Kimberly-Clark Corporation — Q1 2011 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three months ended March 31, 2011. Its principal segments were Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. The company sells branded personal care, tissue, professional, and health care products globally.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $5.029 billion | $4.835 billion | +4.0% |
| Gross profit | $1.463 billion | $1.647 billion | -11.2% |
| Gross margin | 29.1% | 34.1% | -5.0 percentage points |
| Operating profit | $544 million | $665 million | -18.2% |
| Operating margin | 10.8% | 13.8% | -2.9 percentage points |
| Net income attributable to Kimberly-Clark | $350 million | $384 million | -8.9% |
| Diluted EPS | $0.86 | $0.92 | -6.5% |
| Cash provided by operations | $250 million | $464 million | -46.1% |
Net income was $372 million, including $22 million attributable to noncontrolling interests. The effective tax rate was 31.4%, compared with 39.6% in the prior-year quarter. The company declared cash dividends of $0.70 per share, compared with $0.66.
- Segment sales increased to $2.187 billion for Personal Care, $1.674 billion for Consumer Tissue, $768 million for K-C Professional & Other, and $388 million for Health Care.
- Segment operating profit declined in Personal Care to $389 million from $472 million, Consumer Tissue to $150 million from $181 million, K-C Professional & Other to $104 million from $107 million, and Health Care to $50 million from $57 million.
- Capital spending was $234 million, compared with $184 million. Management expected full-year 2011 capital spending of $950 million to $1.050 billion.
- Cash and cash equivalents declined to $585 million at March 31, 2011, from $876 million at December 31, 2010.
- Total debt and redeemable securities were approximately $7.2 billion at March 31, 2011, compared with $6.5 billion at year-end 2010. Balance-sheet debt included $719 million payable within one year and $5.406 billion of long-term debt.
- Stockholders’ equity attributable to Kimberly-Clark declined to $5.434 billion from $5.917 billion, primarily reflecting share repurchases and dividends, partly offset by comprehensive income.
Material changes versus the prior comparable period
- Sales growth was driven by higher volumes, pricing, and favorable currency effects, particularly outside North America. North American sales were essentially flat.
- Operating profit was pressured by approximately $195 million of input-cost inflation and approximately $25 million of production-curtailment effects. Cost savings contributed approximately $60 million.
- Q1 2011 included $82 million of pulp and tissue restructuring charges and a $32 million nondeductible business tax charge related to a Colombian law change.
- Q1 2010 included approximately $98 million of charges related to the adoption of highly inflationary accounting for the Venezuelan operations, including a $96 million after-tax charge.
- Operating cash flow decreased primarily because of lower cash earnings and pension contributions of approximately $265 million, versus $175 million in Q1 2010.
- The company repurchased 13.1 million shares for $850 million, compared with $141 million of treasury-stock acquisitions in the prior-year quarter. Average diluted shares declined to 405.9 million from 419.3 million.
- Kimberly-Clark issued $700 million of long-term notes in February 2011: $250 million of 3.875% notes due 2021 and $450 million of 5.30% notes due 2041.
Guidance, outlook, risks, contingencies, and unusual items
- The pulp and tissue restructuring plan is expected to involve streamlining, selling, or closing five to six facilities and exiting certain nonstrategic products. Completion is expected by December 31, 2012.
- The restructuring is expected to generate cumulative pretax charges of approximately $400 million to $600 million, or $280 million to $420 million after tax. Approximately 25% to 50% of the charges are expected to be cash costs.
- Management expects the restructuring to reduce annual net sales by $250 million to $300 million by 2013 while increasing annual operating profit by at least $75 million.
- Management expected to repurchase approximately $1.5 billion of common stock during 2011 and stated that operating cash generation and debt capacity were adequate to fund operations, capital spending, dividends, repurchases, and other foreseeable needs.
- The company anticipated pension contributions of $400 million to $500 million for full-year 2011.
- Management planned additional pricing actions, cost savings, overhead reductions, and product innovation to address continuing input-cost inflation.
- Risks include raw-material, energy, and distribution-cost inflation; market demand and economic conditions; foreign-exchange exposure; Venezuelan currency restrictions and highly inflationary accounting; restructuring execution; litigation; environmental obligations; and changes in tax laws.
- Kimberly-Clark reported ongoing I-Flow litigation-related expenses in Health Care. Management stated that existing litigation, claims, and environmental matters were not expected to have a material adverse effect, individually or in the aggregate.
- Venezuelan operations represented approximately 1% of consolidated sales in Q1 2011. At March 31, 2011, the operation had a $100 million bolivar-denominated net monetary asset position and a $180 million net investment, both valued at 5.4 bolivars per U.S. dollar.
Important facts for investors to verify
- Whether pricing actions and cost savings offset continued pulp, energy, raw-material, and distribution-cost inflation.
- The timing, cash cost, noncash cost, and final scope of the pulp and tissue restructuring, including facility closures and expected sales reductions.
- Liquidity after funding $850 million of Q1 share repurchases, dividends, pension contributions, capital spending, and debt maturities.
- Progress toward the stated $1.5 billion 2011 share-repurchase objective and its effect on leverage and per-share results.
- Execution of the $950 million to $1.050 billion capital-spending plan and the expected $400 million to $500 million pension contributions.
- Developments in Venezuelan currency convertibility and the value of the company’s Venezuelan monetary assets and net investment.
- Exposure to litigation, environmental claims, tax-law changes, foreign-exchange movements, and further unusual charges.