Kimberly-Clark Corporation — Q3 2017 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited consolidated results for the three and nine months ended September 30, 2017. Its principal reportable segments are Personal Care, Consumer Tissue and K-C Professional. The company sells branded personal care, tissue and workplace products globally.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $4,640 million | $4,594 million | $13,677 million | $13,658 million |
| Operating profit | $854 million | $836 million | $2,487 million | $2,478 million |
| Net income attributable to Kimberly-Clark | $567 million | $550 million | $1,661 million | $1,661 million |
| Diluted EPS | $1.60 | $1.52 | $4.66 | $4.58 |
| Cash dividends declared per share | $0.97 | $0.92 | $2.91 | $2.76 |
- Q3 sales increased 1%, while operating profit increased 2%, net income attributable to Kimberly-Clark increased 3% and diluted EPS increased 5%.
- Q3 gross margin was approximately 35.8%, compared with 36.3% in the prior-year quarter. Operating margin was approximately 18.4%, compared with 18.2%; net income attributable margin was approximately 12.2%, compared with 12.0%.
- For the first nine months, sales were essentially flat, operating profit was essentially flat, and diluted EPS increased 2%. Nine-month gross margin was approximately 36.2%, compared with 36.4% in 2016; operating margin was approximately 18.2%, compared with 18.1%.
- Q3 segment sales and operating profit were: Personal Care $2,284 million and $476 million; Consumer Tissue $1,518 million and $260 million; and K-C Professional $827 million and $173 million.
- Q3 segment operating profit changes were Personal Care +4%, Consumer Tissue -3% and K-C Professional +10%. Nine-month changes were +5%, -6% and +5%, respectively.
- Cash provided by operations was $2,066 million for the first nine months, down from $2,361 million, primarily because of higher tax payments and unfavorable operating working capital.
- Capital spending was $595 million, compared with $582 million. Cash used for investing was $677 million, and cash used for financing was $1,680 million.
- Cash and cash equivalents declined to $655 million at September 30, 2017, from $923 million at December 31, 2016.
- Total debt was approximately $7.6 billion at both September 30, 2017 and December 31, 2016. Balance-sheet debt included $589 million payable within one year and $7,057 million of long-term debt. The fair value of long-term debt, including current maturities, was $7,876 million.
- The company had an unused $2.0 billion revolving credit facility expiring in 2021. Short-term debt was $282 million at September 30, 2017; the average Q3 month-end balance was $517 million.
- The company repurchased 6.3 million shares for $800 million during the first nine months and paid $1,017 million of cash dividends.
Material changes versus the prior comparable period
- Q3 sales benefited from nearly 1% foreign-currency translation and slightly higher organic sales. Volume growth exceeded 1%, while net selling prices reduced sales by 1%.
- Q3 operating profit benefited from volume growth, $125 million of FORCE cost savings and lower marketing, research and general expenses. These benefits were partly offset by lower prices and approximately $115 million of higher input costs, primarily pulp and other raw materials.
- For the first nine months, FORCE savings totaled $355 million, while higher input costs reduced results by approximately $220 million. Net selling prices reduced sales by 1%, and volume increased approximately 1%.
- Consumer Tissue profitability declined despite higher sales, primarily because of input-cost inflation, lower net selling prices and unfavorable mix. Personal Care profitability increased despite lower Q3 sales, supported by cost savings and lower expenses. K-C Professional delivered both sales and profit growth.
- The Q3 effective tax rate declined to 28.8% from 30.0%; the nine-month rate declined to 28.2% from 28.9%, benefiting from tax planning initiatives, resolution of certain tax matters and, in 2017, adoption of ASU 2016-09.
- Share of net income from equity companies declined to $24 million in Q3 from $33 million and to $79 million for the nine months from $103 million, primarily reflecting weaker K-C de Mexico results.
- September 2017 financing included €500 million of 0.625% notes due September 2024 and $350 million of 3.90% notes due May 2047. Proceeds were used partly to repay commercial paper.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2017 EPS at the low end of its $6.20–$6.35 target range. Net sales and organic sales were expected to be similar to, or slightly above, 2016.
- Management expected commodity-cost inflation to be slightly above the previous $200–$300 million estimate, FORCE savings of $425–$450 million, and an effective tax rate slightly below 2016.
- Management expected equity-company income to decline because of lower K-C de Mexico income, input-cost inflation and a weaker Mexican peso.
- Full-year 2017 capital spending was expected to be slightly below the $850–$950 million target range. Full-year share repurchases were targeted at $900 million, subject to market conditions.
- Key risks include raw-material prices and availability, competitive pricing pressure, foreign-exchange volatility, energy costs, retail customer actions, global economic and political conditions, Argentina’s currency and inflation environment, potential U.S. tax reform and Brexit-related policy changes.
- Goodwill impairment testing was completed using qualitative assessments; management concluded that the fair value of each reporting unit was more likely than not above carrying value. No impairment charge was reported.
- The company adopted ASU 2016-09 and early adopted ASU 2016-15 without material impact. It planned to adopt new guidance on benefit-cost presentation, intra-entity asset transfers and revenue recognition; management did not expect a material impact from revenue recognition or intra-entity transfer guidance, while the effects of lease and hedging standards were not yet known.
- Management stated that operating cash generation and debt capacity were adequate for foreseeable working capital, capital spending, dividends, pension contributions and other needs. Disclosure controls and procedures were deemed effective as of September 30, 2017.
Investor verification checklist
- Verify whether commodity inflation, particularly pulp and other raw materials, exceeded management’s revised assumptions and whether pricing actions offset the pressure.
- Assess the sustainability of FORCE savings and whether they compensate for input-cost inflation and lower net selling prices.
- Monitor Personal Care volume trends, especially infant and child care, feminine care and South Korean operations.
- Review Consumer Tissue margin recovery and K-C Professional growth against the company’s outlook.
- Reconcile operating cash flow, working-capital movements and tax payments with the company’s liquidity assumptions.
- Track debt maturities, commercial-paper usage, interest costs and available revolver capacity.
- Evaluate foreign-currency, Argentina, Mexico, tax-policy and Brexit exposures, along with the potential effects of pending accounting standards.