Kimberly-Clark Corporation 2020 Q2 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three and six months ended June 30, 2020. The company operates through Personal Care, Consumer Tissue and K-C Professional. Results were materially affected by COVID-19-related changes in consumer and away-from-home demand, foreign currency movements, lower pulp costs and ongoing restructuring activities.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | $4,612 million | $4,594 million | Flat |
| Gross profit | $1,777 million | $1,486 million | +20% |
| Operating profit | $925 million | $670 million | +38% |
| Net income attributable to Kimberly-Clark | $681 million | $485 million | +40% |
| Diluted EPS | $1.99 | $1.40 | +42% |
| Gross margin | 38.5% | 32.3% | Up 6.2 percentage points |
| Operating margin | 20.1% | 14.6% | Up 5.5 percentage points |
| Six-month metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $9,621 million | $9,227 million | +4% |
| Operating profit | $1,829 million | $1,325 million | +38% |
| Net income attributable to Kimberly-Clark | $1,341 million | $939 million | +43% |
| Diluted EPS | $3.92 | $2.71 | +45% |
| Cash provided by operations | $2,283 million | $926 million | +146% |
Second-quarter organic sales increased 4%, consisting of 2% volume growth, 1% net price growth and 1% mix-related growth; foreign exchange reduced reported sales by approximately 4%. Adjusted operating profit was $1,012 million versus $789 million, and adjusted diluted EPS was $2.20 versus $1.67.
- Personal Care: Q2 sales declined 2% to $2,229 million, while operating profit increased 7% to $519 million.
- Consumer Tissue: Q2 sales increased 12% to $1,645 million, and operating profit increased 94% to $428 million, driven by elevated at-home demand and volume growth.
- K-C Professional: Q2 sales declined 12% to $724 million, and operating profit declined 4% to $155 million, reflecting reduced away-from-home demand.
At June 30, 2020, cash and cash equivalents were $1,448 million, compared with $442 million at December 31, 2019. Total current assets were $5,904 million versus current liabilities of $6,494 million. Total debt was approximately $8.1 billion, consisting of $850 million of debt payable within one year and $7,223 million of long-term debt on the balance sheet. The company maintained unused revolving credit facilities of $2.0 billion expiring in June 2023 and $750 million expiring in June 2021.
Capital spending was $636 million in the first six months, compared with $569 million in the prior-year period. Dividends paid were $722 million, and share repurchases totaled $263 million. Stock repurchases were temporarily suspended on April 24, 2020.
Material changes versus the prior comparable period
- COVID-19 increased demand for consumer tissue products, particularly in North America, while reducing K-C Professional volumes as workplaces and other away-from-home locations experienced lower activity.
- Organic sales growth and cost savings materially improved profitability. The company cited $120 million of second-quarter FORCE program savings and $55 million of restructuring-related savings.
- Input costs decreased by $80 million in the quarter and $195 million year to date, primarily due to lower pulp costs.
- Foreign currency translation reduced second-quarter sales by approximately 4% and negatively affected operating profit.
- Cash from operations increased substantially, primarily due to improved working capital, higher earnings and the timing of tax payments.
- Long-term debt increased following the issuance of $500 million of 2.875% notes due 2050 and $750 million of 3.10% notes due 2030.
- The company repurchased 1.9 million shares for $263 million during the first six months, compared with $330 million in the prior-year period.
Guidance, outlook, risks and unusual items
Management stated that the duration and severity of COVID-19 and its ultimate economic and business effects cannot reasonably be estimated. Demand may remain volatile as consumers use accumulated inventories and conditions normalize. Temporary facility closures and increased employee absences were reported, although no material plant-closure impact had occurred through the filing date.
The 2018 Global Restructuring Program is now expected to extend into 2021. Total pre-tax charges are expected toward the high end of the $1.7 billion to $1.9 billion range, with after-tax charges of $1.3 billion to $1.4 billion. Annual pre-tax savings are expected to reach $500 million to $550 million by the end of 2021, although full realization could be delayed to 2022. Cumulative pre-tax charges through June 30, 2020 were $1.6 billion.
Management expected full-year 2020 capital spending of $1.2 billion to $1.3 billion and anticipated full-year share repurchases of $700 million to $900 million. The share repurchase program was scheduled to restart on July 24, 2020.
Key risks include the ongoing pandemic, foreign currency volatility, raw material and energy costs, competitive pricing pressure, customer and retailer actions, global economic and political conditions, execution of restructuring and cost-saving plans, and the potential effect of business disruptions. K-C Argentina continued to use highly inflationary accounting; its sales represented approximately 1% of consolidated sales.
Second-quarter results included $87 million of pre-tax restructuring charges, or $72 million after tax attributable to Kimberly-Clark. Six-month results included $180 million of pre-tax charges, or $146 million after tax attributable to Kimberly-Clark. Management also presented non-GAAP results excluding these charges.
Important facts for investors to verify
- Whether COVID-19-related consumer tissue demand remains elevated and how quickly K-C Professional demand recovers.
- The sustainability of the substantial margin expansion after pulp-cost benefits and restructuring savings.
- Progress, timing and final cost of the 2018 Global Restructuring Program.
- Execution of the stated $500 million to $550 million annual restructuring savings target.
- Debt maturities, refinancing needs and liquidity under prolonged economic or commercial-paper market disruption.
- The resumption and scale of share repurchases relative to dividends, capital spending and debt reduction.
- Foreign currency, commodity-cost and supply-chain exposure, including the continuing effects of COVID-19.