon churning out far more sheets and towels than Hansen's sales force could sell. The surplus backed up in dozens of trailers outside mills in Kannapolis and elsewhere. The overflow became so great that workers sometimes struggled to locate inventory for shipping.
Pillowtex later dumped the excess inventory for less than cost.
In December 1999, for instance, Pillowtex asked DeSales Trading Co. a Burlington yarn broker, to buy 20 trailers of off-green hotel towels.
DeSales bought them cheap, then resold them in Mexico, says DeSales Vice President Michael Murray.
"They had just a slew of this material they had to get rid of," Murray says.
Hansen defends his decision to pursue low-profit business. Without it, he says, he would have had to close plants and lay people off.
Hansen encountered more trouble in 1999, a little over a year after the merger.
Before he bought the company, Fieldcrest Cannon had ordered a new computer system. When it debuted in 1999, it wreaked havoc with shipping and cost the company millions. An Alabama factory that usually shipped $100,000 of towels a day moved just $1,000 worth the day the system debuted.
One Pillowtex customer received the same order 13 times.
Hansen says computer malfunctions marked the beginning of the company's problems. In fact, he says, it was the computer, not his strategy of chasing low-margin business, that contributed to the Kannapolis overflow.
Unable to track some shipments, Pillowtex could not bill for all the sheets and towels it sold, he says.
Meanwhile, other problems surfaced.
On Oct. 21 that year, Pillowtex warned analysts to expect its first quarterly loss since the merger. The company projected losing 28 cents per share. But less than two weeks later, it shocked Wall Street by announcing the loss was more than five times that amount - $1.45 per share.
"The results reported today are embarrassing to me personally, " Hansen said in a news release.
He also announced that because of its poor performance, Pillowtex had violated terms of its bank loans.
Pillowtex's stock closed that day below $3 for the first time. It had lost 80 percent of its value in the preceding three months.
More importantly, Hansen's earnings surprise fed a growing perception on Wall Street and among Pillowtex's creditors that he and his management team could not be trusted to hit their projections.
"They kept saying, 'We've got things fixed. We've got things fixed,' and it never got any better," says John Clemens, former head of Bank of America's textile lending group. "You just don't keep surprising people with negative news and maintain credibility."
Meanwhile, Hansen's management style was becoming legendary at the Kannapolis office.
On one memorable morning, he stationed two secretaries near entrances to jot the names of workers arriving after 8, according to several employees who worked that day. A third spied from behind the blinds in an office overlooking the parking lot.
"If you're supposed to be there at 8:30 and you show up at 9:30, you're not living up to your end of the bargain," Hansen says.
He installed hot lines to reach key executives at a moment's notice. If the line blinked, they knew to answer.
Hansen says his management techniques were meant to shake up the Fieldcrest Cannon arm. He regarded managers there as slow-moving, indecisive and consumed by "endless meetings and committees."
"Sometimes you have to instill accountability in people," he says.
Though demanding, some co-workers say they also saw Hansen's generous side. Workers he fired often left with valuable benefits.
After a midlevel executive fell ill on business in New York, Hansen dispatched a company jet to fly the man's wife to his hospital bed.
But many who worked in the Kannapolis office thought his 1997 firings a week before Christmas had established a climate of fear. It was the first example of Hansen's arrogance toward his latest acquisition, they say.
As Hansen's style alienated some workers, he beefed up security systems by installing a keypad entry for executive suites in Dallas and Kannapolis.
And he stashed a handgun in his Dallas desk.
With its finances souring, Pillowtex's debt loomed larger.
To buy Fieldcrest Cannon, Hansen had nearly quadrupled the amount Pillowtex owed bankers and other creditors, lifting it to $785 million in 1997.
The company's debt-to-cash-flow ratio, a common measure of a corporation's ability to pay down debt, surged to 4 to 1 in 1998. A ratio higher than 3 to 1 often signals a company is headed for trouble.
Hansen kept spending.
He paid $74 million for The Leshner Corp., an Ohio towel company. He spent $334 million more to modernize plants and computers.
In late 1999, some analysts began speculating that Pillowtex might be headed for bankruptcy restructuring. Chapter 11 allows companies to delay paying creditors while they restructure their finances.
"That's sure as hell not on my agenda," Hansen told Dow Jones News Service.
Hansen's bosses, the Pillowtex board of directors, did little to address the crisis. Scott Shimizu, on the board from 1994 to 2002, says directors lacked the expertise to challenge Hansen.
Of the seven board members besides Hansen, four were Texas acquaintances of his. Five had served since the early 1990s, when Pillowtex was a smaller, simpler company.
"It's like asking a guy who runs a 12-minute mile to suddenly run an eight-minute mile," says Shimizu, who also was Pillowtex's executive vice president of sales and marketing.
He says he failed to realize the seriousness of Pillowtex's problems until it was too late.
As debt rose, profits sank.
By the late 1990s, department stores - where Pillowtex made lots of money selling high-end towels and sheets - were losing business to discount stores, such as Wal-Mart and Target.
With discounters increasingly turning to cheaper imports, retailers of all kinds began demanding lower prices from suppliers such as Pillowtex. Hansen's sales force had little choice but to comply.
"It's difficult to operate a business with 10,000, 12,000, 14,000 employees and say 'no' to a Wal-Mart or Target or Kmart," Hansen says.
In hindsight, Hansen says he and many others misjudged the significance of imports.
"I, for one, never realized how powerful a force foreign suppliers to this industry would be," he says.
In addition to low prices, retailers began demanding increased concessions. They wanted to pay later and sought discounts for in-store promotions and returned inventory.
Hansen grew especially annoyed with Kmart. Pillowtex officials believed Kmart owed the company $11 million, according to internal Pillowtex documents obtained by the Observer.
The issue exploded at a spring 2000 meeting in the retailer's Michigan headquarters.
Hansen accused Kmart of not paying its bills, people in the room recalled.
Kmart Vice President Nick Just shot back, asking why Pillowtex had been late on its deliveries.
I feel like pounding your head in right now, Hansen snapped.
Another Kmart executive appealed for calm.
Within months, Pillowtex and Kmart parted ways. Pillowtex lost one of its largest customers, worth tens of millions of dollars in annual sales, though some in the industry say losing Kmart's low-margin business was not all bad.
Just, who left Kmart in 2003, declined to comment, as did Kmart spokeswoman Caryn Klebba.
Hansen doesn't dispute the account.
"That man was taking money from our shareholders and our employees, and I'm not going to be apple pie and honey to someone who's not paying their bills," he says.
Facing the banks
By spring 2000, with Pillowtex continuing to post losses, some of the company's bankers began to see Hansen as the problem. In their view, he had promised more than he delivered.
The problems took a financial toll on Hansen, too.
With Pillowtex's stock trading in the $2 range, his personal holdings fell to less than $5 million, from a high of $126 million in 1998. Still, he continued buying shares.
On Oct. 4, 2000, Hansen and other Pillowtex executives walked into a Dallas airport hotel to meet with 100 bankers and lawyers. They needed to convince the bankers that Pillowtex could pay its loans.
Inside a basement conference room, Pillowtex Chief Financial Officer Tony Williams - whom Hansen had hired to help re-establish financial discipline - highlighted the company's recent accomplishments: better financial planning, the closing of inefficient plants, and stronger marketing of brands to improve sales.
Then, the money men began:
Why should they trust Hansen?
Had Pillowtex considered bankruptcy?
Hansen again insisted he would not seek bankruptcy protection.
The company intended to make a big payment to the banks, Hansen continued. He just needed more time.
At that, a banker in back shouted: "We just want our f---ing money!" according to Williams and another participant.
What a stupid comment, Hansen recalls thinking. Pillowtex clearly didn't have the money.
Hansen rose, visibly upset.
"If it would serve the best interests of this company," he recalls saying, "then I will step aside."
The room fell silent.
After a few routine questions, the meeting adjourned. The bankers left. The Pillowtex group headed to the SOS Bar, just off the hotel lobby.
There, Hansen raged against the bankers.
He seemed as distressed as some had ever seen him. He headed home.
At his Dallas office, subordinates discreetly removed the gun from Hansen's desk.
Hansen says he remembers little about that afternoon because he had so many thoughts racing through his head. He doesn't know why the gun was removed.
He says he was upset at the direction of the company but had no plans to harm himself.
"That (story) implies something that is not correct, " he says.
Pillowtex's board, including some of Hansen's longtime pals, began questioning his leadership.
Board members met secretly at one another's homes around Dallas, careful not to tip off Hansen, who chaired the group. They concluded Pillowtex needed a new CEO.
They also were concerned for Hansen's health, says Paul Gillease, a board member at the time.
The end of Hansen's tenure came quietly. He reluctantly resigned after board members made clear he had lost their support.
He says today that stress during that period drove up his blood pressure and caused him to sleep less. He concedes he had lost some of his will to fight.
The board voted to pay Hansen nearly $5 million in severance. It made him acknowledge he could no longer use Pillowtex's "airplanes, apartments, condominiums, boats or other Company property," according to Hansen's separation agreement.
On Oct. 27, 2000, Pillowtex announced Hansen's departure. Williams, the CFO, would now lead the company as president.
His challenges were daunting:
The banks were pressing Pillowtex for a bankruptcy filing.
The U.S. economy, after a 10-year growth spurt, was beginning to stagnate.
Pressure from cheaper imports was building.
And a crucial payment on Pillowtex's massive debt was due within weeks.
Chuck Hansen prefers to think of his Pillowtex career as 33 successful years, followed by two rough ones.
Although he relishes his role as a grandfather and enjoys puttering around his Dallas-area home, the 64-year-old says he thinks regularly of Pillowtex and its collapse.
"I still consider it to be a major failure in my life," he says. "I still feel very personal about it. I always will. I was part of a team of dedicated people who built a great company, and it did not work out, at least ultimately."
Hansen says although he accepts some blame for what happened on his watch, others were culpable, as well: the Pillowtex directors who oversaw his moves, the banks that pressured Pillowtex into what he saw as an unnecessary bankruptcy - even other Pillowtex executives.
"I was judged pretty harshly for two years," he says. "I haven't seen many judgments of the people who ran it the next two-and-a-half years. At what point does my responsibility end and somebody else's pick up?"
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