Kimberly-Clark Corporation: Q1 2023 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited consolidated results for the three months ended March 31, 2023. The company operates through Personal Care, Consumer Tissue and K-C Professional segments, with products sold globally under brands including Huggies, Kleenex, Scott, Cottonelle, Kotex, Depend and WypAll.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $5,195 million | $5,095 million | +2% |
| Gross profit | $1,726 million | $1,520 million | +14% |
| Operating profit | $787 million | $693 million | +14% |
| Net income attributable to Kimberly-Clark | $566 million | $523 million | +8% |
| Diluted EPS | $1.67 | $1.55 | +8% |
| Cash provided by operations | $613 million | $204 million | +$409 million |
Gross margin was approximately 33.2%, compared with 29.8% in the prior-year quarter. Operating margin was approximately 15.1%, compared with 13.6%, and net income attributable to Kimberly-Clark margin was approximately 10.9%, compared with 10.3%.
- Organic sales increased 5%, reflecting a 10% benefit from net price, a 1% mix benefit and a 5% volume decline. Foreign currency translation reduced reported sales by approximately 4%.
- Personal Care sales declined 1% to $2,704 million, while operating profit increased 3% to $487 million.
- Consumer Tissue sales increased 4% to $1,634 million, while operating profit increased 40% to $240 million.
- K-C Professional sales increased 9% to $847 million, while operating profit increased 77% to $159 million.
- Operating profit benefited from higher pricing and $105 million of FORCE cost savings, partly offset by $160 million of higher input costs, lower volumes, unfavorable currency effects and higher expenses.
- Interest expense increased to $73 million from $65 million, primarily due to higher weighted-average interest rates. The effective tax rate increased to 24.5% from 18.2%.
Cash flow, debt and liquidity
- Operating cash flow was $613 million. Capital spending was $201 million, compared with $253 million in Q1 2022.
- Cash and cash equivalents were $524 million at March 31, 2023, compared with $427 million at December 31, 2022.
- Total debt was approximately $8.5 billion at March 31, 2023, compared with $8.4 billion at year-end 2022. Debt payable within one year was $536 million and long-term debt was $7,945 million.
- The company issued $350 million of 4.50% notes due February 2033 and used the proceeds for general corporate purposes, including repayment of commercial paper.
- Kimberly-Clark had unused revolving credit facilities of $2.0 billion expiring in June 2026 and $775 million expiring in June 2023.
- Cash dividends paid were $391 million. The company repurchased approximately 265,000 shares for $34 million and expects full-year 2023 repurchases of approximately $100 million to $150 million, subject to market conditions.
- Management expects full-year capital spending of $800 million to $900 million and believes operating cash generation and debt capacity are adequate to fund working capital, capital expenditures, dividends, pension contributions and other needs.
Material changes versus the prior comparable period
- Reported sales growth was modest, but pricing and mix more than offset lower volumes and unfavorable currency translation.
- Profitability improved materially, particularly in Consumer Tissue and K-C Professional, despite continued inflation in fiber, energy and other inputs.
- Operating cash flow increased substantially because of higher operating profit and improved working capital.
- The Q1 2022 comparison included a $85 million noncash gain from remeasuring Kimberly-Clark’s previously held Thinx investment, partly offset by $21 million of transaction and integration costs. Q1 2022 therefore included a net after-tax benefit of approximately $68 million; 2022 adjusted diluted EPS was $1.35 versus reported EPS of $1.55.
- The company completed the Thinx purchase price allocation in Q1 2023 with immaterial measurement-period adjustments.
Guidance, outlook, risks and unusual items
- Management highlighted continued revenue growth management, pricing, mix improvement and FORCE cost savings, but expects results to remain exposed to input-cost inflation, volume pressure and currency movements.
- Kimberly-Clark expects to redeem part of the remaining third-party Thinx securities for approximately $48 million in Q2 2023, increasing ownership to 70%. A further redemption right could require approximately $185 million during January 2024 through June 2026.
- The company agreed to sell its Neve tissue brand and related Brazilian consumer and K-C Professional tissue assets for $175 million, subject to customary closing conditions and adjustments. Antitrust clearance was received April 18, 2023, and closing was expected in Q2 2023.
- Key disclosed risks include raw-material and energy prices, supply-chain disruptions, foreign exchange volatility, interest rates, capital-market access, counterparty defaults, geopolitical conditions including the war in Ukraine, changing consumer preferences, competitive pricing and the ability to realize benefits from acquisitions and divestitures.
- Argentina and Turkey are accounted for as highly inflationary economies; management stated that the related earnings effects were not material for the quarter.
- Derivative liabilities exceeded derivative assets at March 31, 2023, at $368 million and $88 million, respectively. The company uses derivatives principally for foreign currency, commodity and interest-rate risk management.
Investor verification points
- Verify that future volume trends improve, since Q1 organic growth depended heavily on pricing while consolidated volume declined 5%.
- Monitor whether FORCE savings and pricing continue to offset fiber, energy and other input-cost inflation.
- Review debt maturities, refinancing costs and the June 2023 expiration of the $775 million revolving facility.
- Track completion and proceeds from the planned Brazil asset sale and the timing and funding of the Thinx redemption.
- Reconcile future reported earnings with prior-year results affected by the unusual Thinx remeasurement gain and related costs.
- Assess the sustainability of cash flow after dividends, capital spending, share repurchases and potential Thinx payments.