Kimberly-Clark Corporation — Third-Quarter 2016 Form 10-Q Summary
Business context and reporting period
Kimberly-Clark reported unaudited results for the three and nine months ended September 30, 2016. The company operates through Personal Care, Consumer Tissue, and K-C Professional, with North America and international operations. All amounts are in millions except per-share data.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $4,594 | $4,718 | $13,658 | $14,052 |
| Gross profit | $1,670 | $1,682 | $4,973 | $4,998 |
| Operating profit | $836 | $779 | $2,478 | $983 |
| Net income attributable to Kimberly-Clark | $550 | $517 | $1,661 | $680 |
| Diluted EPS | $1.52 | $1.41 | $4.58 | $1.85 |
| Cash provided by operations | Not provided | Not provided | $2,361 | $1,641 |
- Q3 gross margin was approximately 36.4%, compared with 35.7% in the prior-year quarter. Operating margin was approximately 18.2%, compared with 16.5%; net margin attributable to Kimberly-Clark was approximately 12.0%, compared with 11.0%.
- Nine-month operating margin was approximately 18.1%, compared with 7.0% in 2015, primarily because 2015 included $1,350 of pension settlement charges.
- Cash and cash equivalents were $884 at September 30, 2016, versus $619 at December 31, 2015. Total current assets were $5,260 and current liabilities were $5,720.
- Total debt was approximately $7.6 billion at September 30, 2016, versus $7.8 billion at year-end 2015. Long-term debt was $6,443 and debt payable within one year was $1,205.
- The company had an unused $2.0 billion revolving credit facility expiring in 2021. Nine-month capital spending was $582, compared with $798 in 2015.
- Cash dividends declared were $0.92 per share in Q3 and $2.76 per share for the first nine months. The company repurchased 4.0 million shares for $525 during the first nine months.
Material changes versus the prior comparable period
- Q3 sales declined 2.6%; currency translation reduced sales by more than 2%, while organic sales were essentially flat. Nine-month sales declined 2.8%, with currency reducing sales by more than 4%; organic sales increased approximately 2%.
- Q3 operating profit increased 7.3% to $836. Adjusted operating profit increased approximately 1% to $836, compared with $826 in 2015, after excluding prior-year restructuring, Turkey restructuring, and pension settlement charges.
- Q3 net income attributable to Kimberly-Clark increased 6.4%, and diluted EPS increased 7.8%. The average diluted share count declined to 361.5 million from 366.2 million.
- Personal Care sales declined 1.9% and operating profit declined 5.4% in Q3. Consumer Tissue sales declined 3.7%, while operating profit increased 2.7%. K-C Professional sales declined 2.9%, while operating profit increased 1.9%.
- FORCE cost savings contributed $105 in Q3 and $295 year to date. The company also reported $15 of Q3 savings and $45 of year-to-date savings from the 2014 Organization Restructuring.
- The nine-month comparison benefited materially from the absence of the $1,350 pretax pension settlement charge recorded in 2015. Nine-month pension contributions fell to $35 from $437.
- Other income and expense included a favorable $11 Venezuelan adjustment in the first nine months of 2016, compared with $45 of related adjustments in 2015. Venezuela was no longer consolidated beginning in 2016.
Guidance, outlook, risks, and unusual items
- 2016 diluted EPS guidance was $5.92 to $6.05, reduced from $5.92 to $6.15. Adjusted EPS guidance was $5.95 to $6.05, reduced from $5.95 to $6.15.
- Management reduced expected organic sales growth to approximately 2%, from the prior assumption of growth at the low end of 3% to 5%. Expected currency effects were approximately negative 4% on sales and negative 3% on operating profit.
- Expected commodity-cost impact was $25 to $125 of year-over-year deflation. Planned FORCE savings were $350 to $400, with at least $50 of savings from the organization restructuring.
- Full-year capital spending was expected to be somewhat below the prior $950 to $1,050 target range. Full-year share repurchases were targeted at $750, subject to market conditions.
- The 2014 restructuring was expected to conclude by the end of 2016. Cumulative pretax charges were $211 through September 30, versus anticipated total pretax costs of $190 to $230; cumulative pretax savings were $115, with savings expected toward the high end of $120 to $140 by the end of 2017.
- Key risks include foreign-exchange volatility, raw-material and energy costs, competitive pricing and promotional activity, retail customer actions, global economic and political conditions, and the achievement of projected volumes and cost savings.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2016, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic sales growth and volume trends improve, particularly in Personal Care and international markets.
- The sustainability of operating-margin gains after FORCE savings, restructuring benefits, input-cost deflation, and favorable comparisons with 2015 pension charges.
- Progress toward the revised EPS guidance and the assumptions for currency, commodity costs, tax rate, and equity-company earnings.
- Debt maturities, commercial-paper usage, interest expense, and liquidity relative to dividends and planned share repurchases.
- Completion costs and realized savings from the 2014 restructuring, including whether total charges remain within the stated range.
- Exposure to foreign-exchange movements, commodity prices, competitive pricing, and weak volumes in selected geographies and product categories.