Kimberly-Clark Corporation — 2015 Second-Quarter Form 10-Q
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2015. Kimberly-Clark operates through Personal Care, Consumer Tissue and K-C Professional. The health care business was spun off on October 31, 2014 and is presented as discontinued operations in prior-period income statements.
Financial Performance and Position
| Metric | Three Months 2015 | Three Months 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net sales | $4,643 million | $4,953 million | $9,334 million | $9,840 million |
| Gross profit | $1,657 million | $1,700 million | $3,316 million | $3,365 million |
| Operating profit (loss) | $(544) million | $775 million | $204 million | $1,486 million |
| Net income attributable to Kimberly-Clark | $(305) million | $509 million | $163 million | $1,047 million |
| Diluted EPS | $(0.83) | $1.35 | $0.44 | $2.75 |
- Second-quarter sales declined 6.3%; six-month sales declined 5.1%. Foreign currency reduced sales by approximately 10% in the quarter and 9% year to date.
- Gross margin was approximately 35.7% in the quarter and 35.5% year to date, compared with approximately 34.3% and 34.2%, respectively, in the prior-year periods.
- Reported operating results included pension settlement charges of $1,322 million in the quarter and $1,331 million year to date. Excluding the charges, management stated that second-quarter operating profit and attributable net income were essentially even with the prior year; adjusted diluted EPS was $1.39 for the quarter and $2.67 year to date.
- Six-month cash provided by operations was $792 million versus $1,279 million in 2014. The decline reflected higher pension contributions, increased operating working capital and the health care separation.
- Capital spending was $527 million year to date versus $439 million in 2014. Cash dividends paid were $631 million, share repurchases were $300 million, and $151 million was used to acquire the remaining interest in an Israeli subsidiary.
- Cash and cash equivalents were $603 million at June 30, 2015, down from $789 million at December 31, 2014.
- Total debt was approximately $7.6 billion at June 30, 2015, versus $7.0 billion at year-end 2014. Debt payable within one year was $2,055 million and long-term debt was $5,544 million. The company had an unused $2.0 billion revolving credit facility expiring in 2019.
- Current liabilities of $6,765 million exceeded current assets of $5,518 million. Liquidity is supported by operating cash flow, commercial paper and the revolving facility.
Material Changes Versus the Prior Comparable Period
- Personal Care sales fell 5.6% in the quarter, while operating profit increased 4.4% to $473 million. Consumer Tissue sales fell 8.5%, while operating profit increased 8.3% to $260 million. K-C Professional sales fell 4.2% and operating profit fell 5.2% to $145 million.
- North American sales were approximately flat in the quarter, while sales outside North America declined 11.3%, principally because of currency translation. North American operating profit increased 13.2%; outside-North-America operating profit declined 8.0%.
- Volume increased 3% in the quarter and year to date. Cost savings, lower input costs and favorable mix partly offset currency pressure and pricing effects.
- The U.S. pension plan transferred approximately $2.5 billion of obligations covering approximately 21,000 retirees to insurance companies. The transaction generated approximately $0.8 billion of after-tax pension settlement charges, mostly in the second quarter.
- Six-month pension trust contributions were $435 million, including $410 million related to the pension changes. Kimberly-Clark also issued $500 million of notes in February 2015.
- The company recorded a $45 million Venezuelan balance-sheet remeasurement charge in the first quarter; second-quarter remeasurement charges were not material.
Guidance, Outlook, Risks and Unusual Items
- Management targets combined volume, net selling price and product-mix growth of 3% to 5% for 2015.
- Unfavorable currency is expected to reduce net sales at the high end of the previously provided 9% to 10% range and operating profit growth at the high end of the 10% to 11% range. Venezuela is expected to contribute approximately 3% of the sales impact and 4% of the operating-profit impact.
- Expected 2015 commodity cost deflation is $100 million to $200 million. FORCE program savings are expected to be at least $350 million, and restructuring savings are expected to be $60 million to $80 million.
- Planned 2015 capital spending is $950 million to $1,050 million; share repurchases are targeted at $700 million to $900 million; pension contributions are expected to be $450 million to $500 million.
- Restructuring charges are expected to total $30 million to $50 million after tax in 2015. The broader restructuring plan is expected to be completed by the end of 2016, with total estimated costs of $130 million to $160 million after tax.
- Key risks include foreign exchange volatility, Venezuela’s highly inflationary environment and limited currency liquidity, raw-material and energy costs, competitive pricing, customer and retailer actions, global economic conditions and execution of cost-savings plans.
- Management stated that pending litigation and environmental compliance matters were not expected to have a material adverse effect, individually or in aggregate.
- Disclosure controls and procedures were concluded to be effective as of June 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported losses and EPS with the $1.3 billion pension settlement charges and distinguish reported from management-adjusted results.
- Assess the sustainability of sales volumes and segment profit improvements despite significant currency-related sales and profit pressure.
- Review debt maturities, commercial-paper reliance, the unused revolving facility and the effect of pension funding and shareholder distributions on liquidity.
- Evaluate whether the stated FORCE and restructuring savings, commodity deflation and 3% to 5% growth targets are being achieved.
- Monitor Venezuela’s exchange rates, remeasurement charges and the company’s ability to access foreign currency.
- Consider the effects of the health care spin-off on comparability, cash flows and ongoing relationships with the former business.