Kimberly-Clark Corporation 2017 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, 2017, with quarterly information including the fourth quarter. Dollar amounts are in millions except per-share data.
- Approximately 42,000 employees; products sold in more than 175 countries.
- Reportable segments: Personal Care, Consumer Tissue and K-C Professional.
- Walmart represented approximately 14% of consolidated net sales in 2017, 2016 and 2015.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $18,259 | $18,202 | Flat to slightly higher |
| Gross profit | $6,553 | $6,651 | Down 1% |
| Operating profit | $3,299 | $3,317 | Down 1% |
| Net income attributable to Kimberly-Clark | $2,278 | $2,166 | Up 5% |
| Diluted EPS | $6.40 | $5.99 | Up 7% |
| Cash provided by operations | $2,929 | $3,232 | Down $303 |
| Capital spending | $785 | $771 | Up $14 |
Reported gross margin was approximately 35.9%, operating margin approximately 18.1% and net income attributable margin approximately 12.5%. The filing does not present these percentages as reported metrics; they are calculated from the reported amounts.
- Fourth-quarter 2017 net sales were $4,582, operating profit was $812, net income attributable to Kimberly-Clark was $617 and diluted EPS was $1.75. Fourth-quarter 2016 diluted EPS was $1.40.
- Personal Care sales were $9,078 and operating profit was $1,907, compared with $9,046 and $1,857 in 2016.
- Consumer Tissue sales were $5,932 and operating profit was $1,034, compared with $5,967 and $1,117 in 2016.
- K-C Professional sales were $3,208 and operating profit was $633, compared with $3,150 and $603 in 2016.
- Operating results absorbed $355 of higher input costs, lower net selling prices and approximately $24 of debt redemption expense. These pressures were partly offset by $450 of FORCE cost savings, volume growth and lower marketing, research and general spending.
Cash flow, debt and liquidity
- Cash and cash equivalents were $616 at December 31, 2017, compared with $923 at December 31, 2016.
- Total debt was approximately $7.4 billion at year-end, compared with $7.6 billion in 2016; short-term debt was $547 and long-term debt was $6,472.
- The company had an unused $2.0 billion revolving credit facility expiring in 2021 that supports its commercial paper program.
- Dividends paid were $1,359, and share repurchases totaled $900 for 7.2 million shares. Dividends and repurchases together were approximately $2.3 billion.
- Management stated that operating cash generation and debt capacity are adequate for working capital, capital expenditures, dividends, pension contributions and other foreseeable needs.
- Contractual obligations totaled $13,666, including $6,892 of long-term debt principal, $3,084 of interest payments, $610 of operating leases and $1,173 of unconditional purchase obligations.
Material changes versus prior comparable period
- Sales were essentially stable, as approximately 1% volume growth and favorable currency effects offset price declines of more than 1%.
- Operating profit declined modestly because higher input costs and pricing pressure more than offset cost savings and spending reductions.
- Personal Care and K-C Professional operating profit improved, while Consumer Tissue operating profit declined 7% because of lower sales and input-cost inflation.
- The effective tax rate decreased to 25.9% from 30.6%, principally reflecting the 2017 U.S. Tax Cuts and Jobs Act and related tax planning. The reported 2017 results included a net tax benefit of $85; adjusted EPS excluding tax reform-related matters was $6.23.
- Operating cash flow declined primarily because of higher tax payments and unfavorable working-capital movements.
- Stockholders’ equity increased to $882 from $117, aided substantially by favorable currency translation and other comprehensive income.
Guidance, outlook, commentary and risks
For 2018, management forecast reported EPS of $3.90 to $4.50 and adjusted EPS of $6.90 to $7.20, excluding estimated restructuring charges of $2.70 to $3.00 per share. Additional expectations include:
- Net sales growth of 1% to 2% and organic sales growth of approximately 1%.
- Adjusted operating profit growth of 2% to 5%.
- Approximately $400 of FORCE savings and $50 to $70 of restructuring savings.
- Key input-cost inflation of $300 to $400, with most inflation expected internationally.
- Adjusted effective tax rate of 23% to 26% and interest expense down approximately 20%.
- Capital spending of approximately $1.1 billion and share repurchases of $700 to $900.
On January 23, 2018, the company announced a global restructuring program expected to be completed by the end of 2020. The program is expected to close or sell approximately 10 manufacturing facilities, reduce the workforce by 5,000 to 5,500 employees, and exit or divest lower-margin businesses representing approximately 1% of sales. Expected costs are $1.7 billion to $1.9 billion pre-tax, including $900 million to $1.0 billion of cash costs and $600 million to $700 million of incremental capital spending. Annual pre-tax savings are expected to reach $500 million to $550 million by 2021.
- Primary operating risks include competition, private-label substitution, retailer bargaining power, pricing pressure and changing consumer demand.
- Raw-material, pulp, energy, transportation and petroleum-based input-cost volatility may pressure margins.
- International exposure creates foreign-currency, political, regulatory and economic risks; approximately half of net sales are generated outside the United States.
- Other risks include supply-chain disruptions, cybersecurity incidents, litigation, product liability, environmental matters and tax-law changes.
- A former health-care-business litigation matter produced a jury award of $3.9 in compensatory damages and $350 in punitive damages; the company is challenging the verdict and expects indemnification issues with Halyard to apply. Management does not currently expect the matter to have a material adverse effect.
Important facts for investors to verify
- Whether the substantial 2018 restructuring charges and implementation costs are offset by the projected savings and whether the program affects sales, capacity or customer relationships.
- Progress against 2018 sales, adjusted operating-profit, cost-savings, input-cost and adjusted EPS guidance.
- The sustainability of margins given $300 to $400 of expected input inflation and continued pricing pressure.
- The portion of reported EPS improvement attributable to the Tax Act, lower share count and recurring operations rather than nonrecurring items.
- Cash conversion, working-capital trends, debt maturities and funding capacity after dividends, repurchases, capital spending and restructuring cash costs.
- Potential developments in the Halyard-related litigation and indemnification disputes, tax examinations and other contingencies.
- Pension funding requirements and the effect of the approximately $1.5 billion of unrecognized investment and actuarial losses in the principal plans.