Kimberly-Clark Corporation: 2014 Q3 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company operates through Personal Care, Consumer Tissue, K-C Professional and Health Care segments. Amounts are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $5,442 | $5,262 | $16,063 | $15,847 |
| Gross profit | $1,901 | $1,805 | $5,535 | $5,427 |
| Operating profit | $907 | $807 | $2,494 | $2,386 |
| Net income attributable to Kimberly-Clark | $562 | $546 | $1,609 | $1,603 |
| Diluted EPS | $1.50 | $1.42 | $4.25 | $4.13 |
| Cash dividends declared per share | $0.84 | $0.81 | $2.52 | $2.43 |
- Q3 sales increased 3.4%, operating profit increased 12.4% and diluted EPS increased 5.6%. Nine-month sales increased 1.4%, operating profit increased 4.5% and diluted EPS increased 2.9%.
- Calculated Q3 gross margin was approximately 34.9% versus 34.3% in the prior year; operating margin was approximately 16.7% versus 15.3%; and net income attributable margin was approximately 10.3% versus 10.4%.
- Calculated nine-month gross margin was approximately 34.5% versus 34.2%; operating margin was approximately 15.5% versus 15.1%; and net income attributable margin was approximately 10.0% versus 10.1%.
- Cash provided by operations was $2,255 for the first nine months, versus $2,095 in 2013. Capital spending was $730 versus $697.
- Cash and cash equivalents were $1,431 at September 30, 2014, compared with $1,054 at December 31, 2013.
- Total debt and redeemable securities were approximately $7.0 billion at September 30, 2014, versus $6.3 billion at year-end 2013. Balance-sheet debt included $773 of debt payable within one year and $5,633 of long-term debt.
- The company had a currently unused $2.0 billion revolving credit facility expiring in 2019. Short-term debt was $213 at September 30, with an average third-quarter month-end balance of $358.
- The company repurchased 10.3 million shares for $1.1 billion during the first nine months and paid $942 in cash dividends.
Material changes versus the prior comparable period
- Q3 operating profit benefited from organic volume growth, higher pricing and $100 of FORCE cost savings, partly offset by $55 of higher input costs, including raw materials, fiber and distribution.
- Nine-month operating profit benefited from $245 of FORCE savings and $25 of pulp and tissue restructuring savings, but was reduced by $180 of higher input costs and $45 of unfavorable foreign-currency translation.
- Personal Care Q3 sales rose 3.9% and operating profit rose 13.1%. Consumer Tissue sales rose 4.4% and operating profit rose 22.3%. K-C Professional sales rose 3.6% and operating profit rose 6.5%. Health Care sales declined 2.7% and operating profit declined 25.7%.
- Q3 results included $40 of pre-tax health care spin-off transaction and related costs, while the prior-year quarter included $14 of European strategic-change costs versus $1 in 2014. Total after-tax charges related to the health care spin-off and related matters were $41 in Q3 and $94 for the first nine months.
- The effective tax rate increased to 34.5% in Q3 from 30.3% and to 32.7% for the first nine months from 31.3%, primarily due to tax matters associated with preparation for the health care spin-off.
- Share of net income from equity companies declined to $31 in Q3 from $49 and to $114 for the first nine months from $157.
- Other comprehensive income was a loss of $453 in Q3 and $275 for the first nine months, primarily reflecting unfavorable currency translation. The company attributed the year-to-date translation loss primarily to the stronger U.S. dollar against the euro, Russian ruble, Australian dollar and other currencies.
Guidance, outlook, risks and unusual items
- Kimberly-Clark expected 2014 combined organic volume, net selling price and product-mix growth of 3% to 5%, with growth led by K-C International.
- Management expected foreign currency to reduce sales by 2% to 3%, and European strategic changes and pulp and tissue restructuring actions to reduce sales by approximately 1%.
- Planned 2014 cost savings were at least $300. Commodity cost inflation was expected toward the high end of the previously communicated $150 to $250 range. Advertising and research and development spending were expected to increase faster than sales.
- Full-year 2014 capital spending was expected toward the low end of the $1.0 billion to $1.2 billion target range; share repurchases were expected to total approximately $2.0 billion; and pension contributions were expected to be approximately $200.
- The Halyard Health spin-off was expected to be completed on October 31, 2014, subject to market, regulatory and other conditions, at a distribution ratio of one Halyard share for every eight Kimberly-Clark shares. Halyard was expected to distribute excess cash to Kimberly-Clark, with proceeds intended for share repurchases. The health care business was to be presented as discontinued operations after the spin-off.
- An organization restructuring plan initiated in October 2014 was expected to generate $190 to $230 of pre-tax costs, or $130 to $160 after tax, through 2016. Approximately 1,100 to 1,300 salaried positions were expected to be affected, with $85 to $105 of after-tax charges anticipated in Q4 2014. Cumulative pre-tax savings were expected to reach $120 to $140 by the end of 2017.
- European strategic changes were expected to be completed by December 31, 2014. Total after-tax charges were expected to be $300 to $350, with pre-tax charges slightly above $400 and cash costs representing approximately 50% to 55% of total charges.
- In Venezuela, the company continued to use an exchange rate of 6.3 bolivars per U.S. dollar. Limited government approvals for raw-material imports could force Kimberly-Clark to curtail some or all local manufacturing. Venezuelan net monetary assets were $435 and net investment was $572 at September 30, both valued at that rate.
- The company recorded a $39 charge during the first nine months related to an adverse court ruling concerning capital contributions to a majority-owned Middle East affiliate. Management stated that outstanding legal, environmental and other matters were not expected to have a material adverse effect, individually or in aggregate.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2014, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Completion of the Halyard spin-off, the final cash distribution to Kimberly-Clark and the accounting presentation of discontinued operations.
- The timing and ultimate cost of the 2014 organization restructuring, including workforce reductions and expected savings.
- Whether planned cost savings offset commodity inflation, foreign-exchange pressure and stranded overhead costs after the spin-off.
- Liquidity and leverage after the spin-off-related cash distribution, planned share repurchases and additional debt issuance or repayment.
- Venezuelan access to foreign currency and raw-material imports, including potential effects on manufacturing, asset values and cash repatriation.
- Health Care segment pricing and profitability trends before the spin-off, and the effect of removing allocated overhead costs from continuing operations.
- The impact of foreign exchange, raw-material costs, competitive pricing and customer trade actions on the company’s forward-looking outlook.