Kimberly-Clark Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company operates through Personal Care, Consumer Tissue, K-C Professional and Health Care segments.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $5,278 million | $5,318 million | -0.8% |
| Gross profit | $1,825 million | $1,822 million | +0.2% |
| Operating profit | $797 million | $783 million | +1.8% |
| Net income attributable to Kimberly-Clark | $538 million | $531 million | +1.3% |
| Diluted EPS | $1.41 | $1.36 | +3.7% |
| Cash provided by operations | $437 million | $607 million | -28.0% |
| Capital spending | $258 million | $274 million | -5.8% |
- Gross margin was approximately 34.6%, compared with 34.3% in the prior-year quarter. Operating margin was approximately 15.1%, compared with 14.7%.
- Segment sales were $2,382 million for Personal Care, $1,689 million for Consumer Tissue, $800 million for K-C Professional and $397 million for Health Care.
- Segment operating profit increased in Personal Care to $457 million and Health Care to $72 million, but declined in Consumer Tissue to $257 million and K-C Professional to $136 million.
- Cash and cash equivalents totaled $1,165 million at March 31, 2014, versus $1,054 million at December 31, 2013.
- Total debt and redeemable securities were approximately $6.9 billion at March 31, 2014, compared with $6.3 billion at year-end 2013. Short-term debt was $715 million and long-term debt was $5,385 million on the balance sheet.
- The company maintained an unused $1.5 billion revolving credit facility, with an option to increase commitments by an additional $500 million.
- Cash dividends declared were $0.84 per share, compared with $0.81 in the prior-year quarter. The company repurchased 4.3 million shares for $464 million.
Material changes versus the prior comparable period
- Sales declined 1% as organic volume growth of 3% and net price increases of 1% were more than offset by unfavorable currency effects of approximately 3% and a 2% reduction associated with European strategic changes and pulp and tissue restructuring.
- Operating profit benefited from organic volume growth, pricing, $70 million of FORCE cost savings, and $10 million of pulp and tissue restructuring savings. These benefits were partly offset by $65 million of input-cost increases, approximately $30 million of unfavorable currency translation, and transaction-related effects.
- Other income and expense, net increased to $57 million of expense from $12 million. The 2014 amount included a $39 million charge related to a regulatory dispute in the Middle East; the 2013 amount included a $36 million charge from the Venezuelan bolivar devaluation.
- Operating cash flow fell by $170 million, primarily because pension contributions increased to $180 million from $55 million and operating working capital use increased to $210 million from $121 million.
- Comprehensive income attributable to Kimberly-Clark increased to $546 million from $441 million, primarily because the prior-year period included a larger currency translation loss.
Guidance, outlook, risks and unusual items
- For 2014, management targeted combined organic volume, net selling price and product-mix growth of 3% to 5%, with growth led by K-C International.
- Management expected unfavorable currency effects of 2% to 3% on net sales and approximately 1% of sales reduction from European strategic changes and pulp and tissue restructuring.
- Planned 2014 cost savings were at least $300 million, while unfavorable currency and commodity-cost effects were estimated at $150 million to $250 million. The expected effective tax rate was 31.5% to 33.1%.
- Capital spending guidance was $1.0 billion to $1.2 billion, share repurchases were expected to total $1.3 billion to $1.5 billion subject to market conditions, and defined-benefit pension contributions were expected to be approximately $200 million.
- The potential tax-free spin-off of the Health Care business remained subject to Board approval, regulatory and market conditions. Management expected to seek approval to file a Form 10 registration statement in early May and anticipated completion in late Q3 or potentially Q4 2014. There was no assurance that the transaction would occur as planned, or at all. Q1 included $7 million of related transaction costs.
- European strategic changes generated $10 million of pretax charges in Q1 2014. Cumulative pretax charges through March 31, 2014 were $390 million, with $29 million of accrued restructuring expenses remaining.
- Venezuelan operations continued to be measured at 6.3 bolivars per U.S. dollar. The company had not accessed the SICAD or SICAD 2 auction systems, and the availability of U.S. dollars and applicable future exchange rates remained uncertain. Venezuela represented less than 3% of consolidated sales in Q1 2014.
- The company was appealing the Middle East regulatory ruling. Management stated that other legal, environmental and regulatory matters were not expected to have a material adverse effect, although litigation outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether organic volume and pricing growth can offset currency pressure, commodity inflation and restructuring-related sales declines.
- The sustainability of operating-profit improvement after the $70 million FORCE savings benefit and other cost reductions.
- The effect of elevated pension contributions, working-capital requirements, dividends and share repurchases on free cash flow and leverage.
- The timing, structure, tax treatment and financial impact of the proposed Health Care spin-off.
- Progress and remaining costs of the European strategic changes, including the company’s updated charge and cash-cost estimates.
- Potential additional effects from Venezuelan currency restrictions and the unresolved Middle East regulatory dispute.