Kimberly-Clark Corporation: Second-Quarter 2013 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three and six months ended June 30, 2013. The company operates through Personal Care, Consumer Tissue, K-C Professional and Health Care segments. Results were affected by European strategic changes, foreign-currency pressure, input-cost inflation and the February 2013 Venezuelan bolivar devaluation.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Net sales | $5,267 million | $5,269 million | Flat |
| Gross profit | $1,800 million | $1,755 million | +2.6% |
| Operating profit | $796 million | $754 million | +5.6% |
| Net income attributable to Kimberly-Clark | $526 million | $498 million | +5.6% |
| Diluted EPS | $1.36 | $1.26 | +7.9% |
| Gross margin | 34.2% | 33.3% | +0.9 percentage points |
| Operating margin | 15.1% | 14.3% | +0.8 percentage points |
For the first six months, sales were $10,585 million, up 0.7%; operating profit was $1,579 million, up 8.6%; net income attributable to Kimberly-Clark was $1,057 million, up 9.4%; and diluted EPS was $2.72 versus $2.43. Six-month gross and operating margins were approximately 34.2% and 14.9%, respectively, compared with 32.9% and 13.8% in the prior year.
Operating performance benefited from $80 million of second-quarter FORCE cost savings and $165 million of year-to-date savings. These benefits were partly offset by $30 million of higher second-quarter input costs, including fiber, energy and distribution, and $65 million of higher year-to-date input costs. Currency translation reduced second-quarter operating profit by approximately $15 million and year-to-date operating profit by approximately $25 million.
Cash provided by operations was $1,183 million for the first six months, compared with $1,325 million in 2012. Capital spending was $494 million, versus $486 million. Cash dividends paid were $602 million, and the company repurchased 8.5 million shares for approximately $800 million. Cash and cash equivalents were $1,160 million at June 30, 2013, compared with $1,106 million at December 31, 2012.
Total debt was $6,689 million at June 30, 2013, comprising $1,302 million payable within one year and $5,387 million of long-term debt. Including $549 million of redeemable subsidiary securities, total debt and redeemable securities were approximately $7.2 billion, compared with $6.7 billion at year-end 2012. The company had an unused $1.5 billion revolving credit facility, with an option to increase it by $500 million.
Material changes versus the prior comparable period
- Consolidated second-quarter sales were essentially unchanged because 2% organic volume growth and 1% higher net selling prices were offset by 2% of lost sales from restructuring actions and 1% unfavorable currency effects.
- Personal Care sales declined 1.0%, while operating profit increased 6.4% to $432 million.
- Consumer Tissue sales increased 2.3% to $1,625 million, while operating profit was substantially flat at $220 million.
- K-C Professional sales increased 0.2%, while operating profit rose 16.7% to $161 million.
- Health Care sales declined 2.4% and operating profit declined 3.6% to $54 million.
- North American sales declined 1.5% in the quarter, while outside-North-American sales increased 0.7%. North American operating profit increased 7.4%.
- Net income benefited from higher operating profit, increased equity-company income and a lower share count. The average diluted share count declined to 387.8 million from 396.5 million.
- Other comprehensive income was negative $376 million in the quarter and negative $474 million year to date, primarily due to currency translation losses.
Guidance, outlook, risks and unusual items
- Management continued to target full-year organic volume, price and mix growth of 3% to 5%, led by K-C International, and expected cost savings to offset unfavorable currency rates and moderate commodity-cost inflation.
- Full-year 2013 capital spending was expected to be approximately $1.0 billion to $1.1 billion, and planned share repurchases were approximately $1.2 billion, subject to market conditions.
- European strategic changes include exiting the diaper category in Western and Central Europe except Italy, divesting or exiting lower-margin businesses, closing or selling five manufacturing facilities and reducing the workforce by approximately 1,300 to 1,500 positions. Completion is expected by December 31, 2014.
- The European program is expected to generate cumulative after-tax charges of approximately $300 million to $350 million, with approximately 50% to 60% expected to be cash costs. Six-month 2013 pre-tax charges were $53 million; cumulative pre-tax charges through June 30 were $352 million.
- The company recorded a $36 million pre-tax, $26 million after-tax noncash charge from the February 2013 Venezuelan bolivar devaluation. Venezuela represented less than 2% of consolidated sales.
- Prior-year pulp and tissue restructuring actions were substantially complete at December 31, 2012. Management expected those actions to reduce 2013 annual sales by $250 million to $300 million versus the 2010 baseline while increasing 2013 operating profit by at least $75 million.
- Key risks include foreign-currency volatility, raw-material and energy prices, competitive pricing, retail customer actions, economic and political conditions, execution of restructuring programs and achievement of projected cost savings and volume growth.
- Management stated that litigation, environmental matters and governmental proceedings were not expected to have a material adverse effect, individually or in the aggregate. Disclosure controls and procedures were evaluated as effective at June 30, 2013.
Most important facts for investors to verify
- Whether the planned 3% to 5% organic volume, price and mix growth target and expected cost savings were achieved.
- The remaining cash and noncash costs, timing and operational effects of the European strategic changes.
- Whether currency movements, Venezuelan conditions and commodity inflation continue to pressure sales and operating profit.
- Cash conversion, pension contributions, capital spending, dividends, share repurchases and the increase in debt and redeemable securities.
- The sustainability of margin improvement after restructuring charges, FORCE savings and other unusual items.
- Segment trends, particularly declining Health Care performance and the contribution from K-C Professional and Consumer Tissue.