Kimberly-Clark Corporation: Second-Quarter 2019 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, 2019. The company operates through Personal Care, Consumer Tissue and K-C Professional segments, with North America and international operations. The filing was signed July 23, 2019.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $4.594 billion | $4.604 billion | $9.227 billion | $9.335 billion |
| Gross profit | $1.486 billion | $1.455 billion | $2.914 billion | $2.779 billion |
| Operating profit | $670 million | $674 million | $1.325 billion | $921 million |
| Net income attributable to Kimberly-Clark | $485 million | $455 million | $939 million | $548 million |
| Diluted EPS | $1.40 | $1.30 | $2.71 | $1.56 |
| Cash provided by operations | Not separately provided | Not separately provided | $926 million | $1.329 billion |
- Q2 gross margin was approximately 32.3%, compared with 31.6% in the prior-year quarter. Operating margin was approximately 14.6% in both periods; attributable net margin increased to approximately 10.6% from 9.9%.
- Six-month gross margin increased to approximately 31.6% from 29.8%, while operating margin increased to approximately 14.4% from 9.9%, largely reflecting lower restructuring and tax-related charges.
- Q2 organic sales increased 5%, offset by a 5% adverse foreign-currency impact. Net selling prices contributed 5%, mix contributed 1%, and volume was slightly lower.
- Q2 adjusted operating profit was $789 million versus $774 million, and adjusted diluted EPS was $1.67 versus $1.59. These are non-GAAP measures that exclude restructuring-related items.
- Segment Q2 sales and operating profit were: Personal Care $2.286 billion and $485 million; Consumer Tissue $1.472 billion and $221 million; K-C Professional $821 million and $162 million.
- Cash provided by operations declined by $403 million year over year, primarily due to increased working capital and higher tax payments. Capital spending increased to $569 million from $347 million.
- Cash and cash equivalents were $534 million at June 30, 2019, compared with $539 million at December 31, 2018. Current assets were $5.321 billion and current liabilities were $6.585 billion.
- Total debt was approximately $8.0 billion at June 30, 2019, compared with $7.5 billion at year-end 2018. Debt payable within one year was $1.291 billion and long-term debt was $6.701 billion.
- The company had $2.0 billion and $750 million revolving credit facilities, both currently unused, expiring in June 2023 and June 2020, respectively.
Material changes versus the prior comparable period
- Q2 net sales were essentially flat, while six-month sales declined 1%. North American Q2 sales increased 4%; sales outside North America declined 4%.
- Q2 operating profit declined slightly despite higher adjusted operating profit. Cost savings and pricing were offset by approximately $80 million of higher input costs, including pulp inflation, unfavorable currency effects, higher advertising and general and administrative expenses, and other manufacturing costs.
- Personal Care Q2 sales increased 1% and operating profit increased 5%. Consumer Tissue sales were flat and operating profit increased 7%. K-C Professional sales declined 5% and operating profit declined 2%.
- Six-month net income attributable to Kimberly-Clark increased 71%, and diluted EPS increased 74%, primarily because the prior-year period included substantially larger restructuring charges and $82 million of U.S. tax-reform-related expense.
- Operating cash flow declined despite higher reported earnings, reflecting a $525 million use of operating working capital in 2019 versus a $93 million source in 2018.
- The company repurchased approximately 2.7 million shares during the first six months for $334 million and declared dividends of $2.06 per share during the period.
Guidance, outlook, risks and unusual items
- Management raised 2019 reported EPS guidance to $5.50–$5.90 from $4.85–$5.35 and adjusted EPS guidance to $6.65–$6.80 from $6.50–$6.70.
- Management expects 2019 net sales to be flat to down 1%, organic sales growth of approximately 3%, adjusted operating profit growth of 3%–5%, and adjusted effective tax rate of 23%–25%.
- Expected 2019 cost savings from the FORCE program and the restructuring program total $400–$450 million. Expected key-input inflation is $150–$250 million.
- The 2018 Global Restructuring Program is expected to generate annual pretax savings of $500–$550 million by 2021. Total pretax program costs are expected to be $1.7–$1.9 billion through completion by the end of 2020, with cumulative pretax charges of approximately $1.3 billion through June 30, 2019.
- Restructuring charges in 2019 are expected to be $400–$500 million pretax. The program is expected to involve approximately 5,000–5,500 workforce reductions, facility closures or sales, business exits and incremental capital spending of approximately $600–$700 million through 2020.
- Full-year 2019 capital spending is expected to be $1.1–$1.3 billion. Full-year share repurchases are targeted at $600–$900 million, subject to market conditions.
- Key risks include foreign-currency volatility, raw-material and energy costs, competitive pricing pressure, customer and retailer actions, global economic and political conditions, execution of cost savings and restructuring plans, and tax matters.
- A Brazilian tax dispute involving goodwill amortization has proposed adjustments and penalties of approximately $90 million as of June 30, 2019, excluding significant interest. Management believes it has meritorious defenses and expects the matter to take years to resolve.
- Argentina adopted highly inflationary accounting effective July 1, 2018. Argentina represented less than 2% of consolidated sales, and the reported earnings effect was not material.
- Operating lease assets of $416 million and lease liabilities of $427 million were recognized following adoption of the new lease standard on January 1, 2019; the adoption had no material effect on results or cash flows.
Important facts for investors to verify
- Reconcile reported versus adjusted EPS and operating profit, particularly the effect of restructuring charges and prior-year U.S. tax-reform items.
- Assess whether pricing and cost savings can offset pulp, raw-material, distribution and other manufacturing cost inflation.
- Monitor working-capital performance and cash conversion, given the significant year-over-year decline in operating cash flow.
- Evaluate leverage, commercial-paper dependence, debt maturities and available revolving-credit capacity.
- Track execution, costs, savings, capital spending and sales effects of the 2018 Global Restructuring Program.
- Review currency exposure and international operating trends, especially in Latin America, Argentina and other developing markets.
- Monitor the Brazilian tax dispute and other contingencies, including the ultimate amount of interest and any adverse resolution.
- Confirm the assumptions underlying the increased 2019 guidance, including organic growth, input-cost inflation, tax rate, currency effects and share repurchases.