Kimberly-Clark Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three months ended March 31, 2017, compared with the same period in 2016. The company operates through Personal Care, Consumer Tissue, and K-C Professional segments.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $4,483 million | $4,476 million | Flat |
| Gross profit | $1,652 million | $1,639 million | +1% |
| Gross margin | 36.9% | 36.6% | +0.3 points |
| Operating profit | $834 million | $804 million | +4% |
| Operating margin | 18.6% | 18.0% | +0.6 points |
| Net income attributable to Kimberly-Clark | $563 million | $545 million | +3% |
| Diluted EPS | $1.57 | $1.50 | +5% |
| Cash provided by operations | $436 million | $553 million | -21% |
| Capital spending | $215 million | $220 million | -2% |
Cash and cash equivalents were $835 million at March 31, 2017, compared with $923 million at December 31, 2016. Total debt was approximately $7.8 billion, compared with $7.6 billion at year-end 2016; debt payable within one year was $1.328 billion and long-term debt was $6.425 billion. The company had an unused $2.0 billion revolving credit facility expiring in 2021.
Operating cash flow declined primarily because of higher tax payments and a $264 million use of operating working capital, compared with a $105 million use in the prior-year quarter. The company paid $329 million in dividends and repurchased 2.4 million shares for approximately $300 million during the quarter.
Material changes versus the prior comparable period
- Organic sales decreased 1%, with approximately 1% volume growth offset by lower net selling prices. Foreign currency translation increased reported sales by 1%.
- North American sales declined 3%, while sales outside North America increased 4%.
- Personal Care sales increased 2% to $2.250 billion and operating profit increased 7% to $481 million.
- Consumer Tissue sales declined 3% to $1.455 billion and operating profit declined 2% to $275 million.
- K-C Professional sales increased 1% to $768 million, while operating profit declined 3% to $146 million.
- Operating profit benefited from approximately $110 million of FORCE cost savings and favorable currency effects, but was pressured by lower pricing and approximately $35 million of higher input costs.
- The effective tax rate decreased to 27.5% from 28.3%, partly reflecting adoption of the share-based compensation accounting standard, ASU 2016-09.
- Share of net income from equity companies declined to $29 million from $35 million, principally reflecting pressure at K-C de Mexico.
- Other comprehensive income included a $267 million unrealized currency translation gain, substantially increasing comprehensive income relative to net income.
Guidance, outlook, risks and unusual items
- Management expects 2017 EPS of $6.20 to $6.35, organic sales growth of 1% to 2%, and reported sales growth of 1% to 2%.
- Expected commodity-cost inflation is $150 million to $250 million. Management expects operating profit to increase 2% to 4% versus 2016 adjusted operating profit and plans at least $400 million of FORCE savings.
- Full-year capital spending is expected to be $850 million to $950 million; share repurchases are targeted at $800 million to $1 billion, subject to market conditions; pension contributions may be up to $100 million.
- Key risks include raw-material, energy and distribution costs; competitive pricing and retail customer actions; foreign currency volatility; global economic and political conditions; and developments in U.S. tax policy and Brexit-related policy.
- The company is monitoring Argentina's currency devaluation and inflation. Argentina represented approximately 2% of consolidated sales in each comparable quarter.
- On April 7, 2017, after quarter-end, a jury awarded $3.9 million in compensatory damages and $350 million in punitive damages against Kimberly-Clark in a former-healthcare-business litigation matter. The company intends to challenge the verdict and stated that Halyard is obligated to indemnify Kimberly-Clark for liabilities primarily related to the former healthcare business.
- Management stated that litigation matters, including additional Halyard-related proceedings, are not expected to have a material adverse effect, individually or in aggregate, although outcomes cannot be predicted with certainty.
- The company adopted ASU 2016-09 and early adopted ASU 2016-15 without a material impact. It expects to adopt revenue recognition and intra-entity transfer tax standards on January 1, 2018; the reported revenue standard is not expected to have a material impact, while the effect of the intra-entity transfer standard is not yet known.
Important facts for investors to verify
- Whether organic volume growth and planned 1% to 2% sales growth offset continued pricing pressure, particularly in North American Consumer Tissue and Personal Care.
- Whether $150 million to $250 million of anticipated commodity inflation is fully offset by at least $400 million of FORCE savings.
- Progress toward the $6.20 to $6.35 EPS outlook, including the expected decline in equity-company earnings and the effective tax rate assumption.
- Cash generation after dividends, capital spending, share repurchases, pension contributions, and debt maturities.
- Execution of the $800 million to $1 billion repurchase plan and its effect on leverage and per-share results.
- Developments in the post-quarter-end litigation award and the practical availability of Halyard indemnification.
- Foreign currency, Argentina, raw-material costs, competitive pricing, and tax-policy developments.