Business Context and Reporting Period
Kimberly-Clark Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net sales | $5,269 million | $5,259 million | $10,510 million | $10,288 million |
| Gross profit | $1,755 million | $1,557 million | $3,459 million | $3,020 million |
| Operating profit | $754 million | $625 million | $1,454 million | $1,169 million |
| Net income attributable to Kimberly-Clark | $498 million | $408 million | $966 million | $758 million |
| Diluted EPS | $1.26 | $1.03 | $2.43 | $1.89 |
| Cash dividends declared per share | $0.74 | $0.70 | $1.48 | $1.40 |
- Q2 gross margin was approximately 33.3%, compared with 29.6% in the prior-year quarter. Operating margin was approximately 14.3%, compared with 11.9%; net margin attributable to Kimberly-Clark was approximately 9.5%, compared with 7.8%.
- For the first six months, gross margin was approximately 32.9% versus 29.4%, operating margin was approximately 13.8% versus 11.4%, and net margin attributable to Kimberly-Clark was approximately 9.2% versus 7.4%.
- Q2 segment sales increased in Personal Care to $2,415 million and Health Care to $411 million, while Consumer Tissue declined to $1,588 million and K-C Professional & Other declined modestly to $839 million.
- Q2 segment operating profit was $406 million for Personal Care, $219 million for Consumer Tissue, $138 million for K-C Professional & Other, and $56 million for Health Care.
- Cash provided by operations was $740 million in Q2 and $1,325 million for the first six months, compared with $771 million and $1,021 million, respectively, in the prior-year periods.
- Capital spending was $486 million for the first six months, compared with $435 million in 2011. Cash used for investing was $472 million.
- Cash and cash equivalents totaled $994 million at June 30, 2012, compared with $764 million at December 31, 2011.
- At June 30, debt payable within one year was $572 million and long-term debt was $5,695 million. Management reported total debt and redeemable securities of approximately $6.8 billion, compared with $6.7 billion at year-end 2011.
- The company had an unused revolving credit facility consisting of a $1.5 billion facility scheduled to expire in October 2016 and an additional $500 million facility scheduled to expire in October 2012, subject to the terms described in the filing.
Material Changes Versus the Prior Comparable Period
- Q2 net sales rose 0.2%, driven by higher net selling prices and volume, largely offset by unfavorable currency effects of 3%.
- Q2 operating profit increased 20.6% and net income attributable to Kimberly-Clark increased 22.1%. The improvement reflected higher prices, $85 million of cost savings, approximately $30 million of input-cost deflation, and lower restructuring charges.
- Q2 restructuring charges fell to $19 million pre-tax, or $16 million after tax, from $90 million pre-tax, or $59 million after tax, in the prior-year quarter. For the first six months, charges were $54 million versus $172 million in 2011.
- Six-month net sales increased 2.2%, while operating profit increased 24.4%. The comparison also benefited from the absence of a $32 million nondeductible Colombian business tax charge recorded in the first half of 2011.
- Marketing, research and general expenses increased, including $35 million of additional strategic marketing spending in Q2 and $80 million for the first six months.
- The company repurchased 8.9 million shares for $660 million during the first six months, compared with $1.2 billion of share repurchases in the prior-year period. The company increased its 2012 planned repurchases to approximately $1.3 billion.
- Pension contributions declined to $45 million from $415 million in the first six months of 2011, supporting the year-over-year increase in operating cash flow.
- Comprehensive income attributable to Kimberly-Clark was $234 million in Q2, down from $612 million, primarily because of a $269 million unfavorable currency translation adjustment compared with a $218 million favorable adjustment in the prior year.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects volatile economic conditions during the second half of 2012 and plans to increase strategic marketing faster than sales, pursue targeted growth initiatives, deliver cost savings, and generate cash flow.
- Management anticipates lower commodity costs but higher unfavorable currency impacts than previously estimated.
- The pulp and tissue restructuring program, including an additional North American facility streamlining, is expected to be substantially completed by the end of 2012. Expected cumulative pre-tax charges are approximately $550 million to $600 million, with approximately $385 million to $420 million after tax; $469 million pre-tax had been recognized through June 30, 2012.
- Restructuring actions are expected to reduce annual net sales by $250 million to $300 million versus the 2010 baseline, while increasing operating profit by at least $75 million in 2013 and at least $100 million in 2014. Cumulative operating profit benefits were $35 million through the second quarter.
- Full-year 2012 capital spending is expected to be $1.0 billion to $1.1 billion. Pension contributions are expected to be $50 million to $100 million.
- Venezuelan currency controls limit U.S. dollar availability for imports. K-C Venezuela had a $156 million bolivar-denominated net monetary asset position and a $293 million net investment, both valued at 5.4 bolivars per U.S. dollar. Price controls became effective April 1, 2012; management did not expect a material consolidated impact.
- The company is exposed to foreign currency, interest-rate, commodity-price, raw-material, energy, competitive-pricing, customer, economic and political risks. Natural-gas derivatives covered approximately 30% of estimated requirements for the next twelve months.
- Management stated that pending legal, environmental and regulatory matters are not expected to have a material adverse effect, individually or in the aggregate. The filing text does not provide a clear quantified reserve for these matters.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2012, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether price increases, cost savings and commodity deflation can offset volume pressure, marketing investment and unfavorable currency movements.
- The remaining timing and cost of the pulp and tissue restructuring program and whether the projected 2013–2014 profit benefits are achieved.
- Progress against the increased $1.3 billion 2012 share-repurchase plan and its effect on leverage and liquidity.
- The composition, maturity profile and refinancing requirements of the approximately $6.8 billion of debt and redeemable securities.
- Exposure to Venezuelan currency controls and price controls, foreign exchange volatility, raw-material prices and global economic conditions.
- Whether operating cash flow remains sufficient to fund capital spending, dividends, pension contributions, restructuring costs and share repurchases.