Kimberly-Clark Corporation: Third-Quarter 2012 Form 10-Q Summary
Business Context and Reporting Period
Kimberly-Clark Corporation filed an unaudited Form 10-Q for the three and nine months ended September 30, 2012. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments. The filing was signed November 5, 2012.
Financial Performance and Key Metrics
| Metric | Three Months 2012 | Three Months 2011 | Nine Months 2012 | Nine Months 2011 |
|---|---|---|---|---|
| Net sales | $5,246 million | $5,382 million | $15,756 million | $15,670 million |
| Operating profit | $783 million | $662 million | $2,237 million | $1,831 million |
| Net income attributable to Kimberly-Clark | $517 million | $432 million | $1,483 million | $1,190 million |
| Diluted EPS | $1.30 | $1.09 | $3.73 | $2.98 |
| Cash dividends declared per share | $0.74 | $0.70 | $2.22 | $2.10 |
- Third-quarter sales declined 2.5%, while operating profit increased 18.3% and diluted EPS increased 19.3%.
- Nine-month sales increased 0.5%, operating profit increased 22.2%, and diluted EPS increased 25.2%.
- Calculated operating margins were approximately 14.9% in the third quarter of 2012 versus 12.3% in the prior-year quarter, and 14.2% for the first nine months versus 11.7% in 2011.
- Third-quarter net margin attributable to Kimberly-Clark was approximately 9.9%, compared with 8.0% in the prior-year quarter.
- Operating profit benefited from $85 million of cost savings, approximately $55 million of lower input costs, organic sales growth, and lower restructuring charges. These benefits were partly offset by increased marketing, research and general expenses and unfavorable currency translation.
- Third-quarter effective tax rate increased to 31.1% from 29.1%, partly because of lower investment tax credits.
Cash Flow, Liquidity, Debt and Capital Allocation
- Cash provided by operations was $844 million in the third quarter and $2.169 billion for the first nine months, compared with $750 million and $1.771 billion, respectively, in the comparable 2011 periods.
- Cash provided by operations increased primarily because of higher cash earnings and lower pension contributions, partially offset by higher working capital requirements.
- Capital spending was $763 million for the first nine months, compared with $656 million in 2011. Full-year 2012 capital spending was expected to be $1.0 billion to $1.1 billion.
- Cash and cash equivalents were $1.249 billion at September 30, 2012, compared with $764 million at December 31, 2011.
- Total debt and redeemable securities were approximately $7.0 billion at September 30, 2012, compared with $6.7 billion at year-end 2011. Short-term debt was $553 million; long-term debt reported on the balance sheet was $5.130 billion.
- The company maintained an unused $1.5 billion revolving credit facility expiring in October 2016, with an option to increase it by $500 million. An additional $500 million facility expired in October 2012.
- The company repurchased 12.7 million shares for $980 million during the first nine months and planned approximately $1.3 billion of 2012 repurchases, subject to market conditions.
- Pension contributions were $95 million for the first nine months, compared with $416 million in 2011. Management anticipated approximately $100 million of contributions for full-year 2012.
Material Changes Versus the Prior Comparable Period
- Sales performance was pressured by unfavorable currency effects, which reduced third-quarter sales by approximately 5 percentage points and nine-month sales by approximately 3 percentage points.
- Personal Care sales increased 1.0% in the quarter and 4.0% year to date; Consumer Tissue sales declined 6.2% and 4.0%, respectively.
- K-C Professional & Other sales declined 4.8% in the quarter and 0.8% year to date; Health Care sales declined 2.7% in the quarter but increased 2.2% year to date.
- All reported segments increased third-quarter operating profit. Personal Care operating profit rose 10.1%, Consumer Tissue 4.9%, K-C Professional & Other 13.4%, and Health Care 5.4%.
- Nine-month segment operating profit increased across all segments, led by Consumer Tissue, which rose 23.3%, and K-C Professional & Other, which rose 13.1%.
- Pulp and tissue restructuring charges declined to $31 million pre-tax in the third quarter and $85 million year to date, compared with $95 million and $267 million, respectively, in 2011. Cumulative pre-tax charges through September 30, 2012 were $500 million.
- Year-to-date results benefited from the absence of a $32 million non-deductible Colombian business tax charge recorded in 2011.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2012 commodity costs to be lower than in 2011, but anticipated continued pressure from weaker foreign currency exchange rates against the U.S. dollar.
- The company planned to continue targeted growth initiatives, increase strategic marketing spending faster than sales, and pursue additional cost savings.
- The pulp and tissue restructuring was expected to be substantially complete by the end of 2012. Management expected annual net sales to be $250 million to $300 million lower than a 2010 baseline by 2013, with operating profit benefits of at least $75 million in 2013 and at least $100 million in 2014.
- On October 23, 2012, the company approved Western and Central European strategic changes, including exiting the diaper category except in Italy and divesting or exiting certain lower-margin businesses. The actions are expected to affect approximately 1,300 to 1,500 positions and generate $300 million to $400 million of pre-tax restructuring charges through 2014. The affected businesses generated approximately $500 million of annual sales and negligible operating profit.
- Fourth-quarter 2012 results were expected to include charges related to the European strategic changes. A further one-time non-cash pension settlement charge was possible if more than approximately 45% of eligible former employees elected a lump-sum distribution.
- The company identified foreign exchange rates, raw material and energy costs, competitive pricing, customer actions, economic and political conditions, and the achievement of projected savings and volume growth as key risks to forward-looking results.
- Venezuelan currency controls limited U.S. dollar availability. At September 30, 2012, the Venezuelan subsidiary had a $185 million bolivar-denominated net monetary asset position and a $322 million net investment, both measured at 5.4 bolivars per U.S. dollar.
- Management stated that pending legal, environmental, and regulatory matters were not expected to have a material adverse effect, individually or in the aggregate.
Important Facts for Investors to Verify
- Whether the planned European restructuring charges and workforce reductions remain within the disclosed ranges and timetable.
- The magnitude and timing of any fourth-quarter pension settlement charge arising from the lump-sum offer.
- Whether restructuring-related cost savings and operating-profit benefits offset lost sales and execution costs.
- Subsequent trends in currency translation, commodity costs, pricing, volumes, and consumer demand, particularly in Europe and Consumer Tissue.
- Actual capital spending, share repurchases, pension contributions, short-term borrowings, and liquidity usage relative to management’s 2012 expectations.
- The effect of Venezuelan currency controls and price controls on cash repatriation, earnings, and asset values.