Kimberly-Clark Corporation 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kimberly-Clark Corporation reported results for the three months ended March 31, 2019. Its principal reportable segments are Personal Care, Consumer Tissue, and K-C Professional. The company’s products include personal care, tissue, and workplace hygiene products sold globally under brands including Huggies, Kleenex, Scott, Cottonelle, and Depend.
Key Financial Metrics
- Net sales: $4.633 billion, down 2% from $4.731 billion.
- Gross profit: $1.428 billion versus $1.324 billion; gross margin increased to approximately 30.8% from 28.0%.
- Operating profit: $655 million versus $247 million; operating margin increased to approximately 14.1% from 5.2%.
- Net income attributable to Kimberly-Clark: $454 million versus $93 million.
- Diluted EPS: $1.31 versus $0.26. Adjusted diluted EPS was $1.66 versus $1.71.
- Effective tax rate: 24.6% versus 59.8%; the 2018 rate included an $82 million U.S. tax reform-related charge.
- Adjusted operating profit: $807 million versus $824 million, reflecting approximately flat adjusted operating margin despite the reported improvement.
- Cash flow: Operating cash flow was $317 million versus $542 million. Capital spending was $316 million versus $189 million.
- Liquidity: Cash and cash equivalents were $491 million at March 31, 2019, compared with $539 million at December 31, 2018. The company reported $7.9 billion of total debt versus $7.5 billion at year-end.
- Debt facilities: Kimberly-Clark maintained unused revolving credit facilities of $2.0 billion expiring in June 2023 and $500 million expiring in June 2019. In April 2019, it entered into an additional $300 million facility, of which $100 million remained unused.
- Share repurchases and dividends: The company repurchased 1.4 million shares for $167 million and paid $345 million of dividends during the quarter. Dividends declared were $1.03 per share.
Material Changes Versus the Prior Comparable Period
- Reported profitability benefited substantially from lower 2018 Global Restructuring Program charges. Restructuring charges declined to $152 million from $577 million.
- First-quarter 2018 results included an $82 million U.S. tax reform-related charge; no comparable charge was reported in 2019.
- Organic sales increased 3%, including a 4% benefit from higher net selling prices and a 2% volume decline. Foreign currency movements reduced reported sales by 5%.
- Higher input costs reduced adjusted operating profit by approximately $135 million, including $60 million from pulp and $45 million from other raw materials.
- Cost savings contributed approximately $60 million from the restructuring program and $55 million from the FORCE program.
- Personal Care sales declined 1%, while operating profit increased 3%. Consumer Tissue sales and operating profit each declined 3%. K-C Professional sales declined 2% and operating profit declined 5%.
- North America sales were essentially flat, while sales outside North America declined 4%, primarily due to currency effects.
- Adoption of the new lease standard on January 1, 2019 resulted in operating lease assets of $421 million and lease liabilities of $432 million, with no material effect on earnings or cash flows.
Guidance, Outlook, Risks, and Unusual Items
- 2019 EPS guidance: $4.85 to $5.35; adjusted EPS guidance is $6.50 to $6.70, excluding restructuring charges equivalent to $1.35 to $1.65 per share.
- Management expects reported sales to decline 1% to 2%, organic sales to increase approximately 2%, and adjusted operating profit to grow 1% to 4%.
- Expected 2019 cost savings are $400 million to $450 million, including $300 million to $325 million from FORCE and $100 million to $125 million from restructuring.
- Expected key input-cost inflation is $300 million to $400 million. Foreign currency translation is expected to reduce operating profit by 2% to 3%, with transaction effects also unfavorable.
- Full-year capital spending is expected to be $1.1 billion to $1.3 billion. Share repurchases are targeted at $600 million to $900 million, subject to market conditions.
- The 2018 Global Restructuring Program is expected to be completed by the end of 2020, with total pre-tax costs of $1.7 billion to $1.9 billion, cash costs of $900 million to $1.0 billion, and annual pre-tax savings of $500 million to $550 million by 2021.
- Management identified risks from foreign currency volatility, raw material availability and prices, competitive pricing pressure, energy costs, customer and retailer actions, and global economic and political conditions.
- Argentina is accounted for under highly inflationary accounting effective July 1, 2018. Argentine sales represented less than 2% of consolidated sales, and the related earnings impact was not material.
- Management stated that operating cash generation and debt capacity should be adequate to fund working capital, restructuring payments, capital spending, pensions, dividends, and other foreseeable needs.
Important Facts for Investors to Verify
- Determine how much of the reported earnings increase reflects reduced restructuring and tax charges rather than underlying operating improvement; adjusted EPS declined 3%.
- Monitor whether pricing and cost savings offset expected $300 million to $400 million of input-cost inflation.
- Assess execution of the restructuring program, including expected facility closures or divestitures, workforce reductions, cash costs, capital spending, and savings realization.
- Review debt maturities, commercial paper reliance, and renewal or replacement of the $500 million revolving facility expiring in June 2019.
- Evaluate working-capital performance, given the $375 million operating working-capital use of cash in the quarter and the decline in operating cash flow.
- Compare future results with management’s assumptions for currency, organic sales growth, tax rate, adjusted operating profit, capital spending, and share repurchases.