Deriving days in inventory, cash to cash cycle and operating cycle using ratios
All questions relate to the Kimberly-Clark Corp. Annual Report (Form 10-K) for the year ending December 31,2007. Kimberly-Clark (the "Company") "is a global health and hygiene company with manufacturing facilities in 36 countries and its products are sold in more than 150 countries." The Company's "products are sold under such well-known brands as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend." The Company operates in the Paper Mills industry. Median data relating to the Paper Mills industry are:
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ROE
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10.35%
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Beta
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0.97
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Market-to-book
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1.97
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Net profit margin (Return on sales)
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5.86%
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Total asset turnover
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1.12
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Financial leverage
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1.56
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Gross profit margin
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22.93%
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Receivable days (Average collection period/Days to collect)
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48.06
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Inventory days (Days inventory held)
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62.42
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Payable days (Days to pay)
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32.29
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Current ratio
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1.59
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Interest coverage (Times interest earned)
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1.81
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Note: Although an individual company's ROE is the product of net profit margin, total asset turnover, and financial leverage, this relationship will not hold when using the three median variables as shown above because medians distort the relationships among individual company ratios.
Please read the instructions and each question carefully.
Some aspects of Kimberly-Clark's (hereafter, the "Company") 2007 financial statements are noteworthy.
1. Two "above-the-line" special, non-recurring items were reported. The first item was a $107.2 million net charge ($61.4 million after tax (given in annual report)) for a strategic cost reduction plan allocated as follows on a pre-tax basis: $89.4 million charge included in Cost of products sold; $31.8 million charge included in Marketing, research and general expenses; and $14 million gain on dispositions of facilities included in Other (income) and expense, net (See MD&A, pp. 24-25, Note 2, pp. 49-52). The second item was an $16.4 million gain for a settlement of litigation that was included in Other (income) and expense, net (See MD&A, p.25). The after-tax amount for the first item is given; however, consider the second item a taxable gain.
2. Treat Redeemable preferred securities of subsidiary, included in the balance sheet, as interest bearing debt in problem 8(d). Do not treat this item the same way as the preferred stock adjustment that was discussed in Module 5, p.23. Assume that the preferred dividends are already included in the interest expense reported in the 2007 income statement.
Show the adjustments for each problem individually and not a cumulative adjustment unless the question directs you to do so.
(a) Compute the Company's 2007 operating cycle in such a way that the inventory days are not compromised through the use of LIFO (See Note 18, Summary of inventories, p. 79). Also, compute the Company's cash-to-cash cycle. Be sure to include any appropriate adjustment(s), if any, for nonrecurring items. Make sure to label your computations adequately. (Note: In note 18, Summary of accounts receivable, net, p. 79, use the amount from customers as the gross accounts receivable to calculate days to collect (average collection period), purchases for the days to pay calculation, and averages of all appropriate balance sheet accounts). The industry averages are listed on the front page of the exam.
Days to collect ________________ Industry Average ______________
Days in inventory ________________ Industry Average ______________
Days to pay ________________ Industry Average ______________
Operating Cycle ________________ Industry Average ______________
Cash-to-Cash Cycle ________________ Industry Average ______________
(b) Briefly explain why the Company's operating cycle and cash-to-cash cycle differs from the industry median cycles.