Kimberly-Clark Corporation: Q1 2013 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The company operates through Personal Care, Consumer Tissue, K-C Professional and Health Care segments. The filing was signed May 2, 2013.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $5.318 billion | $5.241 billion | +1.5% |
| Gross profit | $1.822 billion | $1.704 billion | +6.9% |
| Operating profit | $783 million | $700 million | +11.9% |
| Net income attributable to Kimberly-Clark | $531 million | $468 million | +13.5% |
| Diluted EPS | $1.36 | $1.18 | +15.3% |
| Cash provided by operations | $607 million | $585 million | +3.8% |
Gross margin improved to approximately 34.3% from 32.5%, while operating margin increased to approximately 14.7% from 13.4%. The effective tax rate was 30.9%, compared with 29.2% in the prior-year quarter. Kimberly-Clark’s share of net income from equity companies increased to $53 million from $39 million.
Segment sales and operating profit were: Personal Care sales of $2.397 billion and operating profit of $441 million; Consumer Tissue sales of $1.718 billion and operating profit of $260 million; K-C Professional sales of $793 million and operating profit of $143 million; and Health Care sales of $397 million and operating profit of $44 million.
Cash used in investing was $179 million, including $274 million of capital spending and $74 million of proceeds from property dispositions. Cash used in financing was $386 million, including $289 million of dividends paid and $486 million of treasury-stock purchases. Cash and cash equivalents ended the quarter at $1.109 billion, compared with $1.106 billion at December 31, 2012.
At March 31, 2013, current liabilities were $6.851 billion, including $1.908 billion of debt payable within one year, and long-term debt was $4.571 billion. Total debt and redeemable securities were approximately $7.0 billion, compared with $6.7 billion at year-end 2012. The company had an unused $1.5 billion revolving credit facility, with an option to increase it by $500 million.
Material changes versus the prior comparable period
- Sales increased 1.5%, reflecting approximately 2% organic volume growth and 1% higher net selling prices, partly offset by unfavorable currency effects and restructuring-related lost sales.
- Operating profit benefited from $85 million of FORCE cost savings and sales growth. These benefits were partly offset by $35 million of higher input costs, including higher fiber, raw-material and distribution costs.
- Personal Care operating profit increased 10.5%, Consumer Tissue increased 19.8% and K-C Professional increased 14.4%; Health Care operating profit declined 17.0%.
- Net income included $21 million after-tax charges for European strategic changes and a $26 million after-tax charge from Venezuelan bolivar devaluation. The prior-year period included $24 million after-tax charges for pulp and tissue restructuring actions.
- Other comprehensive income changed from a $265 million gain to a $98 million loss, primarily because of a $168 million unfavorable currency translation adjustment in 2013 versus a $261 million gain in 2012.
- The company repurchased 5.5 million shares for approximately $500 million during the quarter, reducing average diluted shares outstanding to 390.5 million from 397.1 million.
Guidance, outlook, risks and unusual items
Management expected 2013 capital spending of $1.0 billion to $1.1 billion, share repurchases of $1.0 billion to $1.2 billion subject to market conditions, and defined-benefit pension contributions of $150 million to $250 million. The company increased its regular quarterly dividend by 9% for 2013 and planned continued investment in product innovation, brands and targeted growth initiatives.
European strategic changes include exiting the diaper category in Western and Central Europe except Italy, divesting or exiting certain lower-margin businesses, closing or selling five manufacturing facilities and reducing the European workforce by approximately 1,300 to 1,500 positions. Management expects completion by December 31, 2014, with cumulative charges of approximately $300 million to $350 million after tax, or $350 million to $400 million before tax. Cumulative pre-tax charges were $330 million through March 31, 2013.
The Venezuelan government’s February 2013 currency devaluation generated a $36 million pre-tax, $26 million after-tax noncash remeasurement charge. Venezuela represented less than 2% of consolidated sales, but the company reported a $219 million net monetary asset position and approximately $350 million net investment in the country at the new exchange rate.
Management stated that operating cash flow and access to short- and long-term debt should be adequate for working capital, capital spending, dividends, pension contributions and other foreseeable needs. Principal risks include foreign-exchange volatility, commodity and energy costs, competitive pricing pressure, customer actions, economic and political conditions, and execution of restructuring and cost-savings plans. Management stated that pending legal, environmental and regulatory matters were not expected to have a material adverse effect, individually or in aggregate.
Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned European exits, facility actions and workforce reductions remain on schedule and within the projected $300 million to $350 million after-tax cost range.
- Whether FORCE savings and the pulp-and-tissue restructuring benefits offset commodity inflation and distribution costs during the remainder of 2013.
- The sustainability of volume growth and pricing by segment, particularly the declines in Health Care, K-C Professional and certain European markets.
- The effect of further Venezuelan currency changes and restrictions on the company’s $350 million net investment and $219 million net monetary asset position.
- Debt maturities, short-term borrowing levels and liquidity after planned share repurchases, dividends, capital spending and pension contributions.
- Whether the planned $1.0 billion to $1.2 billion of 2013 share repurchases remain consistent with operating cash generation and leverage objectives.