Kimberly-Clark Corporation — First-Quarter 2012 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2012. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments. The filing was signed May 4, 2012.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $5.241 billion | $5.029 billion | +4.2% |
| Gross profit | $1.704 billion | $1.463 billion | +16.5% |
| Gross margin | 32.5% | 29.1% | +3.4 percentage points |
| Operating profit | $700 million | $544 million | +28.7% |
| Operating margin | 13.4% | 10.8% | +2.6 percentage points |
| Net income attributable to Kimberly-Clark | $468 million | $350 million | +33.7% |
| Diluted EPS | $1.18 | $0.86 | +37.2% |
| Cash provided by operations | $585 million | $250 million | +$335 million |
| Capital spending | $259 million | $234 million | +$25 million |
Net sales growth reflected approximately 1% volume growth, 3% higher net pricing, 1% favorable mix and other factors, partly offset by a 1% currency impact. Higher net selling prices, cost savings and lower restructuring charges supported profit improvement. Cost savings were approximately $60 million, while net input-cost inflation was approximately $10 million.
Segment performance
| Segment | Q1 2012 sales | Sales change | Q1 2012 operating profit | Profit change |
|---|---|---|---|---|
| Personal Care | $2.367 billion | +8.2% | $399 million | +2.6% |
| Consumer Tissue | $1.659 billion | -0.9% | $217 million | +44.7% |
| K-C Professional & Other | $797 million | +3.8% | $125 million | +20.2% |
| Health Care | $405 million | +4.4% | $53 million | +6.0% |
Personal Care sales benefited from international volume growth and adult-care innovation, although North American infant and child-care volumes declined. Consumer Tissue sales were affected by restructuring-related lost sales and lower volumes, but profitability improved through pricing, input-cost deflation and cost savings. K-C Professional benefited from higher volumes, pricing and cost savings. Health Care growth was driven primarily by medical supply and device volumes.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $785 million at March 31, 2012, compared with $764 million at December 31, 2011.
- Cash from operations increased substantially, partly because pension contributions fell to $45 million from $265 million in the prior-year quarter. Management expected full-year 2012 pension contributions of $50 million to $100 million.
- Total debt and redeemable securities were approximately $6.9 billion at March 31, 2012, compared with $6.7 billion at year-end 2011. The balance sheet reported $473 million of short-term debt and $5.707 billion of long-term debt.
- On February 9, 2012, the company issued $300 million of 2.4% notes due March 1, 2022, using proceeds partly to repay a portion of $400 million of notes due February 15, 2012.
- Unused revolving credit facilities included a $1.5 billion facility expiring in October 2016 and a $500 million facility scheduled to expire in October 2012, subject to stated expansion options.
- The company paid $277 million of dividends and repurchased approximately 6.3 million shares for approximately $460 million during the quarter. It planned $900 million to $1.1 billion of share repurchases for full-year 2012, subject to market conditions.
- Management expected full-year 2012 capital spending of $1.0 billion to $1.1 billion and stated that operating cash flow and debt capacity were adequate for foreseeable funding needs.
Material changes versus the prior comparable period
- Operating profit and attributable net income rose 28.7% and 33.7%, respectively, despite modest sales growth.
- Q1 2012 included $35 million of pretax restructuring charges, or $24 million after tax, compared with $82 million pretax, or $57 million after tax, in Q1 2011.
- The prior-year quarter also included a $32 million nondeductible business tax charge related to a change in Colombian law.
- The effective tax rate decreased to 29.2% from 31.4%, reflecting favorable tax-authority resolutions and the prior-year Colombian tax charge.
- Interest expense increased $7 million, primarily because of higher debt levels.
- Share count declined, with average diluted shares falling to 397.1 million from 405.9 million, reflecting share repurchases.
- Comprehensive income attributable to Kimberly-Clark increased to $728 million from $548 million, primarily due to currency translation gains and other postretirement benefit adjustments.
Guidance, outlook, risks and unusual items
- The company expected positive economic conditions in emerging markets, modest improvement but limited near-term demand growth in the United States, and continued challenging conditions in Europe.
- Management planned to increase strategic marketing faster than sales, pursue targeted growth initiatives and deliver cost savings to offset cost increases.
- Commodity-cost inflation was expected to be relatively benign overall in 2012, while foreign-currency weakening against the U.S. dollar was expected to pressure results.
- The pulp and tissue restructuring program, including an additional North American facility streamlining announced in January 2012, was expected to be substantially complete by the end of 2012. Cumulative pretax charges were expected to total approximately $550 million to $600 million, with $450 million recognized through March 31, 2012.
- Management expected restructuring activities to reduce 2013 annual net sales by approximately $250 million to $300 million versus the 2010 baseline, while increasing operating profit by at least $75 million in 2013 and at least $100 million in 2014.
- Venezuelan currency controls limited U.S.-dollar availability, and price controls effective April 1, 2012 were expected to reduce prices for certain products. Management did not expect a material consolidated impact.
- Material litigation, environmental matters and governmental proceedings were disclosed, but management believed their ultimate disposition would not materially affect the company’s business, financial condition, results or liquidity.
- The filing identifies raw-material availability and prices, competitive pricing and promotion, energy costs, customer actions, foreign exchange, and global economic and political conditions as risks to forward-looking statements.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2012, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and cost savings can continue to offset volume pressure, marketing investment and input-cost inflation.
- The remaining timing, cash requirements and total charges associated with the pulp and tissue restructuring program.
- Whether the projected restructuring profit benefits and sales reductions materialize in 2013 and 2014.
- The sustainability of elevated operating cash flow, given the unusually low first-quarter pension contribution compared with 2011.
- Debt maturities, refinancing needs, commercial-paper dependence and continued access to revolving credit facilities.
- The effect of foreign exchange, Venezuelan currency restrictions and price controls on future results.
- Whether the planned $900 million to $1.1 billion of 2012 share repurchases remain appropriate relative to leverage, liquidity and investment requirements.