Business Context and Reporting Period
Kimberly-Clark Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments. The filing was signed August 5, 2011.
Financial Performance and Position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $5,259 million | $4,857 million | $10,288 million | $9,692 million |
| Gross profit | $1,557 million | $1,644 million | $3,020 million | $3,291 million |
| Operating profit | $625 million | $711 million | $1,169 million | $1,376 million |
| Net income attributable to Kimberly-Clark | $408 million | $498 million | $758 million | $882 million |
| Diluted EPS | $1.03 | $1.20 | $1.89 | $2.11 |
| Cash dividends declared per share | $0.70 | $0.66 | $1.40 | $1.32 |
Second-quarter sales increased 8.3%, while operating profit declined 12.1% and net income attributable to Kimberly-Clark declined 18.1%. Six-month sales increased 6.1%, while operating profit declined 15.0% and attributable net income declined 14.1%.
Calculated margins were approximately 29.6% gross and 11.9% operating in the second quarter, compared with 33.8% and 14.6%, respectively, in the prior-year quarter. Six-month gross and operating margins were approximately 29.4% and 11.4%, compared with 34.0% and 14.2% in the prior-year period.
- Second-quarter sales growth reflected approximately 2% volume growth, 1% net price growth, and a 5% currency benefit. Six-month growth reflected approximately 2% volume growth, 1% net price growth, and a 3% currency benefit.
- Second-quarter operating profit was pressured by approximately $180 million of input-cost inflation, including raw materials, fiber, energy, and distribution costs. Cost savings contributed approximately $45 million.
- At June 30, 2011, cash and cash equivalents were $908 million, compared with $876 million at December 31, 2010.
- Cash provided by operations was $771 million in the second quarter and $1,021 million for the six months, compared with $1,051 million for the six-month 2010 period.
- Capital spending was $435 million for the six months, compared with $363 million in the prior-year period.
- Total debt and redeemable securities were approximately $7.5 billion at June 30, 2011, compared with $6.5 billion at December 31, 2010. Reported balance-sheet debt included $1,008 million payable within one year and $5,424 million of long-term debt; fair-value disclosures included additional debt and redeemable securities.
- Inventories increased to $2,521 million from $2,373 million at year-end 2010. Total stockholders’ equity declined to $5,857 million from $6,202 million.
Material Changes Versus the Prior Comparable Period
- Personal Care second-quarter sales increased 7.3%, but segment operating profit declined 9.7% to $400 million, principally because of input-cost inflation.
- Consumer Tissue sales increased 9.2% and operating profit increased 14.6% to $173 million, supported by pricing, volume, cost savings, and currency benefits, partly offset by inflation.
- K-C Professional & Other sales increased 5.6%, while operating profit declined 3.0% to $129 million.
- Health Care sales increased 13.7% and operating profit increased 26.2% to $53 million.
- Foreign currency translation produced a $440 million after-tax other comprehensive income gain for the six months, compared with a $351 million loss in the prior-year period.
- Cash dividends paid increased to $549 million from $525 million. The company repurchased 18.4 million shares for approximately $1.2 billion during the first six months, compared with approximately $486 million in the prior-year period.
- Interest expense increased to $135 million for the six months from $121 million, primarily because of higher debt levels.
- The six-month effective tax rate declined to 31.2% from 33.3%; the second-quarter rate increased to 31.0% from 27.5%.
Guidance, Outlook, Risks, and Unusual Items
- The company initiated a pulp and tissue restructuring plan expected to be completed by December 31, 2012. It involves streamlining, selling, or closing five to six facilities and exiting certain non-strategic products.
- Expected cumulative restructuring charges are approximately $400 million to $600 million before tax, or $280 million to $420 million after tax. Charges recorded were $90 million pretax and $59 million after tax in the second quarter, and $172 million pretax in the first six months.
- Of the six-month restructuring charges, $124 million was noncash and $48 million was cash-related; $18 million of the cash charges had been paid by June 30.
- Management expects the restructuring to reduce annual net sales by $250 million to $300 million by 2013 while increasing operating profit by at least $75 million.
- Management expects full-year 2011 capital spending of $950 million to $1,050 million and plans to complete $1.5 billion of share repurchases during 2011.
- Management stated that worsening commodity costs would be addressed through additional cost savings and overhead reductions, and expected currency exchange rates to benefit results in the second half of 2011.
- A $32 million nondeductible business tax charge related to a Colombian law change affected first-half 2011 results. The prior-year period included a $98 million after-tax charge related to highly inflationary accounting for Venezuela.
- Venezuelan operations represented approximately 1% of consolidated sales. At June 30, 2011, the Venezuelan subsidiary had a bolivar-denominated net monetary asset position of approximately $115 million and a net investment of approximately $205 million, both valued using 5.4 bolivars per U.S. dollar.
- The company is exposed to commodity, currency, interest-rate, pension, inflation, market-demand, restructuring, legal, environmental, and Venezuelan currency-repatriation risks. Management stated that existing litigation and environmental matters were not expected to have a material adverse effect.
- Management stated that operating cash generation and debt capacity were adequate to fund operations, capital spending, dividends, and other foreseeable needs.
Important Facts for Investors to Verify
- Whether pricing and cost savings can offset continuing raw-material, fiber, energy, and distribution inflation.
- The ultimate cost, timing, cash requirements, facility impacts, and realized savings from the pulp and tissue restructuring.
- Whether the planned $1.5 billion share repurchase program is consistent with rising debt and liquidity requirements.
- The sustainability of operating cash flow after increased pension contributions, capital spending, dividends, and share repurchases.
- The effect of currency movements, Venezuelan exchange controls, and potential changes in currency-repatriation rates.
- Whether management’s second-half 2011 currency and commodity-cost assumptions are achieved; the filing does not provide a specific earnings or sales-per-share forecast.