Kimberly-Clark Corp. (NYSE:KMB) on Tuesday reported first-quarter sales of $4.7 billion, a 4% decrease from the prior year, which management attributed primarily to currency fluctuations. Net income declined to $468 million from $538 million in 2014. Earnings per share improved a penny to $1.28 after excluding prior-year earnings from the company's healthcare division, which was spun off in October 2014. The manufacturer of global tissue and personal care brands such as Kleenex, Scott, Depend, and Huggies affirmed its yearlong outlook, however, and still expects to earn between $5.60 and $5.80 per share on an adjusted basis.
Currency headwinds pressure sales and earnings
Kimberly-Clark won't be the last U.S. corporation this earnings season to blame currency fluctuations for its results.The company derives more than half its revenue and earnings outside North America. Foreign currency exchange rate fluctuations reduced sales by 9%, according to the company's earnings release. Organic sales, though, increased by 5%.
Like other multinational consumer goods companies, Kimberly-Clark has taken a beating in Venezuela as of late. The nation's highly inflationary economy has exacerbated dollar strength. After earnings charges of $462 million last year, KMB reported another $45 million charge in the first quarter to remeasure its balance sheet assets in the country. Today's earnings release indicated fluctuations in the Venezuelan bolivar this year will single-handedly decrease company revenue by 3% and adjusted operating profit by 4%.
Equity income weakness
The resurgent greenback also cut into Kimberly-Clark's equity income, that is, the income it derives from partially owned subsidiaries. The primary driver of this income, Kimberly-Clark de Mexico, posted softer results due to a declining Mexican peso, as well as raw materials cost inflation. Overall, the company's equity income decreased from $43 million in first-quarter 2014 to $36 million this past quarter. Equity income has played an increasing role over the past few years in KMB's quarterly results, often equaling 8% to 10% of the net income the corporation generates through its primary operations.
Cost-cutting in "FORCE"
Though Kimberly-Clark's revenue declined 4% year over year, the company kept net income within range of the prior-year quarter on a percentage basis. KMB posted a 10% profit margin this quarter, versus 11% in first-quarter 2014, an impressive performance, clinched primarily through savings wrung out of the company's ongoing FORCE ("Focused On Reducing Costs Everywhere") program.
While the acronym might be a bit corny, the company takes this initiative quite seriously: In the first quarter, FORCE delivered $90 million in cost savings to the bottom line. Kimberly-Clark also found relief in lower fuel costs and a slight decline in commodity inputs to its manufacturing process, for another $10 million in savings. A restructuring program launched in October 2014 added $10 million more to the company's profit.
Kimberly-Clark's continued ability to pull cost savings out of its operations might be the most significant highlight of today's report. The $90 million of FORCE savings equates to 12% of the quarter's operating profit of $748 million. Without this productivity program, profit margin would have only reached 8%.
Tactically, management understands it can't do much about the direction of global currencies, in particular the greenback, which has surged more than 23% against a basket of major currencies in the last 12 months. But it can hone its operations and find manufacturing productivity enhancements in the meantime, so when the dollar finally retracts, the company will (theoretically) enjoy something of a boomerang effect on its profits.
Thus, while each of KMB's major segments -- personal care, consumer tissue, and K-C Professional -- endured revenue declines during the quarter, operating losses were held to less than 1% in both personal care and K-C Professional, while the consumer tissue segment realized a 13.2% increase in operating profit.
Checking in on Kimberly-Clark's balance sheet
While there were no overwhelming changes during the quarter to the company's resources, investors should nonetheless note a few developments on the balance sheet. First, due to higher pension contributions, working capital adjustments, and the impact of the healthcare division spinoff, KMB produced cash flow from operations of only $20 million during the quarter. As a result, balance sheet cash declined from $789 million in the last measurement period (December 2014) to $587 million at the end of March.
Despite flat cash flow, Kimberly-Clark still repurchased $248 million worth of shares during the quarter, paid out $310 million in dividends, and incurred $284 million of capital investment expenditures. These activities were financed through a $291 million increase in short-term debt and long-term debt issuance of $497 million.
These changes follow a yearlong trend that investors might want to monitor. Cash and cash equivalents of $587 million at the end of first-quarter 2015 were roughly half of the $1.17 billion the company had on hand at the end of the same quarter last year. While it's important to put cash to use, it's likely time for Kimberly-Clark to replenish its coffers just a bit over the next couple quarters.