Kimberly-Clark Corporation — 2015 Q1 Form 10-Q Summary
Business Context and Reporting Period
Quarter ended March 31, 2015. Kimberly-Clark is a global consumer products company organized into Personal Care, Consumer Tissue, and K-C Professional. The health care business was spun off on October 31, 2014 and is presented as discontinued operations; prior-period income statement amounts were recast.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $4,691 million | $4,887 million | (4.0%) |
| Gross profit | $1,659 million | $1,665 million | (0.4%) |
| Gross margin | 35.4% | 34.1% | +130 bps |
| Operating profit | $748 million | $711 million | +5.2% |
| Operating margin | 15.9% | 14.6% | +140 bps |
| Income from continuing operations | $486 million | $490 million | (0.8%) |
| Net income attributable to Kimberly-Clark | $468 million | $538 million | (13.0%) |
| Diluted EPS | $1.27 | $1.26 from continuing operations | +0.8% |
| Cash provided by operations | $20 million | $437 million | $(417) million |
Net income attributable to Kimberly-Clark in the 2014 period included $56 million, or $0.15 per diluted share, from discontinued operations. Cash dividends declared increased to $0.88 per share from $0.84.
- Segment sales: Personal Care $2,308 million, down 3.1%; Consumer Tissue $1,574 million, down 6.8%; K-C Professional $795 million, down 0.6%.
- Segment operating profit: Personal Care $455 million, down 0.4%; Consumer Tissue $291 million, up 13.2%; K-C Professional $134 million, down 0.7%.
- Sales drivers: volume increased 3%, net selling prices increased 1%, mix and other factors contributed 1%, while currency reduced sales by 9%.
- Liquidity: cash and cash equivalents were $587 million at March 31, 2015, versus $789 million at December 31, 2014. The company had a currently unused $2.0 billion revolving credit facility expiring in 2019.
- Debt: total debt was approximately $7.7 billion at March 31, 2015, versus $7.0 billion at year-end 2014; short-term debt was $1.064 billion and long-term debt was $6.119 billion on the balance sheet.
- Capital allocation: capital spending was $284 million; cash dividends paid were $310 million; share repurchases totaled $200 million for 1.8 million shares; and the company paid approximately $151 million to acquire the remaining interest in its Israel subsidiary.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of foreign currency translation, which reduced sales by 9%; underlying volume and pricing trends were positive.
- Operating profit increased despite currency headwinds. The comparison benefited from $90 million of FORCE cost savings, $10 million of 2014 restructuring savings, favorable volume and pricing, and lower input costs.
- Operating profit included a $45 million Venezuelan balance-sheet remeasurement charge, $13 million of 2014 Organization Restructuring charges, and $9 million of pension settlement charges in 2015. The 2014 comparison included a $39 million Middle East regulatory dispute charge and $10 million of European restructuring costs.
- Operating cash flow fell sharply because of $435 million of pension contributions versus $180 million in the prior year, increased operating working capital, and the effect of the health care spin-off.
- Comprehensive income attributable to Kimberly-Clark fell to $31 million from $546 million, primarily due to a $465 million after-tax foreign currency translation loss.
- The effective tax rate increased to 33.8% from 30.5%, primarily because of changes in currency rates used to measure Venezuelan operations.
- On February 27, 2015, the company issued $500 million of notes: $250 million of 1.85% notes due 2020 and $250 million of 2.65% notes due 2025.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management targeted combined volume, net selling price, and product mix growth of 3% to 5% for 2015.
- Unfavorable currency was expected to reduce full-year sales by 9% to 10% and operating profit growth by 10% to 11%, including material Venezuela-related effects.
- Expected 2015 commodity cost deflation was $50 million to $150 million. FORCE savings were expected to be at least $300 million, with an additional $60 million to $80 million from the 2014 restructuring.
- Full-year capital spending guidance was $950 million to $1.050 billion, and share repurchase guidance was reduced to $700 million to $900 million from $800 million to $1.000 billion.
- The company expected $30 million to $50 million of after-tax 2014 restructuring charges and total restructuring costs of $130 million to $160 million after tax through completion, expected by the end of 2016.
- Following pension plan changes and planned group annuity transactions covering approximately 21,000 U.S. retirees, management expected 2015 pension settlement charges of approximately $0.8 billion after tax, or $1.3 billion before tax, mostly in the second quarter. Full-year pension contributions were expected to be $450 million to $500 million.
- Venezuela was accounted for using highly inflationary accounting. The first-quarter SIMADI remeasurement rate was 193 bolivars per U.S. dollar and produced a $45 million nondeductible charge. Venezuela represented less than 0.5% of consolidated sales in the quarter.
- Key risks include foreign currency volatility, Venezuela’s exchange controls and liquidity conditions, commodity prices and availability, competitive pricing, retailer actions, global economic and political conditions, and execution of cost savings and pension transactions.
- Management stated that litigation and environmental compliance matters were not expected to have a material adverse effect, individually or in aggregate, on the company’s business, financial condition, results of operations, or liquidity.
Important Facts for Investors to Verify
- Whether the expected pension annuity transactions close and whether the projected $0.8 billion after-tax settlement charges are recognized as anticipated.
- The effect of continuing currency depreciation, especially in Venezuela and other emerging markets, on sales, operating profit, cash flow, and equity.
- Progress toward the $300 million-plus FORCE savings target and the $60 million to $80 million restructuring savings target.
- Whether weak operating cash flow is temporary or persists after unusually large pension contributions and working-capital uses.
- The company’s ability to fund dividends, share repurchases, capital spending, pension obligations, and maturities while total debt remains elevated.
- Actual 2015 capital spending, share repurchases, commodity costs, pricing, volume growth, and currency performance compared with management’s stated outlook.