Kimberly-Clark Corporation 2013 Q3 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation, a global manufacturer and marketer of personal care, consumer tissue, professional, and health care products, reported unaudited results for the three and nine months ended September 30, 2013. Comparisons are with the corresponding 2012 periods. Dollar amounts are in millions except per-share data.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Change | 9M 2013 | 9M 2012 | Change |
|---|---|---|---|---|---|---|
| Net sales | $5,262 | $5,246 | +0.3% | $15,847 | $15,756 | +0.6% |
| Gross profit | $1,805 | $1,766 | +2.2% | $5,427 | $5,225 | +3.9% |
| Gross margin | 34.3% | 33.7% | +0.6 pts | 34.3% | 33.2% | +1.1 pts |
| Operating profit | $807 | $783 | +3.1% | $2,386 | $2,237 | +6.7% |
| Operating margin | 15.3% | 14.9% | +0.4 pts | 15.1% | 14.2% | +0.9 pts |
| Net income attributable to Kimberly-Clark | $546 | $517 | +5.6% | $1,603 | $1,483 | +8.1% |
| Diluted EPS | $1.42 | $1.30 | +9.2% | $4.13 | $3.73 | +10.7% |
| Cash dividends declared per share | $0.81 | $0.74 | +9.5% | $2.43 | $2.22 | +9.5% |
Q3 net income was $565, including $19 attributable to noncontrolling interests. The effective tax rate was 30.3% in Q3 2013 versus 31.1% in Q3 2012; the nine-month rate was 31.3% versus 30.5%.
- Cash provided by operations was $2,095 for the first nine months, compared with $2,169 in 2012.
- Capital spending was $697, down from $763 in the prior-year period.
- Cash used in investing activities was $590; cash used in financing activities was $1,353.
- Ending cash and cash equivalents were $1,179, compared with $1,106 at December 31, 2012.
- Total debt and redeemable securities were approximately $7.0 billion at September 30, 2013, versus $6.7 billion at year-end 2012. Balance-sheet debt included $1,087 of debt payable within one year and $5,388 of long-term debt.
- The company maintained an unused $1.5 billion revolving credit facility, expiring in October 2016, with an option to increase it by $500.
- Working capital increased modestly, with total current assets of $6,894 and current liabilities of $5,780 at September 30, 2013.
Material changes versus the prior comparable period
- Sales growth was limited by unfavorable currency effects and lost sales associated with European strategic changes and prior pulp and tissue restructuring actions. Organic volume increased 3% and net selling prices increased 1% in Q3.
- Operating profit benefited from volume growth and $70 of FORCE cost savings in Q3, while input costs increased $55 and currency translation reduced operating profit by $25.
- For the first nine months, FORCE cost savings totaled $235, while input costs were $120 higher and currency translation reduced operating profit by $45.
- Personal Care Q3 sales declined 1.3% and operating profit declined 2.1%; Consumer Tissue sales increased 1.3% and operating profit increased 7.9%; K-C Professional sales increased 2.6% and operating profit increased 7.6%; Health Care sales increased 1.8% and operating profit increased 18.6%.
- The company repurchased 10.0 million shares for $950 during the first nine months and planned approximately $1.2 billion of 2013 repurchases, subject to market conditions. Q3 repurchases totaled 1.553 million shares.
- Average diluted shares declined to 388.0 million for the first nine months from 397.1 million, supporting EPS growth.
- Other comprehensive income attributable to Kimberly-Clark was a loss of $294 for the first nine months, primarily reflecting a $386 currency translation loss, compared with comprehensive income of $1,549 in the prior-year period.
Guidance, outlook, risks, contingencies, and unusual items
- Management maintained its expectation for 2013 organic volume, price, and mix growth in the 3% to 5% target range, led by Kimberly-Clark International.
- Full-year 2013 capital spending was expected toward the low end of the previously communicated $1.0 billion to $1.1 billion range.
- Management expected cost savings to offset anticipated unfavorable currency rates and moderate commodity-cost inflation.
- European strategic changes, including exiting most of the regional diaper category and divesting or closing lower-margin businesses, generated $14 of pretax charges in Q3 and $67 for the first nine months. Cumulative pretax charges through September 30 were $366, with completion expected by December 31, 2014.
- The European program was expected to produce total pretax charges at the high end of $350 to $400, with cash costs toward the low end of 50% to 60% of charges.
- A February 2013 Venezuelan bolivar devaluation resulted in a $36 pretax, $26 after-tax, noncash remeasurement charge. Venezuela represented approximately 2% of consolidated sales.
- The company expects approximately $200 of pension contributions for full-year 2013; $175 had been contributed through September 30.
- Management stated that operating cash flow and debt capacity were adequate to fund working capital, capital spending, dividends, pension contributions, and other foreseeable needs.
- Key risks include foreign exchange volatility, raw-material and energy costs, competitive pricing and promotions, customer actions, economic and political conditions, execution of restructuring programs, and the realization of projected cost savings and volume growth.
- Management stated that pending legal, environmental, and regulatory matters were not expected to have a material adverse effect, individually or in the aggregate. The filing text does not provide a clear quantified aggregate exposure.
- Goodwill impairment testing was moved prospectively to the beginning of the third quarter; no goodwill impairment was identified.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2013, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic volume, pricing, and mix growth reaches the 3% to 5% 2013 target despite currency and commodity-cost pressures.
- The pace and final cost of the European strategic changes, including asset sales, facility closures, cash payments, and lost sales.
- Whether FORCE savings and other productivity actions continue to offset input-cost inflation and unfavorable currency translation.
- Debt maturities, refinancing requirements, commercial-paper usage, and the effect of higher total debt and redeemable securities on liquidity.
- The sustainability of cash flow after dividends, share repurchases, capital expenditures, restructuring payments, and pension contributions.
- Exposure to Venezuela, including currency controls, further devaluation risk, and the value of the company’s Venezuelan net monetary assets and net investment.
- The effect of share repurchases and dividend growth on capital allocation, leverage, and future per-share earnings.