KIMBERLY CLARK CORP annual report, FY2019

Kimberly-Clark Corporation — FY 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing also provides fourth-quarter 2019 data; the filing date was February 13, 2020. Kimberly-Clark is a global manufacturer and marketer of personal care, consumer tissue and K-C Professional products, including Huggies, Kleenex, Scott, Cottonelle and Depend.

Financial performance and key metrics

Metric	2019	2018	Change
Net sales	$18,450 million	$18,486 million	Flat
Gross profit	$6,035 million	$5,597 million	+8%
Operating profit	$2,991 million	$2,229 million	+34%
Net income attributable to Kimberly-Clark	$2,157 million	$1,410 million	+53%
Diluted EPS	$6.24	$4.03	+55%
Cash provided by operations	$2,736 million	$2,970 million	-8%

Reported gross margin was approximately 32.7%, operating margin 16.2% and net margin attributable to Kimberly-Clark approximately 11.7%.
Organic sales increased 4%, offset by a 3% unfavorable currency impact and a 1% volume decline. North America organic sales rose 3%; outside North America, organic sales increased 6% in developing and emerging markets and 1% in developed markets.
Segment sales and operating profit were: Personal Care $9,108 million and $1,904 million; Consumer Tissue $5,993 million and $1,007 million; and K-C Professional $3,292 million and $657 million.
Adjusted operating profit was $3,281 million, up 5%, and adjusted diluted EPS was $6.89, up 4%. These non-GAAP measures exclude restructuring-related items and the property sale gain.
Fourth-quarter 2019 net sales were $4,583 million, operating profit was $751 million, net income attributable to Kimberly-Clark was $547 million and diluted EPS was $1.59.

Cash flow, balance sheet and capital allocation

Cash provided by operations was $2,736 million. Capital spending was $1,209 million, including increased spending for the restructuring program, and proceeds from property dispositions were $242 million.
Cash and cash equivalents were $442 million at year-end, compared with $539 million in 2018. Total current assets were $5,057 million versus current liabilities of $6,919 million.
Total debt was approximately $7.7 billion, including $775 million of short-term debt, compared with approximately $7.5 billion at December 31, 2018. Long-term debt was $6,213 million.
The company had unused revolving credit facilities of $2.0 billion expiring in June 2023 and $750 million expiring in June 2020. Management stated that operating cash flow and debt capacity were adequate for foreseeable liquidity needs.
Dividends paid were $1,408 million, and share repurchases were $800 million for 6.2 million shares. The 2019 dividend was increased 3%; the company announced a 3.9% dividend increase for 2020 and targeted 2020 share repurchases of $700 million to $900 million, subject to market conditions.
Total stockholders’ equity was $194 million at year-end, compared with negative $46 million in 2018; Kimberly-Clark Corporation stockholders’ equity remained negative at $33 million.

Material changes versus 2018

Reported profitability improved substantially because 2018 included $1,036 million of pretax restructuring charges and a $117 million tax-reform-related charge. In 2019, restructuring charges were $366 million pretax, partially offset by a $31 million property-sale gain.
Operating profit benefited from $260 million of FORCE cost savings and $165 million of 2018 Global Restructuring Program savings. These benefits were partly offset by $145 million of higher input costs, unfavorable currency effects, higher advertising and increased selling, general and administrative expenses.
Consumer Tissue operating profit increased 15% to $1,007 million, Personal Care increased 4% to $1,904 million and K-C Professional increased 4% to $657 million.
The effective tax rate declined to 21.7% from 26.0%, including a nonrecurring $47 million benefit from a capital loss generated by a legal-entity restructuring. The adjusted effective tax rate increased to 23.0% from 21.0%.
Cash flow from operations declined because of higher working capital and tax payments, partly offset by higher earnings and lower pension contributions.

Guidance, outlook, risks and unusual items

The 2018 Global Restructuring Program is expected to be completed by the end of 2020. Total pretax costs are expected to be $1.7 billion to $1.9 billion, with 2020 charges estimated at $300 million to $500 million. Annual pretax savings are expected to reach $500 million to $550 million by 2021; cumulative savings through 2019 were $300 million.
Incremental restructuring-related capital spending is expected to total approximately $600 million to $700 million through the end of 2020. Overall 2020 capital spending is expected to be approximately $1.15 billion to $1.35 billion.
The program is expected to close or sell approximately 10 manufacturing facilities, exit or divest lower-margin businesses representing approximately 1% of net sales, and reduce the workforce by approximately 5,000 to 5,500 employees.
Key risks include retailer concentration and bargaining power, intense branded and private-label competition, changing consumer demand, foreign currency and political risks, pulp and petroleum-based input costs, energy and transportation costs, supply-chain disruption, cybersecurity and data privacy, litigation, environmental regulation, tax changes and execution of restructuring, divestitures or acquisitions.
Approximately 14% of consolidated net sales came from Walmart in 2019. About half of net sales were generated outside the United States.
Legal matters include disputes and investigations related to the former health care business, including an ongoing DOJ investigation for which the company stated it could not predict an outcome or estimate a potential resolution range. A Brazilian tax dispute involved proposed adjustments and penalties of approximately $90 million before interest.
The company reported an aggregate pension funded-status deficit of $244 million and expects approximately $50 million of defined-benefit pension contributions in 2020. It also disclosed approximately $1.2 billion of cumulative unrecognized investment and actuarial losses in the principal pension plans.
In February 2020, after year-end, Kimberly-Clark issued $500 million of 2.875% notes due in 2050, using proceeds partly to repay commercial paper.

Investor verification points

Verify the sustainability of reported earnings after removing restructuring benefits, the property-sale gain and the $47 million nonrecurring tax benefit.
Assess whether pricing and cost savings can offset pulp, petroleum-based materials, energy, transportation and other input-cost inflation without materially reducing volumes.
Monitor completion costs, capital spending, workforce reductions, facility actions and the achievement of the restructuring program’s $500 million to $550 million annual savings target.
Review debt maturities, commercial paper reliance, revolving-credit-facility renewal and the company’s relatively low cash balance compared with current liabilities.
Evaluate retailer concentration, particularly Walmart, and the effects of private-label competition, e-commerce and consumer trade-down behavior.
Review the potential exposure from the former health care business litigation and DOJ investigation, the Brazilian tax dispute and other tax uncertainties.
Reconcile GAAP results with management’s non-GAAP adjusted measures and review the assumptions underlying trade-promotion accruals, pensions, taxes and foreign-currency exposures.