KIMBERLY CLARK CORP quarterly report, Q2 FY2017

Kimberly-Clark Corporation: Q2 2017 Form 10-Q Summary

Business context and reporting period

Kimberly-Clark Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company operates through Personal Care, Consumer Tissue, and K-C Professional segments, with products sold globally under brands including Huggies, Kleenex, Scott, Cottonelle, and Depend.

Financial performance and liquidity

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Net sales	$4.554 billion	$4.588 billion	$9.037 billion	$9.064 billion
Gross profit	$1.644 billion	$1.664 billion	$3.296 billion	$3.303 billion
Operating profit	$799 million	$838 million	$1.633 billion	$1.642 billion
Net income attributable to Kimberly-Clark	$531 million	$566 million	$1.094 billion	$1.111 billion
Diluted EPS	$1.49	$1.56	$3.06	$3.06
Cash provided by operations	Not separately provided	Not separately provided	$1.261 billion	$1.413 billion

Q2 gross margin was approximately 36.1%, compared with 36.3% in the prior-year quarter. Operating margin was approximately 17.5%, compared with 18.3%.
Q2 organic sales declined 1%, driven primarily by lower net selling prices. North American consumer products sales declined 2%; sales outside North America increased 1% on a reported basis.
Q2 operating profit declined 5%, reflecting lower sales and $75 million of higher input costs, primarily pulp and other raw materials. FORCE cost savings contributed $120 million.
Segment Q2 operating profit was $467 million in Personal Care, $241 million in Consumer Tissue, and $163 million in K-C Professional.
Consumer Tissue was the weakest segment, with sales down 2% and operating profit down 12%. K-C Professional operating profit increased 9%, while Personal Care operating profit increased 3%.
Cash and cash equivalents were $1.051 billion at June 30, 2017, compared with $923 million at December 31, 2016. Current assets were $5.390 billion and current liabilities were $5.889 billion.
Total debt was approximately $8.0 billion at June 30, 2017, versus $7.6 billion at year-end 2016. Debt payable within one year was $1.246 billion and long-term debt was $6.777 billion.
The company had an unused $2.0 billion revolving credit facility expiring in 2021. Management stated that operating cash generation and debt capacity were adequate for foreseeable needs.
Six-month capital spending was $386 million. The company paid $674 million of dividends and repurchased 4.7 million shares for $600 million during the first six months.

Material changes versus the prior comparable period

Q2 net sales decreased 1%, operating profit decreased 5%, net income attributable to Kimberly-Clark decreased 6%, and diluted EPS decreased 4%.
Six-month net sales were approximately flat, while operating profit decreased 1% and net income attributable to Kimberly-Clark decreased 2%. Six-month diluted EPS remained $3.06, benefiting from a lower share count and a lower effective tax rate.
Operating cash flow declined $152 million year over year, mainly because of higher tax payments, partially offset by improvements in accounts payable.
Interest expense increased to $85 million in Q2 from $81 million and to $168 million for the six months from $157 million, consistent with higher debt levels.
Share of net income from equity companies declined 26% in Q2 and 21% for the six months, primarily reflecting weaker results at K-C de Mexico.
In May 2017, Kimberly-Clark issued $350 million of 3.90% notes due May 4, 2047, using proceeds for general corporate purposes, including repayment of commercial paper.

Guidance, outlook, risks, contingencies, and unusual items

Management expects 2017 EPS at the low end of the $6.20 to $6.35 target range.
Full-year net sales and organic sales growth are expected to be similar to or slightly above the prior year. Volumes are expected to increase slightly, while net pricing and product mix are expected to be modestly unfavorable.
Commodity cost inflation is expected to be $200 million to $300 million, primarily from higher raw-material prices including pulp. FORCE cost savings are targeted at $425 million to $450 million.
The effective tax rate is expected to be similar to or slightly below 2016 levels. Equity-company income is expected to decline, and pension contributions could be up to $100 million.
Key risks include commodity inflation, foreign-currency movements, competitive pricing and promotional pressure, customer actions, economic and political conditions, and developments in U.S. tax reform and Brexit-related policies.
Kimberly-Clark is monitoring currency devaluation and inflation in Argentina. Argentina represented approximately 2% of consolidated six-month net sales.
Kimberly-Clark and Halyard Health filed cross-suits concerning indemnification obligations under the distribution agreement related to the former healthcare business. Management believes the litigation will not have a material adverse effect, although outcomes cannot be predicted with certainty.
Q2 2016 included an $11 million adjustment related to Venezuelan operations and restructuring-related items. The 2014 organization restructuring was completed by December 31, 2016.
The company adopted share-based compensation and cash-flow classification accounting updates in 2017 without a material impact. Revenue recognition and other accounting standards scheduled for future adoption were not expected to have a material impact, except that the ultimate effect of the new lease standard was not yet known.
Management concluded that disclosure controls and procedures were effective as of June 30, 2017, with no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether the planned $200 million to $300 million commodity inflation is offset by pricing, productivity, and FORCE savings.
Progress toward the $425 million to $450 million FORCE savings target and the effect on operating margins.
Consumer Tissue volume, pricing, and margin trends, particularly in North America.
Whether the expected EPS outcome reaches only the low end of the $6.20 to $6.35 range.
Operating cash flow, working-capital requirements, pension contributions, and the funding of dividends and share repurchases.
Debt maturities, commercial-paper usage, interest expense, and available revolver capacity.
Foreign-exchange and input-cost exposure, including developments in Mexico, Argentina, and other international markets.
Updates on Halyard indemnification litigation and any tax, regulatory, or accounting changes that could affect future results.