Business Context and Reporting Period
Kimberly-Clark Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments, with brands including Huggies, Kleenex, Scott, Cottonelle, Depend, and Kimberly-Clark Professional products.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|
| Net sales | $4,857 million | $4,727 million | $9,692 million | $9,220 million |
| Gross profit | $1,644 million | $1,573 million | $3,291 million | $3,027 million |
| Operating profit | $711 million | $609 million | $1,376 million | $1,237 million |
| Net income attributable to Kimberly-Clark | $498 million | $403 million | $882 million | $810 million |
| Diluted EPS | $1.20 | $0.97 | $2.11 | $1.95 |
| Cash dividends declared | $0.66 per share | $0.60 per share | $1.32 per share | $1.20 per share |
- Q2 sales increased 2.8%; operating profit increased 16.7%; and net income attributable to Kimberly-Clark increased 23.6%.
- Six-month sales increased 5.1%; operating profit increased 11.2%; and attributable net income increased 8.9%.
- Q2 gross margin was approximately 33.8%, compared with 33.3% in the prior-year quarter. Operating margin was approximately 14.6%, compared with 12.9%.
- Six-month gross margin was approximately 34.0%, compared with 32.8%; operating margin was approximately 14.2%, compared with 13.4%.
- Q2 cash provided by operations was $587 million, down 41% from the prior year. Six-month operating cash flow was $1,051 million versus $1,689 million.
- Six-month capital spending was $363 million, compared with $396 million in 2009. Cash used for financing was $912 million, including $525 million of dividends paid and $486 million of treasury-stock purchases.
- Cash and cash equivalents were $585 million at June 30, 2010, versus $798 million at December 31, 2009.
- Debt payable within one year was $1,157 million and long-term debt was $4,442 million at June 30, 2010. Including redeemable subsidiary securities, management reported total debt and redeemable securities of approximately $6.7 billion.
Material Changes Versus the Prior Comparable Period
- Personal Care sales increased 2.8% in Q2 and operating profit increased 12.4%, supported by North American pricing, innovation, and cost savings.
- Consumer Tissue sales declined 1.7% and operating profit declined 6.2% in Q2, principally because of lower volumes, input-cost inflation, and currency effects.
- K-C Professional & Other sales increased 8.8% and operating profit increased 30.4%, aided by pricing, cost savings, and the Jackson Products acquisition.
- Health Care sales increased 2.7%, including an 11% benefit from the I-Flow acquisition, but operating profit declined 32.3% because of lower pricing, input-cost inflation, and higher selling and general expenses.
- Operating results benefited from approximately $105 million of Q2 cost savings, approximately $40 million of lower pension expense, and the absence of $110 million of organization-optimization charges recorded in Q2 2009. These benefits were partly offset by approximately $235 million of input-cost inflation and approximately $40 million of increased strategic marketing investment.
- For the first six months, cost savings were approximately $185 million, while input-cost inflation was approximately $310 million. The company also recorded approximately $100 million of increased marketing, research, and general expenses.
- Interest expense declined by $11 million in Q2 and $23 million for the six months, primarily because of lower average debt and interest rates.
Outlook, Risks, and Unusual Items
- Management expects strategic marketing spending to grow faster than sales in 2010 and anticipates higher input-cost inflation than previously estimated, although pulp prices were expected to decline sequentially in the second half.
- Management expected second-half sales volumes to improve somewhat from Q2 levels and continued to emphasize revenue realization, incremental cost savings, discretionary-spending control, brand investment, and product innovation.
- Full-year capital spending was expected to be at the low end of, or slightly below, the $1.0 billion to $1.1 billion target range. The company expected to contribute approximately $240 million to pension trusts in 2010.
- Kimberly-Clark expected to repurchase $700 million to $800 million of common stock in 2010. It repurchased approximately 8.2 million shares for $500 million during the first six months.
- Venezuelan operations became subject to highly inflationary accounting effective January 1, 2010. The company recorded a $96 million after-tax first-quarter charge, including $19 million in cost of products sold and $79 million in other expense. Venezuela’s currency controls restricted access to U.S. dollars and limited imports; management expected significantly lower Venezuelan sales volumes in the second half.
- The company’s net investment in Venezuela was $140 million at June 30, 2010. Management stated that the currency restrictions had not materially affected 2010 earnings as of the filing date.
- Environmental claims exist at multiple waste-disposal sites, but management did not expect them to have a material adverse effect individually or in aggregate. Management stated that operating cash generation and debt capacity were adequate for foreseeable needs.
- Comprehensive income was materially affected by currency translation losses: six-month other comprehensive income was negative $291 million in 2010 versus positive $447 million in 2009.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2010, with no significant changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of operating-profit growth after removing the benefit of the 2009 restructuring charges and considering continuing input-cost inflation.
- Monitor Consumer Tissue volumes, pricing, promotional activity, and pulp and other raw-material costs.
- Assess whether Jackson Products and I-Flow acquisitions deliver expected revenue, margin, and integration benefits.
- Track Venezuelan currency convertibility, import restrictions, future exchange rates, and potential additional charges or impairment.
- Reconcile lower operating cash flow with working-capital movements, pension contributions, dividends, and share repurchases.
- Review debt maturities, refinancing requirements, redeemable subsidiary securities, and liquidity relative to the $1.157 billion of current debt.
- Evaluate the effect of currency translation and transaction losses on reported earnings, equity, and comprehensive income.