Kimberly-Clark Corporation 2014 Form 10-K Summary
Business Context and Reporting Period
Kimberly-Clark filed its annual report for the fiscal year ended December 31, 2014. The company manufactures and markets personal care, consumer tissue and K-C Professional products under brands including Huggies, Kleenex, Scott, Cottonelle, Depend and Poise. Results for all periods were recast to present the health care business as discontinued operations following its October 31, 2014 spin-off into Halyard Health, Inc.
The company operated in more than 175 countries, with more than half of net sales generated outside the United States. Reportable segments were Personal Care, Consumer Tissue and K-C Professional.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $19,724 million | $19,561 million | +0.8% |
| Gross profit | $6,683 million | $6,609 million | +1.1% |
| Operating profit | $2,521 million | $2,903 million | -13.2% |
| Income from continuing operations | $1,545 million | $2,018 million | -23.4% |
| Net income attributable to Kimberly-Clark | $1,526 million | $2,142 million | -28.7% |
| Diluted EPS | $4.04 | $5.53 | -27.0% |
| Diluted EPS from continuing operations | $3.91 | $5.01 | -21.96% |
| Cash provided by operations | $2,845 million | $3,040 million | -6.4% |
| Capital spending | $1,039 million | $953 million | +9.0% |
Operating margin was approximately 12.8% in 2014, compared with approximately 14.8% in 2013. The decline principally reflected the $462 million Venezuela balance-sheet remeasurement charge, $133 million of organization restructuring charges, $33 million of European strategic-change charges, higher input costs and unfavorable currency effects. The effective tax rate increased to 38.0% from 31.4%, primarily because the Venezuela charge was nondeductible.
| Segment | 2014 Net Sales | 2014 Operating Profit | Sales Change | Profit Change |
|---|---|---|---|---|
| Personal Care | $9,635 million | $1,803 million | +1.0% | +6.2% |
| Consumer Tissue | $6,645 million | $1,062 million | +0.1% | +7.5% |
| K-C Professional | $3,388 million | $604 million | +2.0% | -0.2% |
Fourth-quarter 2014 net sales were $4,828 million, compared with $4,895 million in the fourth quarter of 2013. Fourth-quarter operating profit was $158 million versus $745 million, and diluted loss per share was $0.22 versus diluted earnings of $1.40 in the prior-year quarter. The fourth quarter included significant restructuring and Venezuela-related charges.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $789 million at December 31, 2014, versus $1,054 million a year earlier.
- Total assets were $15,526 million, down from $18,919 million, primarily reflecting the health care spin-off and currency effects.
- Total debt and redeemable securities were approximately $7.0 billion, compared with $6.3 billion in 2013. Long-term debt was $5,630 million and short-term debt was $777 million.
- Total stockholders’ equity declined to $999 million from $5,140 million, reflecting the spin-off, share repurchases and accumulated currency losses.
- The company had an unused $2.0 billion revolving credit facility expiring in 2019, supporting its commercial paper program.
- Contractual obligations totaled $11,906 million, including $6,179 million of long-term debt, $2,732 million of related interest payments, $587 million of operating leases and $1,100 million of unconditional purchase obligations.
Material Changes Versus the Prior Comparable Period
- Net sales rose modestly as organic volumes and net selling prices each increased approximately 2%, offset by a 2% unfavorable currency impact and lower sales from European strategic changes and pulp-and-tissue restructuring.
- Ongoing cost savings were $320 million, while input costs increased approximately $240 million year over year.
- The company completed its health care spin-off, transferring approximately $1.5 billion of net assets and recording $138 million of after-tax transaction and related costs in discontinued operations.
- 2014 organization restructuring charges were $133 million pretax and $95 million after tax. The plan is expected to cost $130 million to $160 million after tax through 2016 and reduce the workforce by approximately 1,100 to 1,300 employees.
- Share repurchases totaled $2.0 billion for 18.0 million shares. Dividends declared were $3.36 per share, a 4% increase and the 42nd consecutive annual increase.
- Other comprehensive income attributable to Kimberly-Clark was adversely affected by approximately $819 million of currency translation losses and $278 million of postretirement-benefit losses.
Guidance, Outlook, Risks and Unusual Items
For 2015, management projected GAAP EPS of $5.46 to $5.72. The outlook assumed combined volume, price and mix growth of 3% to 5%, an unfavorable currency impact on sales of 8% to 9%, commodity cost deflation of $0 to $150 million, at least $300 million of FORCE cost savings and $60 million to $80 million of restructuring savings. Planned capital spending was $950 million to $1,050 million, and planned share repurchases were $800 million to $1.0 billion.
- Venezuela was remeasured at 50 bolivars per U.S. dollar, generating a $462 million nondeductible charge. Production had already been curtailed because of limited import approvals, and further disruption remained possible.
- The company faces substantial foreign-exchange exposure, particularly in emerging markets. A hypothetical 10% unfavorable currency movement would have reduced equity by approximately $800 million through translation adjustments.
- Key operating risks include intense competition, retailer concentration, pulp and petroleum-based input costs, supply-chain disruption, political and currency restrictions, litigation, regulatory matters, cyber-security incidents and execution of restructuring initiatives.
- The pension plans had a funded deficit of $946 million, and principal plans had approximately $2.9 billion of cumulative unrecognized investment and actuarial losses. Management expected pension contributions of up to $100 million in 2015.
- Management stated that legal proceedings and environmental matters were not expected to have a material adverse effect, but the filing notes that outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Reconcile reported EPS and margins using continuing-operations results and separately assess the effect of the Halyard spin-off.
- Evaluate the recurring earnings impact of the $462 million Venezuela charge, currency restrictions and potential production curtailments.
- Monitor execution, cash costs and expected savings from the $190 million to $230 million pretax restructuring program.
- Assess leverage, debt maturities and liquidity in light of $777 million of short-term debt and approximately $7.0 billion of total debt and redeemable securities.
- Compare 2015 guidance with actual currency movements, commodity costs, volume growth, cost savings and restructuring benefits.
- Review pension funding requirements, accumulated actuarial losses and sensitivity to discount-rate changes.
- Consider customer concentration, as Wal-Mart represented approximately 13% of annual net sales in 2014, 2013 and 2012.
- Confirm the status of tax, legal, environmental and spin-off-related contingencies, including potential tax consequences if the spin-off’s tax-free treatment were challenged.