Hood unveiled: H.P. Hood Inc. readies plans for an ESOP, the final step in a multifaceted restructuring program - employee stock ownership plan

Dairy Foods, Oct, 1993 by Gail Rosenbaum Doeff

It's hard to teach an old dairy new tricks. And at 147, Boston-based H.P. Hood Inc. is one of the industry's oldest. But over the past four years, in the face of numerous challenges including a fiercely competitive regional climate, several unprofitable operations, and a bloated corporate staff to name just a few, Hood has reinvented itself and emerged a formidable competitor for the '90s and beyond. The dairy now appears remarkably contemporary in structure and in vision, thanks to Bob Keller, president and chief executive officer, and Denis Keaveny, senior vice president and chief operating officer, who together have guided the company along the sometimes difficult road to fiscal resuscitation.

Within the last few years, Hood has undertaken a series of steps to combat its financial difficulties, particularly a significant downsizing and a bold restructuring program. But the final piece of Hood's restructuring puzzle has very recently emerged in the form of a proposed employee stock ownership plan (ESOP). If all goes as planned, the buyout should close by year-end, making Hood the first major American dairy company to successfully complete an ESOP.

Hood's ESOP plan is designed to strengthen the company financially through a healthy increase in cash flow, facilitating quick debt reduction. Much of the company's debt was incurred after Hood found it necessary to repurchase its plants and facilities from former owner Agri-Mark Inc., a Methuen, Mass., cooperative, after the two divorced in 1990. After the split, Hood endured an unsuccessful sale attempt by remaining owner Agway Inc., Syracuse, N.Y. The worsening Northeastern economy presented another obstacle. During the early 1990s, for example, many banks suffered and as a result some of Hood's important lines of credit disappeared.

"In 1990 we found ourselves in a real cash crunch," Keller affirms. "Our cash flow had dried up and that hurt us. So we had to make dramatic changes," including a major downsizing. Through divestitures, plant closings and consolidation over the past four years, Hood has pared its employee roster from 2,800 to 1,750 and reduced the corporate staff even more drastically from 280 to 40. "At one time our balance sheet was |nearly~ $100 million bigger than what it is today," Keller says.

While Hood has repaid nearly $25 million of its debt over the past three years, the accelerated repayment schedule that will be facilitated by the ESOP is both desirable and necessary, Keller says. And after all the trials, "the management group wanted to drive the process of selling the company," he says.

ESOP details

Under the working ESOP agreement, Hood employees, management and a few investors will repurchase all the company's common stock from Agway. The employee stake is anticipated to exceed 65 percent of the company, which has net sales in excess of $500 million and a current net worth of $45 million. Employees and management will be asked to take a one-time 12-percent cut of their overall compensation. In return, they will receive stock distribution annually proportionate to their share of total payroll.

The projected financial success will make a difference in the whole atmosphere at Hood, Keaveny says. Without the financial wherewithal to react to market opportunities quickly, Hood was forced to watch several come and go. "That can get demoralizing," he says. The flexibility the new arrangement will grant is coveted.

Keaveny is not alone in his support of the ESOP. Hood's management will contribute $2 million of its own money; Keller and Keaveny will each contribute a substantial portion of their available assets. Both are confident and enthusiastic about the prospect of a fortified Hood.

"The fact that we'll be financially stronger and have flexibility and be in control of our destiny will create a much more positive atmosphere and create a group of very highly motivated employees," Keaveny predicts.

The new organization

The new Hood has a new structure that began emerging a year ago after extensive strategic planning. Decentralization is crucial to the new organization's success. Three groups now comprise Hood's operations: the Ice Cream Division, led by Richard Marquis, senior vice president and general manager; the Manufactured Products Group, led by Gary Musial, vice president and general manager; and the Dairy Division, led by Richard Langworthy, senior vice president and general manager.

The divisions operate as separate profit centers, and are broken into strategic business units to allow managers decision-making flexibility. Each unit is expected to provide an average 15-percent return annually, although deficits can technically be balanced by overages in another division. Because Keller and Keaveny champion participative management, each operating group is responsible for developing its own strategic plan and meeting it.

"|Middle management~ doesn't wait for somebody at corporate to approve something so that they can make a profit," Keller explains. "Our philosophy is to take trained people and trust them. To empower them to go out there and get the job done, and it works." Keller's management philosophy also encourages employees to maximize their entrepreneurial strengths and to embrace responsibility. This represents a departure for the man who admits he used to be "more of a control person" when Hood was ailing.