Kimberly-Clark Corporation (KMB) has reported adjusted earnings of $1.18 per share in the second quarter 2011, exceeding the Zacks Consensus Estimate by 3 cents.
The adjusted earnings in the second quarter of 2011 exclude the adjustment for charges related to the pulp and tissue restructuring of 15 cents per share. The results were benefited from sales growth, cost savings and a lower share count.
However, the adjusted earnings were slightly down from the prior-year earnings on the back of significant input cost inflation and a higher effective tax rate.
Kimberly-Clark posted earnings of $1.03 per share in the reported quarter, including the one-time charges. It was, however, 14.2% lower than the year-ago quarter earnings of $1.20 per share.
For fiscal 2011, Kimberly-Clark has reiterated its earnings guidance to the range of $4.80 to 5.05 per share, which is consistent with the company's previous expectations and includes higher input cost expectations, along with incremental plans to reduce costs, compared to previous assumptions.
Consolidated Revenue and Margins
During the quarter, net sales grew 8.0% to $5.3 billion from $4.9 billion in the same period previous year. Kimberly-Clark’s sales also surpassed the Zacks Consensus Estimate of $5.1 billion.
Organic sales climbed 3% in the quarter, driven by increased sales volumes of 2% and higher net selling prices of 1%. Volumes increased in the second quarter of 2011 benefiting from product innovations and targeted growth initiatives, but were negatively impacted by continued soft category demand in portions of the North American market. Besides, changes in foreign currency exchange rates increased Kimberly-Clark’s sales by 5%.
For fiscal 2011, Kimberly-Clark expects net sales to increase by approximately 5% – 7% versus previous guidance of an increase of 4% – 6%. Organic sales guidance continues to grow at 2% – 4%, while volumes are anticipated to grow at 1% – 2% and the combination of higher net selling prices and improved product mix should contribute 1 – 2 points of additional growth.
Further, the company expects sales to increase by approximately 3% in 2011 versus the previous estimate of 2%, as a result of the strengthening of most foreign currency exchange rates relative to the U.S. dollar.
Compared with the year-ago period, gross profit contracted 5.3% to $1.56 billion as compared to $1.64 billion in the prior-year quarter.
The company’s operating profit plunged 12% to $625 million in the second quarter of 2011 from $711 million in the same period in 2010. Excluding the costs for the pulp and tissue restructuring of $90 million, adjusted operating profit posted $715 million in the second quarter of 2011. Further, these results were benefited from sales growth and $45 million in cost savings from the Kimberly-Clark’s FORCE (Focused On Reducing Costs Everywhere) program.
The company expects savings from the FORCE program totaling $300 to $350 million in 2011, up from the prior target range of $250 to $300 million. The company continues to aggressively identify and implement incremental savings opportunities, particularly in sourcing and supply chain activities.
Key costs rose by a total of $180 million, including $110 million for raw materials other than fiber, primarily polymer resin and other oil-based materials, $45 million in higher fiber costs, $15 million for energy and $10 million in distribution costs.
Kimberly-Clark assumes input cost inflation to be in the range of $650 million–$750 million compared to the previous assumption of $450 million–$550 million. The increased inflation assumption is primarily due to higher costs for polymer resin, superabsorbent, adhesives and other packaging materials.
Segment Details
Personal Care: Sales grew 7% on a year-over-year basis to $2.3 billion, benefited from changes in currency rates, sales volumes, and net selling prices, partially offset by the changes in product mix. Operating profit plummeted 10% on a year-over-year basis to $400 million in the quarter, due to input cost inflation.
Consumer Tissue: Sales grew 9% year over year to $1.7 billion, driven by changes in currency rates, sales volumes, and net selling prices. Segment’s operating profit climbed 15% to $173 million in the quarter, driven by benefits from sales growth and cost savings, partially offset by input cost inflation.
K-C Professional (KCP) & Other: Sales increased 6% year over year to $0.8 billion, on the back of changes in currency rates and net selling prices, partially offset by the decline in sales volumes. Operating profit for the segment decreased 3% to $129 million, primarily due to input cost inflation and higher marketing, research and general expenses.
Health Care: Sales advanced 14% year over year to $0.4 billion, resulting from increase in sales volumes, changes in currency rates and net selling prices. Operating profit was $53 million, up 26% year over year, driven by benefits from sales growth and cost savings, more than offsetting input cost inflation.
Pulp and Tissue Restructuring Update
In January 2011, Kimberly-Clark initiated a pulp and tissue restructuring in order to exit its remaining integrated pulp manufacturing operations and improve the underlying profitability and return on invested capital of its consumer tissue and K-C Professional businesses.
The restructuring is expected to be completed by the end of 2012, with total costs of $280 to $420 million after tax. Cash costs are projected to be 25% – 50% of the total charges. Kimberly-Clark expects annual net sales to decrease by $250 to $300 million and operating profit to increase by at least $75 million resulting from restructuring by 2013.
In the quarter under review, restructuring charges totaled $59 million after tax and the company expects that $265 to $315 million of the after tax charges will occur in 2011.
Financial and Cost Saving Update
At the end of second quarter 2011, Kimberly-Clark had cash and cash equivalents of $908 million and long-term debt of $5.42 billion. Operating cash flows in the second quarter of 2011 totaled $771 million, up 31% from $587 million in the prior year. The increase was driven by improved working capital, primarily accounts payable.
Capital expenditure in the quarter was $201 million compared with $179 million in the second quarter of 2010.
During the reported quarter, Kimberly-Clark repurchased approximately 5.3 million shares of its common stock at a cost of $350 million. Total debt and redeemable securities was $7.5 billion at the end of June 30, 2011 compared with $6.5 billion at the end of 2010. In February of 2011, the company issued $0.7 billion of long-term debt, principally to finance share repurchases.
Kimberly-Clark currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, which translates into a short-term Hold rating. The company competes with Procter & Gamble Co. (PG) which will report its second quarter earnings on August 5, 2011.
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