Kimberly-Clark Corporation (KMB) reported adjusted earnings (excluding pulp and tissue restructuring charges) of $1.30 per share in the second quarter of 2012, beating the Zacks Consensus Estimate of $1.28 per share. The adjusted earnings also surpassed the prior-year quarter's earnings of $1.18 per share by 13.6%. The bottom-line growth was boosted by organic sales growth, cost savings and a lower commodity cost. The adjusted earnings do not include costs for pulp and tissue restructuring actions.
Quarter in Detail
During the quarter, net sales remained flat year on year at $5.3 billion, which were also in line with the Zacks Consensus Revenue Estimate. Organic sales climbed 5% in the second quarter of 2012, supported by higher pricing and sales volume and a 9% increase in K-C International (which includes businesses in Asia, Latin America, the Middle East, Eastern Europe and Africa, with a particular emphasis in the regions of China, Brazil, India and Russia).
Sales volume contributed 2% in the sales increase, while net selling prices added more than 2%. Product mix marginally impacted the sales volume growth. However, the results were impacted by unfavorable foreign currency fluctuations, which limited the sales growth by more than 3%. The exit of non-strategic products also reduced sales volumes by an additional 1%.
Excluding the costs for the pulp and tissue restructuring, adjusted operating profit climbed 8% to $773 million in the second quarter of 2012 driven by strong organic growth and cost savings from the Kimberly-Clark's FORCE (Focused On Reducing Costs Everywhere) program. Deflation in key input costs, particularly the 55% million decline in fiber costs, contributed to the increase in gross profit.
Based on product grouping, the company conducts its operations in four business segments of Personal Care, Consumer Tissue, K-C Professional & Other and Health Care.
Personal Care:This segment includes products like disposable diapers, training and youth pants, and swim pants; baby wipes; feminine and incontinence care products under brands, such as Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend and Poise.Sales grew 3% on a year-over-year basis to $2.4 billion.
The results were benefited from an increase in sales volumes by 4% and net selling prices by 3%, which offset the negative impact from currency fluctuations. The segment witnessed sales growth in all geographic regions including North America, Europe and K-C International. Segment's operating profit increased 2% on a year-over-year basis to $406 million in the quarter.
Consumer Tissue: This segment includes bathroom tissue, paper towels, napkins and related products for household use under brands, such as Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle and Page. Sales declined 5% in the quarter to $1.7 billion.
Currency headwinds had a 3% negative impact on sales. Separately, lost sales because of pulp and tissue restructuring actions also affected the sales. Segment operating profit climbed 27% to $219 million in the quarter.
K-C Professional (KCP) & Other: This segment consists of facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products under Kimberly-Clark, Kleenex, Scott, WypAll, Kimtech, KleenGuard, Kimcare and Jackson brands. Sales declined 1% on a year-over-year basis to $0.8 billion.
Unfavorable currency fluctuations reduced sales by 3% and lost sales due to pulp and tissue restructuring activities negatively impacted sales volumes by 1%. Sales growth in North America was offset by decline in Europe and K-C International. Segment operating profit for the segment increased 7% to $138 million.
Health Care: This segment consists of disposable health care products, such as surgical drapes and gowns, sterilization wrap, face masks, exam gloves, digestive health, respiratory products, pain management products and other disposable medical products under Kimberly-Clark, Ballard, ON-Q and other brand names.
Sales advanced 5% on a year-over-year basis to $0.4 billion, resulting from an increase in sales volumes. Operating profit was $56 million, up 6% year over year.
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.
In the second quarter of 2012, the company incurred restructuring charges of $16 million after tax and generated operating profit benefits of $15 million from restructuring actions.
The company has incurred a total of $329 million of restructuring charges and generated an operating profit benefit of $35 million.
The total restructuring charges from the initiative are expected to be in the range of $385 to $420 million after tax through the end of 2012. In addition, 30% to 40% of the total charges will be incurred in cash.
Further, Kimberly-Clark expects that the restructuring will decrease 2013 annual net sales by $250 to $300 million, and will likely increase operating profit by at least $75 million in 2013 and at least by $100 million in 2014.
Capital Structure and Balance Sheet
Cash flow from operations improved to $994 million in the second quarter of 2012 from $585 million in the first quarter of 2012. Capital spending was $227 million in the reported quarter as compared with $259 million in the prior quarter.
In the first quarter of 2012, Kimberly-Clark repurchased approximately 2.5 million shares for $200 million.
Kimberly-Clark has raised its guidance for fiscal 2012. The company expects adjusted earnings to lie in the range of $5.05 to $5.20 per share, compared to a range of $5.00 to $5.15 announced previously.
For fiscal 2012, the company expects cost reduction of $250 million, up from its previous target $150 to $200 million.
The company raised its full-year 2012 share repurchase target to $1.3 billion compared with its previous plan of $900 million to $1.1 billion.
Kimberly-Clark, which competes with Procter & Gamble Co. (PG), currently holds a Zacks #3 Rank (a short-term Hold rating). Over the long term, we provide a Neutral recommendation on the stock.