Business Context and Reporting Period
Kimberly-Clark Corporation is a global manufacturer and marketer of personal care, consumer tissue, K-C Professional and health care products, including Huggies, Kleenex, Scott, Kotex and Depend. This Form 10-K covers the fiscal year ended December 31, 2012; fourth-quarter data are also presented. Dollar amounts are in millions except per-share amounts.
The company operated in more than 175 countries, with approximately 58,000 employees and 109 principal production facilities. Wal-Mart represented approximately 12% of 2012 net sales.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $21,063 | $20,846 | +1% |
| Gross profit | $6,749 | $6,152 | +10% |
| Operating profit | $2,686 | $2,442 | +10% |
| Net income attributable to Kimberly-Clark | $1,750 | $1,591 | +10% |
| Diluted EPS | $4.42 | $3.99 | +11% |
| Cash provided by operations | $3,288 | $2,288 | +44% |
- Gross margin was approximately 32.0%, compared with 29.5% in 2011. Operating margin was approximately 12.8%, compared with 11.7%; net margin attributable to Kimberly-Clark was approximately 8.3%, compared with 7.6%.
- Segment sales were Personal Care $9,576, Consumer Tissue $6,527, K-C Professional $3,283 and Health Care $1,622. Personal Care sales increased 5%; Consumer Tissue declined 4%; K-C Professional was essentially flat; and Health Care increased 1%.
- Operating profit increased across all four segments: Personal Care $1,660, Consumer Tissue $887, K-C Professional $545 and Health Care $229.
- Operating cash flow benefited from higher earnings, improved working capital and pension contributions of $110 versus $679 in 2011. Capital spending was $1,093, dividends paid were $1,151 and share repurchases were $1,284.
- Cash and cash equivalents were $1,106 at year-end, versus $764 in 2011. Current assets were $6,589 and current liabilities were $6,091.
- Debt payable within one year was $1,115 and long-term debt was $5,070. Total debt and redeemable securities were approximately $6.7 billion. The company had an unused $1.5 billion revolving credit facility expiring in October 2016, with an option to increase it by $500.
- Total assets were $19,873 and total stockholders’ equity was $5,287. The defined benefit pension funded deficit increased to approximately $1,215 from $706 in 2011.
Material Changes Versus the Prior Comparable Period
- Sales growth was modest and reflected higher net selling prices and volumes, partly offset by unfavorable currency effects. K-C International sales increased mid-single digits, including 10% growth before currency effects, and represented 37% of consolidated sales versus 36% in 2011.
- Operating profit benefited from $295 of cost savings, approximately $90 of input-cost deflation and lower pension contributions. These benefits were partly offset by $115 of additional strategic marketing spending, higher research and administrative costs, and $55 of unfavorable currency translation effects.
- 2012 included $299 of pretax charges, or $242 after tax, for Western and Central European strategic changes, compared with $415 of pretax, or $289 after-tax, pulp and tissue restructuring charges in 2011. The 2012 results also included $135 of pretax, or $86 after-tax, pulp and tissue restructuring charges.
- Research and development expense increased to $356 from $316, while advertising expense increased to $810 from $686.
- Fourth-quarter 2012 net sales were $5,307 versus $5,176 in the fourth quarter of 2011. Fourth-quarter operating profit was $449 versus $611, and net income attributable to Kimberly-Clark was $267 versus $401, reflecting the impact of restructuring and strategic-change charges.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 growth initiatives, product innovation and increased strategic marketing to support sales, while cost savings were expected to offset moderate commodity inflation. The filing does not provide clear full-year 2013 revenue or earnings guidance.
- European strategic changes include exiting the diaper category in Western and Central Europe except Italy, divesting or exiting lower-margin businesses, selling or closing five manufacturing facilities and reducing the European workforce by approximately 1,300 to 1,500 positions. Completion was expected by December 31, 2014, with cumulative charges of approximately $250 to $350 after tax.
- The exited or divested European businesses generated approximately $500 of annual sales and negligible operating profit. About 50% to 60% of the strategic-change charges were expected to be cash costs.
- Pulp and tissue restructuring was substantially complete at year-end. Management expected annual sales to be $250 to $300 lower than the 2010 baseline by 2013, but operating profit to improve by at least $75 in 2013 and $100 in 2014.
- Management planned $1.0 billion to $1.2 billion of share repurchases and $1.0 billion to $1.1 billion of capital spending in 2013. The regular quarterly dividend was increased 9% for 2013.
- Following Venezuela’s February 2013 currency devaluation, the company expected a $25 to $35 after-tax charge in first-quarter 2013. Venezuela represented approximately 2% of 2012 consolidated sales and 4% of consolidated operating profit.
- Key risks include pulp, petroleum-based materials, energy and transportation costs; intense branded and private-label competition; retailer concentration; foreign-exchange and political risks; economic weakness; supply-chain disruptions; regulatory, tax, litigation and product-liability exposures; and execution of restructuring and cost-savings programs.
- Environmental capital expenditures were estimated at $21 in 2013 and $32 in 2014, excluding potential remediation costs associated with the European strategic changes. Management did not expect routine environmental spending to be material to consolidated results.
- Legal proceedings, environmental matters and tax disputes were disclosed, but management believed their ultimate resolution would not have a material adverse effect on financial condition, results of operations or liquidity.
Important Facts for Investors to Verify
- Reconcile reported earnings and margins after excluding the $299 European strategic-change charge and $135 pulp and tissue restructuring charge.
- Track whether planned European restructuring charges, facility closures, workforce reductions and divestitures remain within the stated scope and timetable.
- Assess the sustainability of the $295 cost savings and whether they offset commodity inflation, marketing investment and currency pressure.
- Monitor the pension deficit, expected 2013 contributions of $100 to $300, and sensitivity to discount rates and investment returns.
- Evaluate liquidity against $1,115 of current debt, scheduled long-term debt maturities, the potential $500 preferred-securities redemption in December 2014 and contractual obligations totaling $13,413.
- Confirm the effect of the Venezuelan devaluation and any additional currency restrictions or repatriation limitations.
- Review the balance between shareholder distributions and investment: 2012 dividends and repurchases totaled approximately $2.5 billion against $3.3 billion of operating cash flow.