Kimberly-Clark Corporation 2018 Q3 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company operates through Personal Care, Consumer Tissue, and K-C Professional segments, with products sold globally under brands including Huggies, Kleenex, Scott, Cottonelle, Kotex, Depend, and others. Amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $4,582 | $4,665 | $13,917 | $13,745 |
| Gross profit | $1,416 | $1,667 | $4,195 | $4,979 |
| Operating profit | $669 | $868 | $1,590 | $2,530 |
| Net income attributable to Kimberly-Clark | $451 | $567 | $999 | $1,661 |
| Diluted EPS | $1.29 | $1.60 | $2.85 | $4.66 |
| Cash dividends declared per share | $1.00 | $0.97 | $3.00 | $2.91 |
Q3 net sales declined 2%, while nine-month sales increased 1%. Q3 gross margin was approximately 30.9%, compared with 35.7% in the prior-year quarter; operating margin was approximately 14.6%, compared with 18.6%; and net income attributable margin was approximately 9.8%, compared with 12.2%. Nine-month gross margin was approximately 30.1% versus 36.2%, operating margin was approximately 11.4% versus 18.4%, and attributable net margin was approximately 7.2% versus 12.1%.
For the first nine months, cash provided by operations was $2,021, compared with $2,066 in 2017. Capital spending was $566, cash dividends paid were $1,039, and share repurchases totaled $601 for 5.5 million shares. Cash and cash equivalents were $494 at September 30, 2018, versus $616 at December 31, 2017.
Total debt was approximately $7.5 billion at September 30, 2018, compared with $7.4 billion at year-end 2017. The balance sheet included $980 of short-term debt and $5,739 of long-term debt, excluding the current portion. Kimberly-Clark had unused revolving credit facilities of $2.0 billion expiring in June 2023 and $500 expiring in June 2019. Management stated that operating cash flow and debt capacity were adequate for expected working capital, restructuring, capital spending, pension, dividend, and other needs.
Material changes versus the prior comparable period
- Q3 operating profit decreased 23%, and nine-month operating profit decreased 37%, primarily because of restructuring charges, higher input costs, and unfavorable currency effects.
- Q3 net income attributable to Kimberly-Clark declined 20%, and nine-month net income declined 40%. Diluted EPS declined 19% in Q3 and 39% year to date.
- Organic sales increased 1% in both Q3 and the first nine months. Q3 currency translation reduced sales by 3%, while volume declined 1% and net price and mix each contributed 1%.
- Consumer Tissue was the weakest segment in Q3: sales declined 3% and operating profit declined 20%, reflecting lower volumes and input-cost inflation. Personal Care sales declined 1% and operating profit declined 3%. K-C Professional sales were approximately flat and operating profit declined 9%.
- Q3 adjusted operating profit was $798, compared with reported operating profit of $868 in 2017. Adjusted EPS was $1.71, up 7% from prior-year reported diluted EPS of $1.60. Nine-month adjusted operating profit was $2,396 and adjusted EPS was $5.01, up 8% from $4.66.
- Management cited approximately $210 of higher Q3 input costs, including $115 of pulp and $65 of other raw materials. Year-to-date higher input costs totaled approximately $580.
Guidance, outlook, risks, and unusual items
The 2018 Global Restructuring Program is expected to close or sell approximately 10 manufacturing facilities, exit or divest businesses representing approximately 1% of sales, and reduce the workforce by 5,000 to 5,500 employees. Completion is expected by the end of 2020. Total pre-tax costs are estimated at $1.7 billion to $1.9 billion, including $900 million to $1.0 billion of cash costs and $800 million to $900 million of non-cash costs. Annual pre-tax savings are expected to reach $500 million to $550 million by 2021, with incremental capital spending of approximately $600 million to $700 million through 2020.
Restructuring charges were $149 in Q3 and $856 for the first nine months, producing net charges attributable to Kimberly-Clark of $119 and $649, respectively. Management expected 2018 restructuring charges of $1.2 billion to $1.35 billion pre-tax and full-year savings of $100 million to $120 million.
For 2018, management expected reported EPS of $3.29 to $3.79 and adjusted EPS of $6.60 to $6.80. The outlook assumed flat year-over-year sales, approximately 1% organic sales growth, a 1% negative currency impact on sales, adjusted operating profit declining at the high end of or slightly more than the previously expected 2% to 5% range, input-cost inflation toward the upper half of the previously estimated $675 million to $775 million range, and an adjusted effective tax rate of 21% to 22%.
U.S. tax reform produced a $26 Q3 discrete tax expense and $82 of first-quarter 2018 tax expense. Certain tax estimates remained provisional, including matters involving GILTI and other tax positions. Argentina adopted highly inflationary accounting effective July 1, 2018; the reported impact was not material and Argentina represented less than 2% of consolidated sales.
Risks include raw-material, energy, and currency inflation; competitive pressure on pricing; execution of the restructuring program; global economic and political conditions; customer relationships; and the achievement of projected cost savings and volume growth. The company also disclosed ongoing DOJ subpoenas and investigations involving its former healthcare business, Avanos, concerning alleged violations related to surgical gowns. The potential outcome and range of loss were not estimable. A separate California matter had an aggregate compensatory and punitive damages award plus pre-judgment interest of approximately $25, and the company intends to continue its defense.
Important facts for investors to verify
- Reconcile reported results with adjusted results and confirm the effect of the $649 nine-month restructuring charge and $108 of nine-month tax-reform-related charges on adjusted EPS.
- Assess whether pricing, cost savings, and productivity actions can offset continued pulp and raw-material inflation.
- Track restructuring execution, cash costs, facility actions, workforce reductions, capital spending, and realization of the projected $500 million to $550 million annual savings.
- Monitor debt maturities, commercial-paper dependence, cash balances, and the company’s ability to fund dividends, repurchases, restructuring, and capital expenditures.
- Evaluate currency exposure, including Argentina’s highly inflationary accounting treatment and the broader negative currency assumptions in guidance.
- Review developments in the DOJ investigation and Avanos indemnification disputes, as the filing does not provide a clear potential loss estimate.
- Confirm the company’s final 2018 results against the stated sales, adjusted operating profit, tax-rate, and adjusted EPS assumptions.