Business Context and Reporting Period
Kimberly-Clark Corporation’s Form 10-K covers the fiscal year ended December 31, 2010, including fourth-quarter results. The company manufactures and markets personal care, consumer tissue, K-C Professional & Other, and health care products under brands including Huggies, Kleenex, Scott, Cottonelle, Kotex and Depend. Products were sold in more than 150 countries, with approximately 57,000 employees worldwide.
Financial Performance and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|
| Net sales | $19.746 billion | $19.115 billion | +3.3% |
| Gross profit | $6.550 billion | $6.420 billion | +2.0% |
| Operating profit | $2.773 billion | $2.825 billion | -1.8% |
| Net income attributable to Kimberly-Clark | $1.843 billion | $1.884 billion | -2.2% |
| Diluted EPS | $4.45 | $4.52 | -1.5% |
| Cash provided by operations | $2.744 billion | $3.481 billion | -21% |
- Gross margin was approximately 33.2%, compared with 33.6% in 2009; operating margin was 14.0%, compared with 14.8%; net margin attributable to Kimberly-Clark was approximately 9.3%.
- Segment sales were $8.670 billion for Personal Care, $6.497 billion for Consumer Tissue, $3.110 billion for K-C Professional & Other, and $1.460 billion for Health Care.
- Segment operating profit was $1.764 billion for Personal Care, $660 million for Consumer Tissue, $468 million for K-C Professional & Other, and $174 million for Health Care.
- Capital spending was $964 million, compared with $848 million in 2009. No business acquisitions were completed in 2010.
- Cash and cash equivalents were $876 million at year-end, compared with $798 million in 2009. Current assets were $6.328 billion and current liabilities were $5.338 billion.
- Long-term debt was $5.120 billion; total debt and redeemable securities were approximately $6.5 billion. The debt-to-capital ratio was 51.2%, compared with 53.1% in 2009, and pretax interest coverage was 9.6 times.
- The company had a $1.33 billion revolving credit facility, expandable to $1.77 billion, with no borrowings during 2010. Short-term debt at year-end was $79 million.
- Dividends declared were $2.64 per share, and the company repurchased approximately $800 million of common stock, or about 12.8 million shares, during 2010.
- The defined benefit pension plans were underfunded by approximately $1.1 billion at year-end. Management expected 2011 pension contributions of approximately $400 million to $500 million.
Fourth-Quarter 2010
| Metric | Q4 2010 | Q4 2009 | Change |
|---|
| Net sales | $5.075 billion | $4.982 billion | +1.9% |
| Gross profit | $1.645 billion | $1.666 billion | -1.3% |
| Operating profit | $699 million | $717 million | -2.5% |
| Net income attributable to Kimberly-Clark | $492 million | $492 million | Flat |
| Diluted EPS | $1.20 | $1.17 | +2.6% |
Material Changes Versus the Prior Comparable Period
- Sales growth reflected approximately 1% volume, 1% net pricing and 1% mix or other benefits, with no material currency contribution.
- Operating profit declined despite higher sales, approximately $370 million of cost savings, lower pension expense of about $120 million and benefits from the 2009 workforce optimization program. These benefits were offset by approximately $790 million of input-cost inflation, about $100 million of increased strategic marketing spending, higher research and general expenses, and the Venezuela charge.
- Personal Care operating profit increased 1.4%, while K-C Professional & Other increased 0.9%. Consumer Tissue operating profit declined 10.3%, and Health Care declined 28.7%.
- Consumer Tissue sales growth was constrained by lower North American volumes and consumer trade-down to lower-priced products. Health Care comparisons benefited from the 2009 I-Flow acquisition but were affected by lower face-mask demand after the 2009 H1N1-related increase and ongoing I-Flow litigation-related expenses.
- Pension expense decreased to $133 million from $251 million, while pension contributions decreased to approximately $245 million from $845 million.
- Net income and EPS benefited from lower average debt, lower interest rates and share repurchases, but were reduced by a higher effective tax rate of 30.9% versus 29.0%.
Guidance, Outlook, Risks and Unusual Items
- Management expected a difficult 2011 economic environment and planned to emphasize brand strength, innovation, targeted growth, cost reduction and cash flow. Expected benefits from sales growth and cost savings were anticipated to be partly offset by commodity inflation, higher marketing spending, increased interest expense and restructuring charges.
- On January 21, 2011, the company initiated a pulp and tissue restructuring plan expected to be completed by the end of 2012. The plan involves streamlining, selling or closing five to six facilities, exiting certain non-strategic products and transferring production to lower-cost facilities.
- Estimated restructuring charges are $400 million to $600 million pretax, or $280 million to $420 million after tax. Approximately 25% to 50% of the charges are expected to be cash costs, with most noncash charges relating to incremental depreciation.
- Management expects the restructuring to reduce annual sales by $250 million to $300 million by 2013 while increasing annual operating profit by at least $75 million.
- Effective January 1, 2010, Venezuela was accounted for as a highly inflationary economy. The company recorded a $98 million pretax and $96 million after-tax charge, and Venezuela represented 1% of consolidated sales in 2010 versus 3% in 2009. The company’s net investment in Venezuela was $175 million at year-end.
- The company planned to repurchase $1.5 billion of common stock in 2011, subject to market conditions, and increased its regular quarterly dividend for 2011.
- Principal risks include pulp, petroleum-based materials, energy and transportation cost inflation; intense branded and private-label competition; retailer concentration; consumer trade-down; foreign currency and political risks; Venezuelan currency restrictions; access to commercial paper and bond markets; pension funding; litigation and regulatory exposure; and execution of cost-reduction and restructuring plans.
- In January 2011, the company settled the Delcora wastewater dispute for a $250,000 monetary sanction and $3.75 million for historic wastewater charges. Management stated that other litigation and environmental matters were not expected to have a material adverse effect.
- Independent auditors issued an unqualified opinion on the financial statements and internal control over financial reporting. The company reported that disclosure controls and internal controls were effective as of December 31, 2010.
Important Facts for Investors to Verify
- Whether input-cost inflation, particularly pulp and petroleum-based materials, can be recovered through pricing without further volume deterioration.
- The timing, cash cost and final scope of the pulp and tissue restructuring, including the five to six affected facilities and projected 2013 profit improvement.
- Actual 2011 share repurchases, dividend payments, pension contributions and funding sources, including the planned $1.5 billion repurchase authorization.
- The December 2011 redemption of approximately $500 million of preferred securities and the company’s ability to manage scheduled debt maturities and other contractual obligations.
- Changes in Venezuelan currency controls, the recoverability of the $175 million net investment and the effect on future sales and earnings.
- Consumer demand and market-share trends in Consumer Tissue and K-C Professional, including the effects of private-label competition and consumer trade-down.
- Health Care performance, including the impact of I-Flow litigation-related expenses and post-H1N1 demand normalization.
- Pension asset performance, discount-rate changes and the potential effect of approximately $2.2 billion of unrecognized investment and actuarial losses on future pension expense.
