Introduction
This management's discussion and analysis ("MD&A") of financial condition and results of operations is intended to provide investors with an understanding of our recent performance, financial condition and prospects. The following will be discussed and analyzed: •Overview of First Quarter 2020 Results •Impact of COVID-19 •Results of Operations and Related Information •Liquidity and Capital Resources •Information Concerning Forward-Looking Statements We describe our business outsideNorth America in two groups - Developing and Emerging Markets ("D&E") and Developed Markets. D&E markets compriseEastern Europe , theMiddle East andAfrica ,Latin America andAsia-Pacific , excludingAustralia andSouth Korea . Developed Markets consist of Western andCentral Europe ,Australia andSouth Korea . We have three reportable business segments: Personal Care, Consumer Tissue and K-C Professional. These business segments are described in greater detail in Note 7 to the unaudited interim consolidated financial statements. This section presents a discussion and analysis of our first quarter 2020 net sales, operating profit and other information relevant to an understanding of the results of operations. In addition, we provide commentary regarding organic sales growth, which describes the impact of changes in volume, net selling prices and product mix on net sales. Change in foreign currency exchange rates and exited businesses also impact the year-over-year change in net sales. Our analysis compares the three months endedMarch 31, 2020 results to the same period in 2019. Throughout this MD&A, we refer to financial measures that have not been calculated in accordance with accounting principles generally accepted in theU.S. , or GAAP, and are therefore referred to as non-GAAP financial measures. These measures include adjusted gross and operating profit, adjusted net income, adjusted earnings per share, adjusted other (income) and expense, net and adjusted effective tax rate. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight into some of the financial measures used to evaluate management. Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measures, and they should be read only in conjunction with our unaudited interim consolidated financial statements prepared in accordance with GAAP. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation and items being excluded. We compensate for these limitations by using these non-GAAP financial measures as a supplement to the GAAP measures and by providing reconciliations of the non-GAAP and comparable GAAP financial measures. The non-GAAP financial measures exclude the following item for the relevant time periods as indicated in the reconciliations included later in this MD&A: •2018 Global Restructuring Program - In 2018, we initiated this restructuring program to reduce our structural cost base by streamlining and simplifying our manufacturing supply chain and overhead organization. See Item 1, Note 2 to the unaudited interim consolidated financial statements for details. Overview of First Quarter 2020 Results •Net sales of$5.0 billion increased 8 percent compared to the year-ago period, including organic sales growth of 11 percent. Changes in foreign currency exchange rates reduced sales by 2 percent and business exits in conjunction with the 2018 Global Restructuring Program reduced sales slightly. •Operating profit was$904 in 2020 and$655 in 2019. Net Income Attributable toKimberly-Clark Corporation was$660 in 2020 compared to$454 in 2019, and diluted earnings per share were$1.92 in 2020 compared to$1.31 in 2019. Results in 2020 and 2019 include charges related to the 2018 Global Restructuring Program. Impact of COVID-19 Over the past few months, we have seen the profound impact that the novel coronavirus (COVID-19) is having on human health, the global economy and society at large. Kimberly-Clark has been actively addressing the COVID-19 situation and its 14 -------------------------------------------------------------------------------- impact globally, with global crisis response teams working to mitigate the potential impacts to our people and business. The impact of COVID-19 and measures to prevent its spread are affecting our business in a number of ways. We continue to believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business and results. Health and Safety of our People and Consumers From the beginning of the COVID-19 pandemic, our priority has been the safety of our employees and consumers. We are incredibly proud of the great teamwork exhibited by our approximately 40,000 employees around the world who are doing their best to provide a steady supply of product. We have taken extra precautions globally at our office, mill and distribution center operations, which were developed in line with guidance from global health authorities, including social distancing, thermal scanning and partitions in our facilities. We have also provided employee appreciation bonuses to front-line workers and expanded certain sick leave policies to provide our employees with additional flexibility. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely. Customer Demand In the first quarter, particularly in March, we experienced increased demand across all business segments and major geographies as consumers increased home inventory levels in response to COVID-19. We expect to see continued strong demand in the beginning of the second quarter in some of our businesses as retailers rebuild inventory levels, which we expect will be followed by periods of potential demand softness and volatility as consumers use existing home inventories and demand potentially returns to more normal levels. The ultimate timing and impact of this demand volatility will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences. The near-term increase in demand has created operational challenges for our distribution network, though none have had a material impact on our results to date. We have taken immediate action to accelerate production, including simplifying the number of specific product offerings we make in order to improve overall production levels, particularly in our Consumer Tissue business. While our K-C Professional business experienced strong demand in the first quarter, we expect volume declines in this business in the near term given the reduction in global business activity with much of the population working from home. We expect these challenges to continue until business and economic conditions return to more normal levels. Facilities and SupplyChain During 2020, we have experienced temporary closures of certain facilities, though we have not experienced a material impact from a plant closure to date and our facilities have largely been exempt or partially exempt from government closure orders. At many of our facilities, we have been experiencing reduced productivity and increased employee absences, which we expect to continue in the current situation. Throughout our supply chain, we are also facing increased operational and logistics costs, though these did not have a material impact on our first quarter results. We continue to place a priority on business continuity and contingency planning, including for potential extended closures of any key facilities or disruptions related to our key suppliers that might arise related to COVID-19. We may experience additional disruptions in our supply chain as the pandemic continues, though we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact. As a result of the outbreak of COVID-19 and the related uncertainty and complexity of the situation, certain of our restructuring activities for our 2018 Global Restructuring Program have been delayed and we now expect these activities and the related charges will extend into 2021 rather than being completed at the end of 2020 as previously planned as further described in the "2018 Global Restructuring Program" section below. Foreign Currency Exchange Rates and Commodity Prices During the first quarter, we experienced increased volatility in foreign currency exchange rates and commodity prices, in part related to the uncertainty from COVID-19, as well as actions taken by governments and central banks in response to COVID-19. Certain foreign currency rates have depreciated significantly against theU.S. dollar this year, with numerous currencies in D&E markets down 20 percent through the first quarter. Commodity prices, including polymer resin and oil, have also declined year-to-date, providing some incremental benefits to our first quarter results. We expect continued volatility in foreign currency exchange rates and commodity prices during 2020, though we cannot reasonably estimate the duration or extent of that volatility. 15 -------------------------------------------------------------------------------- Liquidity and Capital Resources Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment. In the first quarter, we took additional actions to provide additional liquidity and flexibility, as described in "Liquidity and Capital Resources" section below, and we will continue to actively monitor the potential impacts of COVID-19 and related events on the commercial paper and credit markets. As we continue to manage our business in this uncertain environment, our priorities will remain the health and safety of our people, providing our essential products to consumers around the world, and prudently managing our business to deliver long-term growth. Results of Operations and Related Information This section presents a discussion and analysis of our first quarter 2020 net sales, operating profit and other information relevant to an understanding of the results of operations. Consolidated Selected Financial Results
Three Months Ended
Percent 2020 2019 ChangeNet Sales : North America$ 2,601 $ 2,390 +9 % Outside North America 2,484 2,315 +7 % Intergeographic sales (76) (72) N.M. Total Net Sales 5,009 4,633 +8 % Operating Profit: North America 659 572 +15 % Outside North America 414 303 +37 % Corporate & Other(a) (155) (216) N.M. Other (income) and expense, net(a) 14 4 N.M. Total Operating Profit 904 655 +38 % Share of net income of equity companies 38 27 +41 % Net Income Attributable to Kimberly-Clark Corporation 660 454 +45 % Diluted Earnings per Share 1.92 1.31 +47 % (a) Corporate & Other and Other (income) and expense, net include income and expense not associated with the business segments, including adjustments as indicated in the Non-GAAP Reconciliations. N.M. - Not Meaningful GAAP to Non-GAAP Reconciliations of Selected Financial Results
Three Months Ended
2018 Global As As Restructuring Adjusted Reported Program Non-GAAP Cost of products sold$ 3,218 $ 70 $ 3,148 Gross Profit 1,791 (70) 1,861 Marketing, research and general expenses 873 23 850 Operating Profit 904 (93) 997 Provision for income taxes (197) 18 (215) Effective tax rate 23.6 % - 23.2 % Net income attributable to noncontrolling interests (15) 1 (16) Net Income Attributable to Kimberly-Clark Corporation 660 (74) 734 Diluted Earnings per Share(a) 1.92 (0.22) 2.13 16
-------------------------------------------------------------------------------- Three Months Ended March 31, 2019 2018 Global As As Restructuring Adjusted Reported Program Non-GAAP Cost of products sold 3,205 125 3,080 Gross Profit 1,428 (125) 1,553 Marketing, research and general expenses 769 28 741 Other (income) and expense, net 4 (1) 5 Operating Profit 655 (152) 807 Provision for income taxes (143) 31 (174) Effective tax rate 24.6 % - 23.7 % Share of net income of equity companies 27 (2) 29 Net income attributable to noncontrolling interests (12) 1 (13) Net Income Attributable to Kimberly-Clark Corporation 454 (122) 576 Diluted Earnings per Share(a) 1.31 (0.35) 1.66
(a) "As Adjusted Non-GAAP" may not equal "As Reported" plus "Adjustments" as a result of rounding.
Analysis of Consolidated Results
Percent Change Percent Change For the Three For the Three Months Ended Months Ended Net Sales March 31, 2020 Adjusted Operating Profit March 31, 2020 Volume 8 Volume 18 Net Price 1 Net Price 6 Mix/Other 1 Input Costs 14 Currency (2) Cost Savings(c) 16 Total(a) 8 Currency Translation (2) Other(d) (28) Organic(b) 11 Total 24 (a) Total may not equal the sum of volume, net price, mix/other and currency due to rounding. (b) Combined impact of changes in volume, net price and mix/other. (c) Combined benefits of the FORCE (Focused On Reducing Costs Everywhere) program and 2018 Global Restructuring Program. (d) Includes impact of changes in product mix, marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs. Net sales of$5.0 billion increased 8 percent compared to the year-ago period. Changes in foreign currency exchange rates reduced sales by 2 percent and business exits in conjunction with the 2018 Global Restructuring Program reduced sales slightly. Organic sales increased 11 percent. Volumes increased more than 8 percent, driven by increased shipments to support consumer stock up related to the global outbreak of COVID-19. The stock up impacted all business segments, in particular consumer tissue, and all major geographies. Changes in net selling prices and product mix each improved sales by 1 percent. InNorth America , organic sales increased 11 percent in consumer products and 6 percent in K-C Professional.Outside North America , organic sales rose 9 percent in D&E markets and 15 percent in developed markets. Operating profit in the first quarter was$904 in 2020 and$655 in 2019. Results in both periods include charges related to the 2018 Global Restructuring Program. First quarter adjusted operating profit was$997 in 2020 and$807 in 2019. Results benefited from organic sales growth,$100 of cost savings from our FORCE program and$25 of cost savings from the 2018 Global Restructuring Program. Input costs decreased$115 , driven by pulp, while other manufacturing costs rose year-on-year. Advertising spending increased and selling, general and administrative costs were also higher compared to the prior year. Foreign currency translation effects reduced operating profit by$15 and transaction effects also negatively impacted the comparison. The first quarter effective tax rate was 23.6 percent in 2020 and 24.6 percent in 2019. The first quarter adjusted effective tax rate was 23.2 percent in 2020 and 23.7 percent in 2019. 17 -------------------------------------------------------------------------------- Our share of net income of equity companies in the first quarter was$38 in 2020 and$27 in 2019. The improvement was driven by volume growth and lower input costs. Diluted net income per share for the first quarter of 2020 was$1.92 in 2020 and$1.31 in 2019. First quarter adjusted earnings per share were$2.13 in 2020, an increase of 28 percent compared to$1.66 in 2019. Results by Business Segments Personal Care Three Months Ended March Three Months Ended March 31 31 2020 2019 2020 2019 Net Sales$ 2,422 $ 2,275 Operating Profit$ 527 $ 484 Net Sales Percent Change Operating Profit Percent Change Volume 7 Volume 14 Net Price 1 Net Price 4 Mix/Other 2 Input Costs 3 Currency (3) Cost Savings(c) 13 Total(a) 6 Currency Translation (2) Other(d) (23) Organic(b) 9 Total 9 (a) Total may not equal the sum of volume, net price, mix/other and currency due to rounding. (b) Combined impact of changes in volume, net price and mix/other. (c) Combined benefits of the FORCE program and 2018 Global Restructuring Program. (d) Includes impact of changes in product mix, marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs. Net sales inNorth America increased 10 percent. Volumes increased 7 percent, and changes in product mix and net selling prices increased sales by 2 percent and 1 percent, respectively. Volumes increased double-digits in adult care, high-single digits in feminine care and mid-single digits in baby and child care. The changes in product mix and net selling prices were driven by baby and child care. Net sales in D&E markets increased 3 percent despite a 6 percent negative impact from changes in foreign currency exchange rates. Volumes increased 6 percent, and changes in product mix and net selling prices increased sales by 3 percent and 1 percent, respectively. Volumes increased inAsia-Pacific ,Eastern Europe , theMiddle East andSouth Africa . Net sales in developed markets outsideNorth America . increased 5 percent despite a 5 percent negative impact from changes in foreign currency exchange rates. Volumes increased 8 percent, driven byAustralia and Western/Central Europe , and changes in net selling prices and product mix each increased sales by 1 percent. Operating profit of$527 increased 9 percent. The comparison benefited from organic sales growth, cost savings and lower input costs. Results were impacted by higher advertising spending, increased selling, general and administrative costs, other manufacturing cost increases and unfavorable currency effects. 18 -------------------------------------------------------------------------------- Consumer Tissue Three Months Ended March Three Months Ended March 31 31 2020 2019 2020 2019 Net Sales$ 1,723 $ 1,526 Operating Profit$ 365 $ 241 Net Sales Percent Change Operating Profit Percent Change Volume 14 Volume 26 Net Price 1 Net Price 6 Mix/Other - Input Costs 32 Currency (2) Cost Savings(c) 19 Total(a) 13 Currency Translation (1) Other(d) (31) Organic(b) 14 Total 51 (a) Total may not equal the sum of volume, net price, mix/other and currency due to rounding. (b) Combined impact of changes in volume, net price and mix/other. (c) Combined benefits of the FORCE program and 2018 Global Restructuring Program. (d) Includes impact of changes in marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs. Net sales inNorth America increased 12 percent. Volumes rose 10 percent and changes in net selling prices increased sales by 3 percent, while changes in product mix decreased sales by 1 percent. The volume increase included double-digit gains on bathroom tissue and facial tissue driven by increased shipments to support consumer stock up related to the global outbreak of COVID-19. Net sales in D&E markets increased 10 percent despite a 3 percent negative impact from changes in foreign currency exchange rates. Volumes increased 12 percent and changes in product mix increased sales by 2 percent, while changes in net selling prices decreased sales by 1 percent. Volumes increased in all major geographies driven by increased shipments to support consumer stock up related to the global outbreak of COVID-19. Net sales in developed markets outsideNorth America increased 17 percent. Volumes rose 21 percent, with significant increases in all markets, driven by increased shipments to support consumer stock up related to the global outbreak of COVID-19. Changes in product mix increased sales by 1 percent. Changes in foreign currency exchange rates and net selling prices decreased sales by 4 percent and 1 percent, respectively. Operating profit of$365 increased 51 percent. Results benefited from organic sales growth, lower input costs and cost savings. The comparison was impacted by other manufacturing cost increases, higher selling, general and administrative costs, increased advertising spending and unfavorable currency effects. 19 -------------------------------------------------------------------------------- K-C Professional Three Months Ended March 31 Three Months Ended March 31 2020 2019 2020 2019 Net Sales$ 848 $ 817 Operating Profit$ 181 $ 150 Net Sales Percent Change Operating Profit
Percent Change Volume 4 Volume 8 Net Price 2 Net Price 9 Mix/Other 1 Input Costs 13 Exited Businesses(e) (1) Cost Savings(c) 12 Currency (2) Currency Translation (2) Total(a) 4 Other(d) (19) Organic(b) 7 Total 21 (a) Total may not equal the sum of volume, net price, mix/other, exited businesses and currency due to rounding. (b) Combined impact of changes in volume, net price and mix/other. (c) Combined benefits of the FORCE program and 2018 Global Restructuring Program. (d) Includes impact of changes in product mix, marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs. (e) Exited businesses in conjunction with the 2018 Global Restructuring Program. Net sales inNorth America increased 5 percent. Volumes increased 4 percent and changes in net selling prices and product mix each increased sales by 1 percent. Business exits in conjunction with the 2018 Global Restructuring Program reduced sales by 1 percent. Net sales in D&E markets increased 2 percent despite a 4 percent negative impact from changes in foreign currency exchange rates. Higher volumes and changes in net selling prices each increased sales by 3 percent, while changes in product mix decreased sales by 1 percent. Net sales in developed markets outsideNorth America increased 5 percent. Changes in product mix increased sales by 4 percent and higher volumes and changes in net selling prices each increased sales by 3 percent, while changes in foreign currency exchange rates were unfavorable by 4 percent. Operating profit of$181 increased 21 percent. Results benefited from organic sales growth, cost savings and lower input costs. The comparison was impacted by higher selling, general and administrative costs and other manufacturing cost increases. 2018 Global Restructuring Program As a result of the outbreak of COVID-19 and the related uncertainty and complexity of the environment, we now expect that some restructuring activity and the related charges will extend into 2021 rather than being completed at the end of 2020 as previously planned. Total restructuring charges to implement the program are expected to be toward the high end of the previously estimated range of$1.7 billion to$1.9 billion pre-tax ($1.3 billion to$1.4 billion after tax). We continue to expect the program will generate annual pre-tax cost savings of$500 to$550 . We continue to target to achieve those savings by the end of 2021, although it is possible the full realization could occur in 2022 because of the uncertainties related to COVID-19. Savings for the first three months of 2020 were$25 , bringing cumulative savings to$325 . See Item 1, Note 2 to the unaudited interim consolidated financial statements for additional information. Liquidity and Capital Resources Cash Provided by Operations Cash provided by operations was$704 for the first three months of 2020 compared to$317 in the prior year. The increase was driven by higher earnings and improved working capital. Investing During the three months endedMarch 31, 2020 , our capital spending was$352 compared to$316 in the prior year. Financing Our short-term debt, which consists ofU.S. commercial paper with original maturities up to 90 days and/or other similar short-term debt issued by non-U.S. subsidiaries, was$0.5 billion as ofMarch 31, 2020 (included in Debt payable within one year on the consolidated balance sheet). The average month-end balance of short-term debt for the first quarter of 2020 was 20 --------------------------------------------------------------------------------$0.7 billion . These short-term borrowings provide supplemental funding for supporting our operations. The level of short-term debt generally fluctuates depending upon the amount of operating cash flows and the timing of customer receipts and payments for items such as dividends and income taxes. AtMarch 31, 2020 andDecember 31, 2019 , total debt was$8.4 billion and$7.7 billion , respectively. InFebruary 2020 , we issued$500 aggregate principal amount of 2.875% notes dueFebruary 7, 2050 . Proceeds from the offering were used for general corporate purposes including the repayment of a portion of our commercial paper indebtedness. InMarch 2020 , we issued$750 aggregate principal amount of 3.10% notes dueMarch 26, 2030 . Proceeds from the offering were used for general corporate purposes including the repayment of a portion of our commercial paper indebtedness. We maintain a$2.0 billion revolving credit facility which expires inJune 2023 and a$750 revolving credit facility which expires inJune 2020 . These facilities, currently unused, support our commercial paper program, and would provide liquidity in the event our access to the commercial paper markets is unavailable for any reason. InJuly 2017 , theUnited Kingdom's Financial Conduct Authority , which regulates the London Interbank Offered Rate (LIBOR), announced that it intends to phase out LIBOR by the end of 2021. We are currently evaluating the potential effect of the eventual replacement of the LIBOR, but we do not expect the effect to be material. Accounting guidance has been recently issued to ease the transition to alternative reference rates from a financial reporting perspective. See Item 1, Note 1 to the unaudited interim consolidated financial statements for details. We repurchase shares of Kimberly-Clark common stock from time to time pursuant to publicly announced share repurchase programs. During the first three months of 2020, we repurchased 1.6 million shares of our common stock at a cost of$224 through a broker in the open market. We are temporarily suspending our share repurchase program effectiveApril 24, 2020 for at least the remainder of the second quarter to enhance flexibility in the current environment. We do not expect any change in our plans for our quarterly dividend, which was increased by 3.9 percent inJanuary 2020 . We will continue to monitor the environment and further assess our share repurchase program later in the year. K-C Argentina began accounting for their operations as highly inflationary effectiveJuly 1, 2018 , as required by GAAP. Under highly inflationary accounting, K-C Argentina's functional currency became theU.S. dollar, and its income statement and balance sheet have been measured inU.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other (income) and expense, net and was not material. As ofMarch 31, 2020 , K-C Argentina had a small net peso monetary position. Net sales of K-CArgentina were approximately 1 percent of our consolidated net sales for the three months endedMarch 31, 2020 . We believe that our ability to generate cash from operations and our capacity to issue short-term and long-term debt are adequate to fund working capital, payments for our 2018 Global Restructuring Program, capital spending, pension contributions, dividends and other needs for the foreseeable future. Further, we do not expect restrictions or taxes on repatriation of cash held outside of theU.S. to have a material effect on our overall business, liquidity, financial condition or results of operations for the foreseeable future. Information Concerning Forward-Looking Statements Certain matters contained in this report concerning the business outlook, including the anticipated cost savings from our FORCE program, costs and savings from the 2018 Global Restructuring Program, cash flow and uses of cash, growth initiatives, innovations, marketing and other spending, net sales, anticipated currency rates and exchange risks, including the impact inArgentina , raw material, energy and other input costs, effective tax rate, contingencies and anticipated transactions of Kimberly-Clark, including dividends, share repurchases and pension contributions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are based upon management's expectations and beliefs concerning future events impacting Kimberly-Clark. There can be no assurance that these future events will occur as anticipated or that our results will be as estimated. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them. The assumptions used as a basis for the forward-looking statements include many estimates that, among other things, depend on the achievement of future cost savings and projected volume increases. In addition, many factors outside our control, including pandemics (including the ongoing COVID-19 outbreak), epidemics, fluctuations in foreign currency exchange rates, the prices and availability of our raw materials, potential competitive pressures on selling prices for our products, energy costs, our ability to maintain key customer relationships and retail trade customer actions, as well as general economic and political conditions globally and in the markets in which we do business, could affect the realization of these estimates. 21 -------------------------------------------------------------------------------- For a description of certain factors that could cause our future results to differ from those expressed in these forward-looking statements, see Item 1A of this report entitled "Risk Factors" and Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 entitled "Risk Factors." Other factors not presently known to us or that we presently consider immaterial could also affect our business operations and financial results. Item 4. Controls and Procedures As ofMarch 31, 2020 , an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as ofMarch 31, 2020 . There were no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 22
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