Kimberly-Clark Corporation — Third Quarter 2019 Form 10-Q
Business context and reporting period
Kimberly-Clark reported unaudited results for the three and nine months ended September 30, 2019. The company operates through Personal Care, Consumer Tissue, and K-C Professional segments, with branded products including Huggies, Kleenex, Scott, Cottonelle, and Depend.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $4.640 billion | $4.582 billion | $13.867 billion | $13.917 billion |
| Gross profit | $1.555 billion | $1.416 billion | $4.469 billion | $4.195 billion |
| Operating profit | $915 million | $669 million | $2.240 billion | $1.590 billion |
| Net income attributable to Kimberly-Clark | $671 million | $451 million | $1.610 billion | $999 million |
| Diluted EPS | $1.94 | $1.29 | $4.65 | $2.85 |
| Cash provided by operations | Not provided for quarter | Not provided for quarter | $1.812 billion | $2.021 billion |
Q3 gross margin was approximately 33.5%, compared with 30.9% in the prior-year quarter. Operating margin was approximately 19.7%, compared with 14.6%. For the first nine months, gross margin was approximately 32.2% versus 30.1%, and operating margin was approximately 16.2% versus 11.4%.
- Q3 organic sales increased 4%; reported sales increased more than 1% after a 2% foreign-exchange headwind and a slight reduction from exited businesses.
- Q3 adjusted operating profit was $859 million, compared with $798 million in 2018; adjusted diluted EPS was $1.84, compared with $1.71.
- Q3 adjusted results benefited from higher pricing, $50 million of FORCE cost savings, $45 million of restructuring savings, and approximately $10 million of lower input costs.
- Cash and cash equivalents were $416 million at September 30, 2019, down from $539 million at December 31, 2018.
- Total debt was approximately $7.8 billion at September 30, 2019, compared with $7.5 billion at year-end 2018. Debt payable within one year was $1.555 billion and long-term debt was $6.198 billion.
- The company maintained unused revolving credit facilities of $2.0 billion expiring in June 2023 and $750 million expiring in June 2020.
- Capital spending was $867 million through nine months, compared with $566 million in the prior-year period. Full-year 2019 capital spending was expected to be $1.1 billion to $1.3 billion.
- Cash dividends paid were $1.054 billion through nine months, and share repurchases totaled approximately $548 million through nine months.
Material changes versus the prior comparable period
- Q3 operating profit increased 37%, net income attributable to Kimberly-Clark increased 49%, and diluted EPS increased 50%.
- Nine-month reported sales declined slightly, while operating profit increased 41%, net income attributable to Kimberly-Clark increased 61%, and diluted EPS increased 63%.
- Personal Care Q3 sales increased 2% and operating profit increased 5%. Consumer Tissue sales increased 1% and operating profit increased 25%. K-C Professional sales declined 1% and operating profit increased 10%.
- North American Q3 sales increased 3% and operating profit increased 14%; outside-North-America sales declined 1% and operating profit increased 5%.
- Restructuring-related charges attributable to Kimberly-Clark were $33 million in Q3 2019 versus $119 million in Q3 2018. For the first nine months, such charges were $181 million versus $649 million.
- Q3 2019 included an approximately $182 million pretax gain from the sale of a manufacturing facility and associated real estate as part of the restructuring program.
- Operating cash flow declined to $1.812 billion from $2.021 billion, primarily because of increased working capital and higher tax payments, partly offset by higher operating income and lower pension contributions.
Guidance, outlook, risks, contingencies, and unusual items
- Management raised 2019 reported EPS guidance to $5.75-$6.00 from $5.50-$5.90 and adjusted EPS guidance to $6.75-$6.90 from $6.65-$6.80.
- Management expected reported sales to decline slightly, organic sales to increase approximately 3%-4%, adjusted operating profit to grow 4%-5%, and the adjusted effective tax rate to be toward the low end of 23%-25%.
- The 2018 Global Restructuring Program is expected to be completed by the end of 2020. Total pretax costs are estimated at $1.7-$1.9 billion, with $900 million-$1.0 billion of cash costs. Annual pretax savings are expected to reach $500-$550 million by 2021.
- Cumulative pretax restructuring charges were approximately $1.3 billion through September 30, 2019. Restructuring liabilities were $142 million at September 30, 2019.
- The company expects workforce reductions of approximately 5,000-5,500 employees, closure or sale of approximately 10 manufacturing facilities, and incremental restructuring-related capital spending of approximately $600-$700 million through 2020.
- Key risks include foreign-currency volatility, raw-material and energy costs, competitive pricing pressure, customer and retail-trade actions, general economic and political conditions, and achievement of planned cost savings and volume growth.
- Kimberly-Clark is contesting approximately $90 million of proposed Brazilian tax adjustments and penalties, excluding significant interest. Management believes it has meritorious defenses, but resolution is expected to take years.
- Argentina has been accounted for as a highly inflationary economy since July 1, 2018; Argentina represented approximately 1% of consolidated sales, and the related earnings impact was not material.
- Goodwill impairment testing completed in 2019 did not identify impairment. Adoption of the new lease standard and other accounting standards had no material effect on results or cash flows.
Important facts for investors to verify
- Reconcile reported versus adjusted EPS and operating profit, particularly the effects of restructuring charges and the $182 million facility-sale gain.
- Assess whether pricing, organic growth, and cost savings can offset volume declines, currency effects, inflation, and higher marketing and administrative costs.
- Monitor restructuring execution, remaining liabilities, cash costs, capital spending, facility actions, and achievement of the $500-$550 million annual savings target.
- Evaluate liquidity relative to $7.8 billion of debt, $1.555 billion of current debt, dividends, repurchases, restructuring payments, and planned capital expenditures.
- Review the sustainability of operating cash flow, given the nine-month decline and adverse working-capital impact.
- Track the Brazilian tax dispute, foreign-exchange exposure, commodity prices, and the potential effect of highly inflationary conditions in Argentina.