Kimberly-Clark Corporation — 2020 Q1 Form 10-Q
Business context and reporting period
Quarterly report for the three months ended March 31, 2020. Kimberly-Clark operates through Personal Care, Consumer Tissue and K-C Professional, with products including Huggies, Kleenex, Scott, Cottonelle and related hygiene and workplace products. The quarter included significant COVID-19-related consumer stock-up activity, particularly in tissue products.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $5.009 billion | $4.633 billion | +8% |
| Gross profit | $1.791 billion | $1.428 billion | +25% |
| Operating profit | $904 million | $655 million | +38% |
| Net income attributable to Kimberly-Clark | $660 million | $454 million | +45% |
| Diluted EPS | $1.92 | $1.31 | +47% |
| Cash provided by operations | $704 million | $317 million | +$387 million |
Reported gross margin was approximately 35.8%, versus 30.8% in the prior-year quarter. Operating margin was approximately 18.0%, versus 14.1%, and net income attributable to Kimberly-Clark was approximately 13.2% of sales, versus 9.8%. Results included restructuring charges of $93 million pretax, or $74 million attributable to Kimberly-Clark after tax and noncontrolling interests. Excluding the restructuring program, adjusted operating profit was $997 million and adjusted diluted EPS was $2.13, compared with $807 million and $1.66, respectively, in Q1 2019.
- Segment sales and operating profit: Personal Care sales of $2.422 billion and operating profit of $527 million; Consumer Tissue sales of $1.723 billion and operating profit of $365 million; K-C Professional sales of $848 million and operating profit of $181 million.
- Organic sales increased 11%, driven primarily by volume growth of more than 8%; currency reduced reported sales by 2%.
- Adjusted operating profit benefited from approximately $100 million of FORCE cost savings, $25 million of restructuring-related savings and lower input costs, particularly pulp. Higher advertising, selling and administrative expenses, manufacturing costs and unfavorable currency effects partially offset those benefits.
- Cash and cash equivalents were $979 million at March 31, 2020, compared with $442 million at December 31, 2019. Capital spending was $352 million and dividends paid were $357 million.
- Total debt was approximately $8.4 billion at March 31, 2020, compared with $7.7 billion at year-end 2019. Debt payable within one year was $1.238 billion and long-term debt was $7.210 billion.
- The company issued $500 million of 2.875% notes due 2050 and $750 million of 3.10% notes due 2030 during the quarter. It maintained unused revolving credit facilities of $2.0 billion expiring in June 2023 and $750 million expiring in June 2020.
Material changes versus the prior comparable period
- Consumer Tissue was the strongest segment, with sales up 13% and operating profit up 51%, reflecting COVID-19-related stock-up demand, lower input costs and cost savings.
- Personal Care sales increased 6% and operating profit increased 9%; K-C Professional sales increased 4% and operating profit increased 21%.
- Operating cash flow more than doubled, primarily due to higher earnings and improved working capital.
- Restructuring charges declined to $93 million from $152 million in Q1 2019, while cumulative pretax charges under the 2018 Global Restructuring Program reached approximately $1.5 billion.
- Other comprehensive loss was $333 million, primarily from a $399 million after-tax currency translation loss, compared with other comprehensive income of $5 million in Q1 2019. Total stockholders’ equity declined to $46 million from $194 million at year-end, and Kimberly-Clark Corporation stockholders’ equity was negative $167 million at March 31, 2020.
- The company repurchased approximately 1.6 million shares for $224 million during the quarter. It announced that share repurchases would be temporarily suspended effective April 24, 2020, at least through the remainder of Q2.
Guidance, outlook, risks and unusual items
The filing does not provide a clear updated full-year sales or EPS guidance figure. Management stated that demand could remain strong in some businesses early in Q2 as retailers rebuild inventories, followed by potential demand softness and volatility as consumers use existing stockpiles. K-C Professional was expected to face near-term volume declines because of reduced global business activity and work-from-home trends.
- COVID-19 created increased demand but also operational, logistics, absenteeism and supply-chain risks. Management could not reasonably estimate the pandemic’s duration, severity or ultimate financial impact.
- Management expected restructuring activities and related charges to extend into 2021 rather than finish at the end of 2020. Total charges were expected toward the high end of the previously estimated $1.7 billion to $1.9 billion pretax range, with annual pretax savings targeted at $500 million to $550 million. Full realization of savings could move into 2022.
- Foreign currencies, particularly in developing and emerging markets, depreciated significantly against the U.S. dollar. Commodity prices, including polymer resin and oil, declined during the quarter, but management expected continued volatility.
- The company identified risks from changing consumer demand, manufacturing and supplier disruptions, commodity and currency volatility, competitive pricing, economic conditions and possible delays to cost-saving and restructuring programs.
- Management stated that liquidity was adequate for working capital, restructuring payments, capital spending, pension contributions, dividends and other foreseeable needs. The quarterly dividend plan was unchanged after a 3.9% increase in January 2020.
Important facts for investors to verify
- Whether COVID-19 stock-up benefits reverse in subsequent quarters and how quickly K-C Professional demand recovers.
- The timing, remaining cash costs and final total cost of the 2018 Global Restructuring Program, including whether targeted savings are achieved by 2021 or slip into 2022.
- Maintenance of liquidity and access to commercial paper and revolving credit markets as total debt remains elevated.
- The sustainability of reported margins after temporary stock-up demand, lower input costs and restructuring savings normalize.
- The effect of foreign currency movements, commodity prices and supply-chain disruptions on future results and cash flow.
- The company’s share repurchase suspension, dividend capacity and the implications of the low consolidated stockholders’ equity balance.