Kimberly-Clark Corporation — 2010 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, 2010. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments, with products sold globally under brands including Huggies, Kleenex, Scott, Cottonelle, Kotex, Depend and Kimberly-Clark.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $4,979 million | $4,913 million | $14,671 million | $14,133 million |
| Gross profit | $1,614 million | $1,727 million | $4,905 million | $4,754 million |
| Operating profit | $698 million | $871 million | $2,074 million | $2,108 million |
| Net income attributable to Kimberly-Clark | $469 million | $582 million | $1,351 million | $1,392 million |
| Diluted EPS | $1.14 | $1.40 | $3.25 | $3.35 |
| Cash dividends declared per share | $0.66 | $0.60 | $1.98 | $1.80 |
- Q3 sales increased 1.3%, while operating profit declined 19.9% and attributable net income declined 19.4%.
- Q3 gross margin was approximately 32.4%, versus 35.2% in the prior-year quarter. Operating margin was approximately 14.0%, versus 17.7%; attributable net margin was approximately 9.4%, versus 11.8%.
- For the first nine months, sales increased 3.8%, while operating profit decreased 1.6% and attributable net income decreased 2.9%. Nine-month operating margin was approximately 14.1%, compared with 14.9% in 2009.
- Q3 cash provided by operations was $745 million, down 5.8% year over year. Nine-month operating cash flow was $1,796 million, down from $2,480 million, primarily because working capital consumed cash in 2010.
- Nine-month capital spending was $611 million, compared with $563 million. Management expected full-year 2010 capital spending of $900 million to $1.0 billion.
- At September 30, cash and cash equivalents were $533 million, versus $798 million at December 31, 2009. Current assets were $6,092 million and current liabilities were $5,159 million.
- Total debt and redeemable securities were approximately $6.5 billion, essentially unchanged from year-end 2009. Reported debt payable within one year was $731 million and long-term debt was $4,710 million.
Material Changes Versus the Prior Comparable Period
- Sales growth was led by Personal Care and Health Care. Q3 segment sales increased 2.4% in Personal Care and 4.6% in Health Care, while K-C Professional & Other declined 3.0%.
- Q3 operating profit declined across all segments: Personal Care decreased 8.4%, Consumer Tissue 32.8%, K-C Professional & Other 28.8%, and Health Care 37.2%.
- Management attributed the Q3 operating-profit decline primarily to approximately $265 million of input-cost inflation, higher strategic marketing and research and development spending, and approximately $20 million of adverse impact from production curtailments. These pressures were partly offset by $95 million of cost savings, lower pension expense, and benefits from the 2009 organization optimization initiative.
- For the first nine months, input-cost inflation was approximately $575 million, partly offset by $280 million of cost savings, lower pension expense of approximately $95 million, higher sales volumes and pricing, and $80 million of benefits from organizational streamlining.
- Health Care sales benefited from the I-Flow acquisition, while selling and general expenses increased in part because of that acquisition. The filing does not provide the acquisition purchase price in the presented text.
- Shares outstanding declined following repurchases. The company repurchased approximately 11.2 million shares for $700 million during the first nine months, including approximately 3.1 million shares for $200 million in Q3.
Guidance, Outlook, Risks and Unusual Items
- Management planned continued investment in brands, innovation and targeted growth initiatives, with strategic marketing spending expected to increase faster than sales during 2010. No specific full-year earnings or sales guidance is provided in the filing text.
- Management expected full-year pension-trust contributions of approximately $240 million; $230 million had been contributed through September 30.
- The company issued $250 million of 3.265% notes due August 1, 2020 and used the proceeds to repay floating-rate notes maturing July 30, 2010.
- Venezuelan operations became subject to highly inflationary accounting on January 1, 2010. The company recorded a $96 million after-tax charge, including $19 million in cost of products sold and $79 million in other expense. Currency restrictions limited the subsidiary’s ability to convert bolivars into U.S. dollars and constrained imports. The company’s net investment in Venezuela was $162 million at September 30, and management expected depressed Venezuelan sales volumes to continue in Q4.
- The filing identifies exposure to raw-material and energy-cost inflation, foreign-currency movements, economic weakness and demand in North America, Venezuela’s currency controls, pension obligations, acquisition integration, and debt and liquidity requirements.
- Environmental claims exist at several waste-disposal sites, but management did not expect them, individually or collectively, to have a material adverse effect.
- Management stated that operating cash generation and access to short- and long-term debt were adequate to fund operations, capital spending, dividends and other foreseeable needs. Disclosure controls and procedures were assessed as effective at September 30, 2010.
Investor Verification Points
- Verify whether input-cost inflation, promotional activity and production curtailments continued to pressure gross and operating margins after Q3.
- Reconcile the reported $6.5 billion of debt and redeemable securities to the balance-sheet debt, redeemable securities and fair-value disclosures.
- Assess Venezuela’s continuing currency-conversion restrictions, import limitations, earnings effects and recoverability of the $162 million net investment.
- Track capital spending against the $900 million to $1.0 billion 2010 target and operating cash flow conversion as working capital normalizes.
- Evaluate the sustainability of the planned $800 million 2010 share-repurchase program alongside dividends, pension contributions and debt maturities.
- Review the I-Flow acquisition’s contribution to Health Care revenue and its effect on expenses and operating profit.