Kimberly-Clark Corporation: First-Quarter 2016 Form 10-Q Summary
Business Context and Reporting Period
Kimberly-Clark reported unaudited consolidated results for the three months ended March 31, 2016, compared with the first quarter of 2015. The company operates through Personal Care, Consumer Tissue, and K-C Professional segments. Results exclude the Venezuelan business following its deconsolidation effective December 31, 2015.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $4.476 billion | $4.691 billion | (4.6%) |
| Gross profit | $1.639 billion | $1.659 billion | (1.2%) |
| Gross margin | 36.6% | 35.4% | Up 120 basis points |
| Operating profit | $804 million | $748 million | +7.5% |
| Operating margin | 18.0% | 15.9% | Up 210 basis points |
| Net income attributable to Kimberly-Clark | $545 million | $468 million | +16.5% |
| Diluted EPS | $1.50 | $1.27 | +18.1% |
| Cash provided by operations | $553 million | $20 million | + $533 million |
| Capital spending | $220 million | $284 million | $(64) million |
Organic net sales increased 2%, including 5% growth in developing and emerging markets, but reported sales declined because foreign currency translation reduced sales by 7%. Adjusted operating profit was $818 million versus $815 million. Management cited $95 million of FORCE cost savings, $15 million of restructuring savings, and $30 million of lower input costs.
- Personal Care sales declined 4.4% to $2.207 billion; operating profit declined 1.3% to $449 million.
- Consumer Tissue sales declined 5.0% to $1.496 billion; operating profit declined 3.8% to $280 million.
- K-C Professional sales declined 4.0% to $763 million; operating profit increased 11.9% to $150 million.
Cash and cash equivalents were $635 million at March 31, 2016, compared with $619 million at December 31, 2015. Total debt was approximately $7.9 billion, including $999 million of current debt and $6.904 billion of long-term debt. The company had an unused $2.0 billion revolving credit facility expiring in 2019. It paid $318 million of dividends and repurchased 1.1 million shares for approximately $150 million.
Material Changes Versus the Prior Comparable Period
- Operating profit and earnings improved despite lower reported sales, supported by cost savings, lower input costs, reduced other expense, and a lower effective tax rate.
- The GAAP effective tax rate declined to 28.3% from 33.8%, primarily reflecting tax-planning benefits.
- Other income and expense declined to $10 million of expense from $62 million, as the prior-year period included a $45 million Venezuelan remeasurement charge and $9 million of pension settlement-related expense.
- Operating cash flow rose sharply because first-quarter pension contributions declined to $30 million from $435 million in 2015.
- Comprehensive income attributable to Kimberly-Clark increased to $721 million from $31 million, largely because currency translation generated a $208 million gain in 2016 versus a $468 million loss in 2015.
- The company issued $800 million of notes in February 2016, consisting of $400 million of 1.40% notes due 2019 and $400 million of 2.75% notes due 2026.
Guidance, Outlook, Risks, and Unusual Items
- Management reaffirmed 2016 adjusted EPS guidance of $5.95 to $6.15, excluding expected restructuring charges equivalent to $0.03 to $0.06 per share.
- Organic net sales growth is expected at 3% to 5%; foreign currency translation is expected to reduce net sales and operating profit toward the low end of the previously estimated 5% to 6% range.
- Expected commodity-cost impact is $0 to $150 million of year-over-year deflation. FORCE savings are expected to be at least $350 million, with at least $50 million from the organization restructuring.
- Expected 2016 capital spending is $950 million to $1.050 billion, share repurchases are targeted at $600 million to $900 million, and pension contributions may be up to $100 million.
- The 2014 organization restructuring is expected to be completed by the end of 2016. Cumulative pretax charges were $210 million through March 31, 2016, and cumulative pretax savings were $85 million.
- Key risks include foreign currency volatility, raw-material and energy costs, competitive pricing pressure, customer and retailer actions, global economic and political conditions, and the execution of cost savings and volume-growth plans.
- The company early adopted the new deferred-tax balance-sheet classification guidance prospectively. The effects of the new leases and revenue-recognition standards were not yet known.
- Management stated that pending litigation and environmental compliance obligations were not expected to have a material adverse effect, individually or in the aggregate.
Important Facts for Investors to Verify
- Whether organic sales growth and cost savings offset continuing currency pressure and competitive pricing effects.
- The sustainability of the improved tax rate and the extent to which earnings growth reflects recurring operations rather than favorable comparisons with Venezuelan and pension-related charges.
- Debt maturity and refinancing requirements, including reliance on commercial paper and the $2.0 billion revolving facility.
- Progress toward restructuring completion, the remaining charges, and achievement of projected savings.
- Execution of the $950 million to $1.050 billion capital-spending plan and $600 million to $900 million share-repurchase target.
- Exposure to foreign exchange, commodity costs, pension funding requirements, and conditions in developing and emerging markets.