Kimberly-Clark Corporation: Q1 2018 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three months ended March 31, 2018, compared with the same period in 2017. The company operates through Personal Care, Consumer Tissue and K-C Professional segments. Net sales are generated primarily from branded consumer, tissue and workplace products.
Financial performance and liquidity
- Net sales: $4.731 billion, up 5% year over year. Organic sales increased 2%; foreign currency translation contributed 3%.
- Gross profit: $1.324 billion versus $1.660 billion; gross margin declined to approximately 28.0% from 36.8%, primarily because of restructuring charges and higher input costs.
- Operating profit: $247 million versus $848 million, down 71%. Reported operating margin was approximately 5.2% versus 18.8%. Adjusted operating profit was $824 million, with an adjusted margin of approximately 17.4%.
- Net income attributable to Kimberly-Clark: $93 million versus $563 million. Diluted EPS was $0.26 versus $1.57; adjusted diluted EPS was $1.71.
- Tax rate: Reported effective tax rate was 59.8%, including an $82 million net charge related to U.S. tax reform. Adjusted effective tax rate was 22.0% versus 27.5%.
- Cash flow: Operating cash flow was $542 million versus $436 million. Capital spending was $189 million versus $215 million. Cash and cash equivalents ended at $626 million, compared with $616 million at December 31, 2017.
- Debt and liquidity: Total debt was approximately $7.7 billion at March 31, 2018, compared with $7.4 billion at year-end. Short-term debt was $794 million. The company had an unused $2.0 billion revolving credit facility expiring in 2021.
- Capital allocation: The company paid $341 million in dividends and repurchased 1.8 million shares for $204 million during the quarter. The declared quarterly dividend was $1.00 per share.
Segment results and material changes
| Segment | Q1 2018 sales | Year-over-year sales | Q1 2018 operating profit | Year-over-year profit |
|---|---|---|---|---|
| Personal Care | $2.307 billion | +3% | $470 million | -3% |
| Consumer Tissue | $1.579 billion | +9% | $249 million | -11% |
| K-C Professional | $832 million | +5% | $158 million | +6% |
- Higher pulp and other raw-material costs reduced operating profit by approximately $175 million, including a $105 million increase in pulp costs and a $45 million increase in other raw-material costs.
- Cost savings from the FORCE program contributed approximately $90 million, while lower marketing, research and general expenses, volume growth and favorable currency translation also supported results.
- The 2018 Global Restructuring Program generated $577 million of pre-tax charges, or $428 million after tax attributable to Kimberly-Clark, substantially depressing reported earnings.
- The company adopted several accounting standards in 2018, including pension-cost presentation, intra-entity tax transfers and revenue recognition. The reported effects were immaterial or primarily presentational, except for the disclosed retrospective pension-cost presentation.
Guidance, outlook, risks and unusual items
- 2018 EPS guidance: Reported EPS of $3.67 to $4.27; adjusted EPS of $6.90 to $7.20. Adjusted guidance excludes restructuring charges of $2.70 to $3.00 per share and a $0.23 per-share U.S. tax reform charge.
- Management increased its reported net-sales growth outlook to 2%–3% from 1%–2%, expects organic sales growth of approximately 1%, and expects currency to provide a 1%–2% benefit.
- Input-cost inflation is expected to be $400 million–$550 million, compared with the prior estimate of $300 million–$400 million. Adjusted operating profit is expected to grow 2%–5%.
- FORCE savings are expected to be approximately $400 million, with an additional $50 million–$70 million of 2018 restructuring savings. Adjusted effective tax rate guidance is 23%–26%.
- The restructuring program is expected to close or sell approximately 10 manufacturing facilities, reduce the workforce by 5,000–5,500 employees and exit or divest businesses representing approximately 1% of sales. Total pre-tax costs are estimated at $1.7 billion–$1.9 billion through 2020, including $900 million–$1.0 billion of cash costs and $800 million–$900 million of non-cash costs. Incremental capital spending is expected to be approximately $600 million–$700 million.
- Full-year 2018 capital spending is expected to be approximately $1.1 billion, and share repurchases are targeted at $700 million–$900 million.
- Key risks include commodity-cost inflation, competitive pricing pressure, foreign currency movements, customer and promotional activity, global economic and political conditions, execution of the restructuring plan and realization of expected savings.
- U.S. tax reform amounts remained provisional, and the company had not yet determined its accounting policy for deferred taxes related to GILTI. The filing states that the ultimate impact may change with further guidance and analysis.
- Kimberly-Clark disclosed ongoing litigation related to its former healthcare business. In one California matter, punitive damages were reduced to approximately $19 million and total damages plus pre-judgment interest were approximately $25 million. Management believes the ultimate outcomes will not materially affect the company, although litigation outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether restructuring charges, facility closures, workforce reductions and divestitures remain within the disclosed cost and timing ranges.
- Progress toward the stated $500 million–$550 million of annual pre-tax restructuring savings by 2021 and 2018 savings of $50 million–$70 million.
- Actual pulp and other input-cost inflation versus the $400 million–$550 million forecast and the company’s ability to recover costs through pricing.
- Underlying organic volume and pricing trends, particularly in Personal Care and Consumer Tissue.
- Changes to provisional U.S. tax reform accounting, including GILTI and transition-tax estimates.
- Debt maturities, commercial-paper usage, cash generation and the capacity to fund dividends, repurchases, capital spending and restructuring cash costs.