Kimberly-Clark Corporation — Form 10-Q Summary
Business Context and Reporting Period
Kimberly-Clark Corporation reported results for the three and six months ended June 30, 2018. Its principal segments are Personal Care, Consumer Tissue and K-C Professional. The filing was signed July 24, 2018. Financial amounts are in millions, except per-share data, percentages and other specified amounts.
Key Financial Metrics
| Metric | Three Months 2018 | Three Months 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $4,604 | $4,576 | $9,335 | $9,080 |
| Gross profit | $1,455 | $1,652 | $2,779 | $3,312 |
| Operating profit | $674 | $814 | $921 | $1,662 |
| Net income attributable to Kimberly-Clark | $455 | $531 | $548 | $1,094 |
| Diluted EPS | $1.30 | $1.49 | $1.56 | $3.06 |
| Cash dividends declared per share | $1.00 | $0.97 | $2.00 | $1.94 |
- Second-quarter sales increased 1%; six-month sales increased 3%. Reported sales benefited from currency translation by 1% in the quarter and 2% year to date. Organic sales were flat in the quarter and increased approximately 1% year to date.
- Approximate gross margin was 31.6% in the quarter versus 36.1% in the prior-year quarter, and 29.8% year to date versus 36.5%. Operating margin was approximately 14.6% versus 17.8% in the quarter and 9.9% versus 18.3% year to date.
- Adjusted second-quarter operating profit was $774, compared with $814 of reported operating profit in the prior-year period. Adjusted EPS was $1.59 versus $1.49. Year-to-date adjusted operating profit was $1,598 and adjusted EPS was $3.30.
- Cash provided by operations was $1,329 for the first six months, compared with $1,261 in 2017. Capital spending was $347, cash dividends paid were $691 and share repurchases were $420 in the cash flow statement.
- Cash and cash equivalents were $484 at June 30, 2018, compared with $616 at December 31, 2017. Total debt was approximately $7.5 billion versus $7.4 billion at year-end; short-term debt was $638 and long-term debt, including the current portion, had a carrying amount of $6,849.
- The company entered into a $2.0 billion revolving credit facility expiring in June 2023 and a $500 million facility expiring in June 2019. Both were unused at June 30 and support the commercial paper program.
Material Changes Versus the Prior Comparable Period
- Profitability declined materially despite modest sales growth. Second-quarter operating profit fell 17%, net income attributable to Kimberly-Clark fell 14% and diluted EPS fell 13%. For the first six months, operating profit fell 45%, net income attributable to Kimberly-Clark fell 50% and diluted EPS fell 49%.
- Higher input costs were the primary headwind: approximately $200 in the second quarter and $375 year to date, driven particularly by pulp and other raw materials. Lower net selling prices and, in some businesses, lower volumes also pressured results.
- FORCE cost savings, restructuring savings, favorable product mix and lower marketing, research and general expenses partially offset cost inflation.
- Segment sales and operating profit trends were mixed. Second-quarter sales and operating profit were $2,257 and $461 for Personal Care, $1,472 and $207 for Consumer Tissue, and $861 and $165 for K-C Professional. Consumer Tissue operating profit declined 16%, while K-C Professional operating profit declined 1%.
- Second-quarter reported results included $130 of restructuring charges, producing a $102 after-tax impact attributable to Kimberly-Clark. Six-month restructuring charges produced a $530 after-tax impact attributable to Kimberly-Clark. The first quarter also included an $82 net charge related to U.S. tax reform.
- Other comprehensive income was a loss of $273 in the quarter and $157 year to date, primarily reflecting unfavorable foreign-currency translation. Kimberly-Clark Corporation stockholders’ equity declined from $629 at year-end to a deficit of $57 at June 30, principally due to accumulated comprehensive losses, dividends and share repurchases.
Guidance, Outlook, Risks and Unusual Items
- Full-year 2018 reported EPS guidance was $3.37 to $3.87. Adjusted EPS guidance was reduced to $6.60 to $6.80 from $6.90 to $7.20, excluding restructuring charges of approximately $2.70 to $3.00 per share and the $0.23 U.S. tax reform-related charge.
- Management expects full-year sales to be similar to or up 1% year over year, approximately 1% organic sales growth, adjusted operating profit down 2% to 5%, and an adjusted effective tax rate at the low end of the 23% to 26% range.
- Expected 2018 input-cost inflation increased to $675-$775 from the prior estimate of $400-$550. FORCE savings are expected at $425-$450, and restructuring savings at approximately $100-$120.
- The 2018 Global Restructuring Program is expected to close or sell approximately 10 manufacturing facilities, affect 5,000 to 5,500 employees and exit or divest businesses representing approximately 1% of sales. Total costs are estimated at $1.7-$1.9 billion pretax through 2020, including $900 million-$1.0 billion of cash costs and $800-$900 million of noncash costs. Incremental capital spending is expected to be approximately $600-$700 million, with annual pretax savings of $500-$550 million by 2021.
- Management identified risks from raw-material prices and availability, competitive pricing pressure, foreign-exchange volatility, energy costs, customer relationships, global economic and political conditions, and the execution of planned cost savings and restructuring.
- Argentina will use highly inflationary accounting beginning July 1, 2018. Argentine sales represented less than 2% of consolidated sales for the six months ended June 30, 2018 and 2017, and the subsidiary had a small net peso monetary position at June 30.
- U.S. Tax Cuts and Jobs Act accounting remained provisional at June 30. The company had not recorded deferred taxes for GILTI because it could not reasonably estimate the amount.
Investor Verification Points
- Verify whether input-cost inflation, particularly pulp costs, remains within management’s revised assumptions and whether pricing actions offset the pressure.
- Track restructuring charges, cash payments, facility actions, workforce reductions, incremental capital spending and realized savings against the stated program ranges.
- Reconcile reported EPS with adjusted EPS, including the effects of restructuring and U.S. tax reform exclusions.
- Monitor short-term borrowing, cash balances, commercial paper access, dividend commitments and planned share repurchases of $700-$900 million for 2018.
- Assess segment trends, especially Consumer Tissue volume and profitability and Personal Care pricing pressure.
- Review subsequent effects of Argentine highly inflationary accounting, foreign-currency movements and any remaining provisional U.S. tax reform estimates.