Kimberly-Clark Corporation — Q1 2010 Form 10-Q
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2010, compared with the first quarter of 2009. Kimberly-Clark operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments. The company had 413.97 million common shares outstanding as of April 30, 2010.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $4,835 million | $4,493 million | +7.6% |
| Gross profit | $1,647 million | $1,454 million | +13.3% |
| Gross margin | 34.1% | 32.4% | +170 bps |
| Operating profit | $665 million | $628 million | +5.9% |
| Operating margin | 13.8% | 14.0% | Down approximately 20 bps |
| Net income attributable to Kimberly-Clark | $384 million | $407 million | -5.7% |
| Diluted EPS | $0.92 | $0.98 | -6.1% |
| Cash provided by operations | $464 million | $692 million | -33% |
| Capital spending | $184 million | $211 million | Down $27 million |
Interest expense declined to $61 million from $73 million, primarily because of a lower average level of debt. The effective tax rate increased to 39.6% from 29.1%, versus management’s full-year target range of 30% to 32%.
Cash and cash equivalents were $669 million at March 31, 2010, compared with $798 million at December 31, 2009. Total current assets were $5.7 billion and current liabilities were $5.3 billion. Debt payable within one year was $1.0 billion, long-term debt was $4.4 billion, and total debt plus redeemable securities was approximately $6.4 billion, compared with $6.5 billion at year-end 2009.
Operating cash flow was reduced by higher working-capital requirements and pension contributions. Pension contributions were approximately $175 million in the quarter, compared with $90 million in the prior-year period. Financing uses included $250 million of dividends paid and approximately $150 million for share repurchases. Comprehensive income attributable to Kimberly-Clark was $390 million, compared with $105 million in Q1 2009, primarily because the prior year included a $361 million unfavorable currency translation adjustment.
Segment performance and material changes
- Personal Care: Sales increased 8.1% to $2,137 million; operating profit increased 6.8% to $472 million. Growth reflected higher volumes, pricing, currency benefits, and innovation, partly offset by higher input costs and marketing expense.
- Consumer Tissue: Sales increased 2.0% to $1,606 million, but operating profit declined 6.7% to $181 million. Lower volumes, higher input costs, and increased marketing spending outweighed cost savings and pricing actions.
- K-C Professional & Other: Sales increased 12.1% to $730 million; operating profit increased 33.8% to $107 million. Results benefited from pricing, cost savings, currency, and the Jackson Products acquisition.
- Health Care: Sales increased 23.2% to $367 million; operating profit increased 18.8% to $57 million. The I-Flow acquisition, organic volume growth, currency, and increased demand for face masks contributed to performance.
Consolidated sales growth was driven by approximately 5% net selling-price and mix benefits, 2% volume growth, and 1% currency benefit. Management reported approximately $80 million of FORCE cost savings, approximately $35 million of benefits from the 2009 organization optimization initiative, and nearly $40 million of lower pension expense. These benefits were partly offset by approximately $70 million of higher input-cost inflation, including higher fiber, other raw-material, and distribution costs.
Outlook, risks, contingencies, and unusual items
- Effective January 1, 2010, Venezuela began applying highly inflationary accounting. A $96 million after-tax charge was recorded, including $19 million in cost of products sold and $79 million in other income and expense. The charge resulted from remeasuring Venezuelan bolivar-denominated monetary assets at a parallel exchange rate of approximately six bolivars per U.S. dollar.
- The Venezuelan operation had a net monetary asset position of 357 million bolivars at March 31, 2010. Management did not expect further 2010 changes in the parallel exchange rate to have a material effect on consolidated financial condition, results, or liquidity, although the exposure remains a risk.
- Management expects strategic marketing spending to grow faster than sales in 2010 and intends to continue investing in brands, innovation, and targeted growth initiatives.
- Management reported significantly higher-than-previously-estimated input-cost inflation, particularly for pulp, and plans to offset a substantial portion through revenue realization, cost savings, and discretionary-spending controls.
- Full-year 2010 capital spending was targeted at $1.0 billion to $1.1 billion, pension contributions at approximately $240 million, and share repurchases at $500 million to $600 million.
- Management stated that operating cash generation and debt-issuance capacity were adequate to fund operating needs, capital spending, dividends, and other foreseeable requirements.
- The company reported environmental-site liabilities under federal and state statutes but stated that none was likely to have a material adverse effect individually or in aggregate. Disclosure controls and procedures were assessed as effective at March 31, 2010.
Most important facts for investors to verify
- Whether the $96 million Venezuela charge is nonrecurring or whether currency restrictions and highly inflationary accounting could generate additional charges.
- Progress toward offsetting pulp and other input-cost inflation through pricing, mix, cost savings, and spending controls.
- Whether declining Consumer Tissue volumes and margins stabilize, particularly in North America.
- Achievement of the stated 2010 targets for capital spending, pension contributions, share repurchases, and the 30% to 32% full-year tax-rate range.
- Liquidity relative to the $1.0 billion of debt payable within one year, dividend commitments, planned repurchases, and ongoing pension funding.
- Integration and contribution from the Jackson Products and I-Flow acquisitions and sustainability of related sales and profit growth.