Kimberly-Clark Corporation — 2011 Q3 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation reported unaudited results for the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Net sales | $5.382 billion | $4.979 billion | +8.1% |
| Operating profit | $662 million | $698 million | -5.2% |
| Net income attributable to Kimberly-Clark | $432 million | $469 million | -7.9% |
| Diluted EPS | $1.09 | $1.14 | -4.4% |
| Cash dividends declared per share | $0.70 | $0.66 | +6.1% |
| Metric | Nine months 2011 | Nine months 2010 |
|---|---|---|
| Net sales | $15.670 billion | $14.671 billion |
| Operating profit | $1.831 billion | $2.074 billion |
| Net income attributable to Kimberly-Clark | $1.190 billion | $1.351 billion |
| Diluted EPS | $2.98 | $3.25 |
| Cash provided by operations | $1.771 billion | $1.796 billion |
Q3 gross margin was approximately 29.5%, versus 32.4% in the prior-year quarter; operating margin was approximately 12.3%, versus 14.0%. For the first nine months, gross margin was approximately 29.4%, versus 33.4%, and operating margin was approximately 11.7%, versus 14.1%.
- Q3 sales growth reflected a 4% currency benefit, a 3% net price benefit and a 1% mix/other benefit; reported volume was flat.
- Q3 operating profit was pressured by approximately $150 million of input-cost inflation, including raw materials, energy, distribution and fiber, and $95 million of pulp and tissue restructuring charges. Cost savings contributed approximately $90 million.
- Cash and cash equivalents were $1.232 billion at September 30, 2011, compared with $876 million at December 31, 2010.
- Total debt and redeemable securities were approximately $7.2 billion at September 30, 2011, compared with $6.5 billion at year-end 2010. Long-term debt was $5.422 billion and debt payable within one year was $758 million on the balance sheet.
- Capital spending was $656 million through nine months, compared with $611 million in 2010. The company expected full-year 2011 capital spending of $950 million to $1.050 billion.
- The company paid $824 million of dividends and repurchased approximately 19 million shares for $1.24 billion through nine months.
Material changes versus the prior comparable period
- All reportable segments increased Q3 sales: Personal Care +9.5%, Consumer Tissue +4.1%, K-C Professional & Other +10.5%, and Health Care +10.9%.
- Personal Care operating profit declined 7.5% because input-cost inflation, lower production volumes and unfavorable mix exceeded sales and cost-savings benefits.
- Consumer Tissue operating profit increased 32.1%, while K-C Professional & Other increased 9.5% and Health Care increased 14.3%.
- For the first nine months, operating profit declined 11.7%. The comparison included $267 million of 2011 restructuring charges and a $32 million nondeductible Colombian business-tax charge, versus a $98 million Venezuelan highly inflationary accounting charge in 2010.
- Net income was also affected by a stronger U.S. dollar. Q3 other comprehensive income attributable to Kimberly-Clark was negative $171 million, principally due to currency translation adjustments.
- Pension contributions were $416 million through nine months, versus $230 million in 2010. Management increased its expected 2011 pension contributions to $680 million–$760 million from $420 million–$500 million and reduced the expected 2011 share repurchase target to approximately $1.24 billion from $1.5 billion.
Guidance, outlook, risks and unusual items
- The pulp and tissue restructuring is expected to be completed by December 31, 2012 and involves streamlining, selling or closing five to six facilities. Cumulative charges are estimated at $400 million–$600 million pretax, with approximately 25%–50% expected to be cash costs. Management expects annual sales to be reduced by $250 million–$300 million by 2013, while operating profit is expected to improve by at least $75 million.
- Of the $267 million of restructuring charges recorded through nine months, $205 million were noncash; $34 million of $62 million of cash charges had been paid.
- Management expected less commodity-cost inflation and less foreign-currency benefit than previously anticipated for 2011 because the commodity environment had improved and the U.S. dollar had strengthened.
- Management continued to emphasize revenue realization, targeted growth, cost savings, overhead control and cash generation.
- Venezuelan operations remained subject to currency controls and highly inflationary accounting. Venezuela represented approximately 1% of consolidated sales; the company reported a $130 million bolivar-denominated net monetary asset position and a $220 million net investment, both valued at 5.4 bolivars per U.S. dollar.
- The company reported ordinary litigation, environmental matters and claims but stated that their ultimate disposition was not expected to have a material adverse effect.
- In October 2011, after the quarter-end, the company renegotiated its revolving facilities into a $1.5 billion facility maturing in October 2016 and an additional $500 million facility maturing in October 2012; both were unused as of October 31, 2011.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2011, with no material changes to internal control over financial reporting.
Investor verification checklist
- Reconcile reported earnings with and without the $95 million Q3 and $267 million year-to-date restructuring charges.
- Assess whether price increases and cost savings can offset raw-material, energy, distribution and fiber inflation.
- Track restructuring execution, remaining cash costs, facility closures and the expected 2013 profitability benefit.
- Review debt maturities, redeemable securities, interest expense and the availability of the revised credit facilities.
- Verify the sustainability of pension contributions, dividends and the reduced share-repurchase program relative to operating cash flow.
- Monitor foreign-exchange volatility, Venezuelan currency restrictions and the effect of currency translation on reported equity and earnings.