Kimberly-Clark Corporation 2018 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, Depend and WypAll. Products are sold in more than 175 countries through retail, e-commerce, distributors and business-to-business channels. The filing covers the fiscal year ended December 31, 2018; it is an annual filing rather than a standalone fourth-quarter filing. Dollar amounts are in millions except per-share data.
The company had approximately 41,000 employees and operated or participated in facilities across 35 countries. Walmart represented approximately 14% of consolidated net sales in 2018, 2017 and 2016.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $18,486 | $18,348 | +1% |
| Gross profit | $5,597 | $6,587 | -15% |
| Operating profit | $2,229 | $3,358 | -34% |
| Net income attributable to Kimberly-Clark | $1,410 | $2,278 | -38% |
| Diluted EPS | $4.03 | $6.40 | -37% |
| Cash provided by operations | $2,970 | $2,929 | +1% |
| Capital spending | $877 | $785 | +$92 |
| Cash dividends paid | $1,386 | $1,359 | +$27 |
Reported gross margin was approximately 30.3%, compared with 35.9% in 2017. Reported operating margin was approximately 12.1%, compared with 18.3% in 2017. The 2018 results included $1,036 of pretax restructuring charges and a $117 net charge related to U.S. tax reform. Excluding these items, adjusted operating profit was $3,138, adjusted net income attributable to Kimberly-Clark was $2,310 and adjusted diluted EPS was $6.61.
Input cost inflation was $795, including approximately $460 from pulp and $220 from other raw materials. This was partially offset by $375 of FORCE cost savings and $135 of restructuring-related savings.
| Segment | 2018 Sales | 2018 Operating Profit | Sales Change | Operating Profit Change |
|---|---|---|---|---|
| Personal Care | $9,037 | $1,833 | Flat | -5% |
| Consumer Tissue | $6,015 | $875 | +1% | -17% |
| K-C Professional | $3,382 | $634 | +3% | -2% |
Cash Flow, Debt and Liquidity
Cash and cash equivalents were $539 at December 31, 2018, versus $616 at year-end 2017. Total debt was approximately $7.5 billion, compared with $7.4 billion in 2017, including $495 of short-term debt and $6,247 of long-term debt. Scheduled long-term debt maturities were $716 in 2019 and $758 in 2020.
The company had an unused $2.0 billion revolving credit facility expiring in June 2023 and an unused $500 revolving facility expiring in June 2019. Management stated that operating cash flow and debt capacity were adequate to fund working capital, capital spending, dividends, pension contributions and other foreseeable needs.
Total contractual obligations were $13,908, including $6,973 of long-term debt, $3,063 of related interest payments, $538 of operating leases, $1,238 of unconditional purchase obligations and $2,096 of open purchase orders. Total stockholders’ equity was negative $46 at year-end, primarily reflecting treasury stock and accumulated other comprehensive losses.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, but profitability declined materially because of raw-material inflation, unfavorable currency effects and restructuring charges.
- Organic sales increased by more than 1%; foreign currency translation reduced reported sales by approximately 1%.
- Consumer Tissue operating profit declined most significantly, down 17%, while Personal Care operating profit fell 5% and K-C Professional operating profit fell 2%.
- Cash flow from operations increased slightly despite lower earnings, supported by improved working capital and lower tax payments.
- Debt increased modestly, while cash balances declined.
- The company repurchased 7.3 million shares for $800 during 2018 and paid $1.4 billion in dividends. The dividend was increased 3.1%, representing the 46th consecutive annual increase.
- Fourth-quarter 2018 net sales were $4,569, operating profit was $639, net income attributable to Kimberly-Clark was $411 and diluted EPS was $1.18, compared with fourth-quarter 2017 sales of $4,603, operating profit of $828, attributable net income of $617 and diluted EPS of $1.75.
Guidance, Outlook, Risks and Unusual Items
For 2019, management expected reported EPS of $4.85 to $5.35 and adjusted EPS of $6.50 to $6.70. The adjusted outlook excludes estimated restructuring charges equivalent to $1.35 to $1.65 per share. Management expected reported sales to decline 1% to 2%, organic sales to increase approximately 2%, adjusted operating profit to grow 1% to 4%, cost savings of $400 to $450 and input-cost inflation of $300 to $400.
The 2018 Global Restructuring Program is expected to be completed by the end of 2020. It includes closing or selling approximately 10 manufacturing facilities, exiting or divesting lower-margin businesses representing approximately 1% of sales, reducing the workforce by 5,000 to 5,500 employees and incurring total pretax costs of $1.7 billion to $1.9 billion. Expected annual pretax savings are $500 to $550 by 2021, with incremental capital spending of approximately $600 to $700. 2019 restructuring charges were expected to be $600 to $750 pretax.
Key risks include pulp and petroleum-based raw-material inflation, energy and transportation costs, pricing pressure, intense competition and private-label substitution, retailer concentration, foreign currency and political risks, supply-chain disruption, cyber-security and data-privacy events, regulatory and environmental matters, litigation, tax-law changes and execution risk associated with restructuring, divestitures and acquisitions.
The company adopted highly inflationary accounting for Argentina effective July 1, 2018; the impact was not material and Argentine sales were less than 2% of consolidated sales. The company also reported ongoing legal matters involving its former health care business and related indemnification disputes; the potential outcome of the Department of Justice investigation could not be estimated.
Most Important Facts for Investors to Verify
- Reconcile reported 2018 EPS of $4.03 with adjusted EPS of $6.61, particularly the $1,036 pretax restructuring charge and $117 tax-reform charge.
- Assess whether planned pricing actions and cost savings can offset pulp, raw-material, energy and transportation inflation.
- Monitor restructuring execution, cash costs of $900 to $1.0 billion, workforce reductions, facility closures and the expected $500 to $550 of annual savings by 2021.
- Evaluate debt maturities, commercial-paper reliance, liquidity facilities and the effect of continued dividends and share repurchases on balance-sheet flexibility.
- Track segment trends, especially the deterioration in Consumer Tissue profitability and the sustainability of K-C Professional sales growth.
- Review foreign-exchange exposure, including the potential effect of a stronger U.S. dollar on sales, operating profit and accumulated other comprehensive income.
- Follow the former health care business litigation, DOJ investigation and related indemnification proceedings.
- Consider pension and postretirement obligations, including a $289 pension funded-status deficit and a $673 other-benefit liability at year-end 2018.