Kimberly-Clark Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark reported results for the three and nine months ended September 30, 2020. Its principal segments are Personal Care, Consumer Tissue and K-C Professional. The company continued to experience COVID-19-related demand volatility, including elevated consumer tissue demand and materially weaker away-from-home demand in K-C Professional.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $4,683 million | $4,640 million | $14,304 million | $13,867 million |
| Gross profit | $1,590 million | $1,555 million | $5,158 million | $4,469 million |
| Operating profit | $666 million | $915 million | $2,495 million | $2,240 million |
| Net income attributable to Kimberly-Clark | $472 million | $671 million | $1,813 million | $1,610 million |
| Diluted EPS | $1.38 | $1.94 | $5.30 | $4.65 |
| Cash provided by operations | Not separately provided | Not separately provided | $2,842 million | $1,812 million |
Calculated Q3 gross margin was approximately 33.9%, operating margin 14.2% and net margin attributable to Kimberly-Clark 10.1%. For the first nine months, the corresponding margins were approximately 36.1%, 17.4% and 12.7%.
- Q3 adjusted operating profit was $806 million versus $859 million in the prior-year quarter; adjusted diluted EPS was $1.72 versus $1.84.
- Cash and cash equivalents were $1,518 million at September 30, 2020, compared with $442 million at December 31, 2019.
- Total debt was approximately $8.4 billion at September 30, 2020, compared with $7.7 billion at year-end 2019. Debt payable within one year was $517 million and long-term debt was $7,851 million.
- The company had unused revolving credit facilities of $2.0 billion expiring in June 2023 and $750 million expiring in June 2021.
- Capital spending was $894 million through nine months. Management expected full-year capital spending of $1.2 billion to $1.3 billion and full-year share repurchases of approximately $700 million.
Material changes versus the prior comparable period
- Q3 sales increased 1%; organic sales increased 3%, including 2% volume growth, while currency reduced sales by 2%.
- Q3 operating profit declined 27% and reported diluted EPS declined 29%, primarily reflecting restructuring charges, the absence of the prior-year restructuring-related facility-sale gain, higher advertising and general and administrative spending, COVID-19-related manufacturing costs and foreign currency effects.
- Q3 Consumer Tissue sales increased 9% and operating profit increased 20%, supported by higher at-home demand and cost savings.
- Q3 Personal Care sales increased 1%, while operating profit declined 1%.
- Q3 K-C Professional sales declined 16% and operating profit declined 51%, reflecting reduced away-from-home demand related to COVID-19.
- For the first nine months, sales increased 3%, operating profit increased 11%, net income attributable to Kimberly-Clark increased 13% and diluted EPS increased 14%.
- Operating cash flow increased by $1.0 billion year over year, driven by higher earnings and improved working capital.
Guidance, outlook, risks and unusual items
- The 2018 Global Restructuring Program is expected to be completed in 2021, with total pre-tax charges toward the high end of $1.7 billion to $1.9 billion and cash costs of $900 million to $1.0 billion. Annual pre-tax savings are expected to reach $500 million to $550 million, targeted by the end of 2021, although full realization could extend into 2022.
- Restructuring charges attributable to Kimberly-Clark were $107 million in Q3 2020 and $253 million for the first nine months. Cumulative pre-tax charges through September 30, 2020 were $1.7 billion.
- On October 1, 2020, the company acquired Softex Indonesia for approximately $1.2 billion in cash. Financing included cash, commercial paper and a $600 million bond. Softex generated approximately $420 million of 2019 sales and will be consolidated beginning in Q4 2020.
- Management stated that COVID-19 could continue to cause demand volatility, employee absences, temporary facility closures, foreign exchange volatility and commodity-price uncertainty. The duration and ultimate economic impact of the pandemic could not be reasonably estimated.
- The IRS is auditing the 2017 federal tax return and has proposed an adjustment that would increase the transition tax. Management believes reserves are adequate and intends to contest the proposal.
- Legal developments were favorable during the quarter: a Ninth Circuit decision vacated compensatory and punitive damages and decertified a class in a former health care business matter; the related shareholder derivative suit and securities class action were also dismissed.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting.
Investor verification priorities
- Verify whether elevated Consumer Tissue demand persists or normalizes as consumer inventories and mobility patterns change.
- Monitor recovery in K-C Professional and the effect of continued away-from-home demand weakness.
- Assess execution, timing and remaining costs of the 2018 restructuring program and realization of its targeted savings.
- Evaluate Softex Indonesia integration, purchase-price allocation, incremental debt and expected contribution to Personal Care results.
- Review debt maturity, refinancing and commercial-paper exposure following the acquisition financing.
- Track COVID-19 effects on volumes, manufacturing costs, employee availability, foreign exchange and raw-material prices.
- Follow the IRS transition-tax audit and any change in reserves or potential cash tax exposure.