Kimberly-Clark Corporation 2016 Form 10-K Summary
Business Context and Reporting Period
Kimberly-Clark is a global manufacturer and marketer of personal care, consumer tissue and K-C Professional products, including Huggies, Kleenex, Scott, Cottonelle, Kotex and Depend. The filing covers the fiscal year ended December 31, 2016. Results are reported in millions of dollars except per-share amounts. Approximately half of net sales were generated outside the United States, and Wal-Mart represented approximately 14% of total sales.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $18,202 | $18,591 | -2.1% |
| Gross profit | $6,651 | $6,624 | +0.4% |
| Operating profit | $3,317 | $1,613 | +105.6% |
| Net income attributable to Kimberly-Clark | $2,166 | $1,013 | +113.8% |
| Diluted EPS from continuing operations | $5.99 | $2.77 | +116.2% |
| Cash provided by operations | $3,232 | $2,306 | +40.2% |
- Approximate GAAP gross margin was 36.5%, operating margin 18.2% and net margin attributable to Kimberly-Clark 11.9%.
- Organic sales increased approximately 2%, primarily from higher volumes, while foreign currency translation reduced reported sales by approximately 4%.
- Adjusted operating profit was $3,341, up 4% from $3,210 in 2015. Adjusted diluted EPS was $6.03, up 5% from $5.76.
- Segment sales and operating profit were: Personal Care $9,046 and $1,857; Consumer Tissue $5,967 and $1,117; and K-C Professional $3,150 and $603.
- Cash and cash equivalents were $923 at year-end, compared with $619 in 2015. Capital spending was $771, compared with $1,056 in 2015.
- Total debt was approximately $7.6 billion, including $170 of short-term debt. Long-term debt was $6,439, excluding the current portion. The company had an unused $2.0 billion revolving credit facility expiring in 2021.
- Dividends paid were $1,311, and share repurchases were $750 for 6.0 million shares. Total dividends and repurchases were approximately $2.1 billion.
Material Changes Versus the Prior Comparable Period
- Reported earnings benefited substantially from the absence of 2015 exceptional charges, including $1,358 of pre-tax pension settlement charges and $153 of charges related to Venezuelan operations.
- 2016 included $35 of pre-tax charges, or $27 after tax, related to the 2014 Organization Restructuring. The restructuring was completed by year-end, with $70 of 2016 savings and $140 of annualized savings.
- FORCE cost savings reached a record $435, compared with $365 in 2015. Input costs were $65 lower year over year.
- Personal Care sales declined 1.7% and operating profit declined 1.5%, primarily due to currency and pricing pressure. Consumer Tissue sales declined 2.5% but operating profit increased 4.1%. K-C Professional sales declined 2.1% while operating profit increased 2.2%.
- Operating cash flow improved primarily because of better working capital and lower pension contributions. The company reduced capital spending while maintaining shareholder distributions.
Guidance, Outlook, Risks and Unusual Items
- For 2017, management projected diluted EPS of $6.20 to $6.35, approximately 2% organic sales growth, and reported sales approximately similar to 2016 after an expected 2% currency headwind.
- Management expected adjusted operating profit growth of 2% to 4%, at least $400 of FORCE savings, and commodity-cost inflation of $50 to $200.
- Planned 2017 capital spending was $850 to $950, share repurchases were targeted at $800 to $1 billion, pension contributions were expected to be up to $100, and the quarterly dividend was increased 5.4%.
- Key risks include foreign exchange and political risks, intense competition and private-label substitution, retailer concentration, raw-material and energy-cost volatility, supply-chain disruption, cybersecurity incidents, product liability and regulatory matters, tax uncertainties, and pension funding or actuarial changes.
- The company had approximately $14,016 of contractual obligations, including $7,416 of long-term debt principal, $2,993 of related interest payments, $597 of operating leases and $1,256 of unconditional purchase obligations.
- The company reported a $592 pension funded-status deficit and a $758 other-postretirement-benefit deficit at year-end. Unrecognized pension and actuarial losses could increase future expense.
- Approximately $8.9 billion of foreign subsidiary earnings were considered indefinitely reinvested; the related potential deferred U.S. tax liability was not practicable to determine.
- Management stated that pending legal, environmental and tax matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty. The 2016 audit opinion and internal-control opinion were unqualified.
Investor Verification Checklist
- Reconcile GAAP earnings growth with the 2015 pension settlement, Venezuelan charges and other unusual items; compare both GAAP and adjusted results.
- Assess whether organic volume growth and FORCE savings can offset currency pressure, pricing constraints and projected commodity inflation.
- Review debt maturities, refinancing requirements and the availability of the $2.0 billion revolving credit facility.
- Monitor retailer concentration, particularly Wal-Mart, and competitive pressure from private-label products and emerging sales channels.
- Evaluate pension funding, actuarial assumptions, the $1.5 billion of cumulative unrecognized investment and actuarial losses in the principal plans, and future postretirement obligations.
- Review foreign-currency exposure, Venezuela-related accounting, unremitted foreign earnings and uncertain tax positions, including up to $140 of possible tax-uncertainty resolutions within 12 months.