Kimberly-Clark Corporation — Q2 2014 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark reported unaudited results for the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The company operates through Personal Care, Consumer Tissue, K-C Professional and Health Care segments. Its principal brands include Huggies, Kleenex, Scott, Cottonelle, Depend, Kotex and Kimberly-Clark Professional products.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $5,343 million | $5,267 million | $10,621 million | $10,585 million |
| Operating profit | $790 million | $796 million | $1,587 million | $1,579 million |
| Net income attributable to Kimberly-Clark | $509 million | $526 million | $1,047 million | $1,057 million |
| Diluted EPS | $1.35 | $1.36 | $2.75 | $2.72 |
| Cash dividends declared per share | $0.84 | $0.81 | $1.68 | $1.62 |
| Cash provided by operations | Not separately provided | Not separately provided | $1,279 million | $1,183 million |
- Q2 gross profit was $1,809 million, or approximately 33.9% of sales, versus $1,800 million, or approximately 34.2%, in Q2 2013.
- Q2 operating margin was approximately 14.8%, versus 15.1% in the prior-year quarter. Six-month operating margin was approximately 14.9%, versus 14.9% in 2013.
- Cash and cash equivalents were $1,369 million at June 30, 2014, compared with $1,054 million at December 31, 2013.
- Total debt and redeemable securities were approximately $7.1 billion at June 30, 2014, compared with $6.3 billion at year-end 2013. Balance-sheet debt included $591 million payable within one year and $5,964 million of long-term debt.
- Capital spending was $439 million in the first six months, compared with $494 million in the prior year. Financing cash use was $681 million, including $627 million of dividends and $917 million of treasury-stock acquisitions.
- The company repurchased 8.6 million shares for $940 million during the first six months.
Material changes versus the prior comparable period
- Q2 sales increased 1.4%, driven by 3% organic volume growth and 2% higher net selling prices, partly offset by a 2% currency headwind and restructuring-related sales reductions.
- Six-month sales increased 0.3%; organic volume rose 3% and net selling prices increased 2%, while currency reduced sales by 3% and strategic actions reduced sales by 2%.
- Q2 operating profit declined 0.8% despite $75 million of FORCE cost savings and $10 million of pulp and tissue restructuring savings. Higher input costs, currency effects, increased advertising and unusual charges offset operating benefits.
- Six-month operating profit increased 0.5%, supported by $145 million of FORCE savings and lower administrative expenses, but affected by $125 million of higher input costs, currency effects and unusual items.
- Personal Care and Consumer Tissue operating profit increased 4.9% and 9.1%, respectively, in Q2. K-C Professional declined 4.3%, while Health Care increased 16.7%.
- Q2 net income attributable to Kimberly-Clark declined 3%, partly because equity-company income fell to $40 million from $55 million.
- The effective tax rate improved to 32.2% in Q2 from 32.6%, and to 31.6% for the first six months from 31.8%.
Guidance, outlook, risks and unusual items
- Management expects combined organic volume, net selling price and mix growth of 3% to 5% for 2014. Unfavorable currency is expected to reduce sales by 2% to 3%, with an additional 1% reduction from European strategic changes and pulp and tissue restructuring.
- Management expects at least $300 million of cost savings, commodity cost inflation toward the high end of the previously stated $150 million to $250 million range, and equity-company income below the prior year.
- 2014 capital spending guidance is $1.0 billion to $1.2 billion; share repurchases are expected to total $1.3 billion to $1.5 billion; pension contributions are expected to be approximately $200 million.
- The company is pursuing a potential tax-free spin-off of its Health Care business, with approximately $1.7 billion of annual sales. Management expected completion near the end of October 2014, subject to Board approval and market, regulatory and other conditions. Completion was not assured.
- Health Care spin-off and related matters generated charges of $68 million in Q2 and $75 million year to date, including a $42 million asset impairment and $7 million of workforce-reduction costs related to a Thai glove facility exit. Total Q2 after-tax impact was $49 million.
- European strategic changes generated $12 million of pretax charges year to date. Cumulative pretax charges through June 30 were $392 million, with completion expected by December 31, 2014.
- Other income and expense included a $39 million nondeductible charge related to an adverse Middle East regulatory/court dispute; the company is appealing. The prior-year period included a $36 million pretax Venezuelan bolivar devaluation charge.
- Venezuela remains subject to highly inflationary accounting and currency-access uncertainty. The company continued using an exchange rate of 6.3 bolivars per U.S. dollar; Venezuelan net monetary assets were $394 million and net investment was $534 million at June 30.
- Key ongoing risks include foreign-exchange volatility, commodity and energy costs, pricing pressure, raw-material availability, competitive conditions, global economic and political conditions, restructuring execution and the proposed Health Care spin-off.
- Management stated that operating cash generation and debt capacity should fund working capital, capital spending, dividends, pension contributions and other foreseeable needs. A new, currently unused, $2.0 billion revolving credit facility expires in 2019.
Important facts for investors to verify
- Whether the proposed Health Care spin-off received required approvals and was completed on the expected timetable, and the final allocation of costs and liabilities.
- The extent to which currency movements, Venezuela’s exchange systems and commodity inflation affect reported sales, margins and cash flow.
- Progress against the $300 million-plus cost-savings target and the $1.0 billion to $1.2 billion capital-spending plan.
- Actual 2014 share repurchases, dividend payments, pension contributions and resulting leverage.
- Resolution and financial impact of the Middle East regulatory dispute and completion costs for European strategic changes.
- The filing states that disclosure controls were effective as of June 30, 2014, with no material changes to internal control over financial reporting.