Kimberly-Clark Corporation 2016 Q2 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark filed a Form 10-Q for the quarter and six months ended June 30, 2016. The company operates through Personal Care, Consumer Tissue and K-C Professional, with global exposure to foreign currency, commodity prices, retail customers and emerging markets. The financial statements are unaudited and presented in millions of dollars, except per-share amounts.
Financial performance and key metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $4,588 | $4,643 | $9,064 | $9,334 |
| Gross profit | $1,664 | $1,657 | $3,303 | $3,316 |
| Gross margin | 36.3% | 35.7% | 36.4% | 35.5% |
| Operating profit | $838 | $(544) | $1,642 | $204 |
| Net income attributable to Kimberly-Clark | $566 | $(305) | $1,111 | $163 |
| Diluted EPS | $1.56 | $(0.83) | $3.06 | $0.44 |
| Cash provided by operations | Not separately provided | Not separately provided | $1,413 | $792 |
Second-quarter sales declined 1.2%, while six-month sales declined 2.9%. Foreign currency translation reduced second-quarter sales by 4% and six-month sales by more than 5%. Organic sales increased approximately 3% in both periods, primarily from higher volume.
Second-quarter adjusted operating profit was $828, up 5% from $790. Six-month adjusted operating profit was $1,646, up 3% from $1,605. Reported operating profit and earnings benefited significantly from the absence of the prior-year pension settlement charges.
- Personal Care: Second-quarter sales were $2,279, down 1.2%; operating profit was $455, down 3.8%. Volume increased 6%, but currency and pricing pressure reduced reported sales and profit.
- Consumer Tissue: Second-quarter sales were $1,494, down 0.3%; operating profit was $275, up 5.8%. Volume growth, cost savings and lower input costs supported profitability.
- K-C Professional: Second-quarter sales were $806, down 1.9%; operating profit was $150, up 3.4%, primarily due to cost savings.
Second-quarter operating results included $95 of FORCE cost savings, $15 of restructuring savings and approximately $20 of input-cost benefit, partly offset by $25 of unfavorable currency translation. Six-month FORCE savings were $190, restructuring savings were $30 and input costs were $50 lower year over year.
Cash and cash equivalents were $656 at June 30, 2016, compared with $619 at December 31, 2015. Total current assets were $5,114, versus current liabilities of $5,228. Total debt was approximately $7.7 billion, consisting primarily of $758 of short-term debt and $6,905 of long-term debt on the balance sheet. Kimberly-Clark had an unused $2.0 billion revolving credit facility expiring in 2019.
Capital spending was $397 during the first six months, compared with $527 in the prior-year period. The company paid $650 of dividends, repurchased $300 of common stock under its share repurchase program and used $1,003 in financing activities overall. Cash increased by $37 during the first six months.
Material changes versus the prior comparable period
- Reported operating profit improved from a $544 loss to $838 of profit in the second quarter and from $204 to $1,642 for the six-month period.
- The primary comparison benefit was the absence of 2015 pension settlement charges of $1,322 in the second quarter and $1,331 year to date.
- Adjusted operating profit increased despite lower reported sales, reflecting volume growth, FORCE savings, restructuring benefits and lower input costs.
- Foreign currency remained a substantial headwind, reducing sales and operating profit, particularly outside North America.
- Operating cash flow increased by $621 to $1,413, aided by higher earnings, improved working capital and pension contributions of $30 versus $435 in the prior year.
- Long-term debt increased to $6,905 from $6,106 at year-end, while debt payable within one year declined to $772 from $1,669. The company issued $800 of notes in February 2016.
- Shareholders’ equity attributable to Kimberly-Clark improved from a deficit of $174 at December 31, 2015 to $196 at June 30, 2016, primarily due to net income and other equity movements.
Guidance, outlook, risks and unusual items
Management maintained 2016 diluted EPS guidance of $5.92 to $6.15 and adjusted EPS guidance of $5.95 to $6.15. Organic sales growth is expected at the low end of the previously assumed 3% to 5% range. Management expects foreign currency translation to reduce sales and operating profit by 4% to 5%, commodity costs to provide $25 to $125 of year-over-year deflation, FORCE savings of $350 to $400 and at least $50 of restructuring savings.
Full-year 2016 capital spending is expected to be $950 to $1,050. Share repurchases are targeted at $700 to $800, subject to market conditions. The company expects its full-year effective tax rate and adjusted tax rate to be in the lower half of the 30.5% to 32.5% target range.
- The 2014 organization restructuring is expected to be completed by year-end 2016. Cumulative pretax charges were $211 through June 30, 2016, and cumulative savings were $100. Total costs are expected toward the high end of the previously stated range.
- Venezuelan operations were deconsolidated effective December 31, 2015. Kimberly-Clark recorded $11 of other income in the second quarter and first six months of 2016 from an updated assessment.
- Foreign exchange, raw-material availability and prices, competitive pricing, retail customer actions, energy costs and global economic or political conditions may cause results to differ from guidance.
- The company uses derivatives for foreign currency, interest-rate and commodity exposures. Derivative assets were $51 and liabilities were $41 at June 30, 2016.
- Accounting changes for leases and revenue recognition were not yet effective; the eventual effects of the lease standard were not known, while the expected effects of the revenue standard were not expected to be material.
- Management concluded that disclosure controls were effective as of June 30, 2016, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether organic volume growth and innovation-led market-share gains can offset pricing pressure and foreign currency effects.
- Progress toward the $350 to $400 FORCE savings target and at least $50 of restructuring savings for 2016.
- Achievement of the $5.92 to $6.15 diluted EPS guidance range and the underlying assumptions for currency, commodities and tax rates.
- Debt maturities, commercial-paper usage, interest expense and continued access to the $2.0 billion revolving credit facility.
- Capital allocation, including planned capital spending, dividends and the $700 to $800 share-repurchase target.
- The sustainability of improved operating cash flow after unusually low pension contributions and the absence of prior-year pension settlement charges.
- Exposure to foreign exchange, commodity costs, emerging-market conditions, Venezuela-related developments and potential legal or other contingencies described in the company’s other filings.