Kimberly-Clark Corporation — 2015 Q3 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2015. Kimberly-Clark operates through Personal Care, Consumer Tissue, and K-C Professional. Results reflect continuing operations after the October 31, 2014 spin-off of the health care business, with prior periods recast. All amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Change | 9M 2015 | 9M 2014 |
|---|---|---|---|---|---|
| Net sales | $4,718 | $5,056 | -6.7% | $14,052 | $14,896 |
| Gross profit | $1,682 | $1,765 | -4.7% | $4,998 | $5,130 |
| Operating profit | $779 | $877 | -11.2% | $983 | $2,363 |
| Net income attributable to Kimberly-Clark | $517 | $562 | -8.0% | $680 | $1,609 |
| Diluted EPS from continuing operations | $1.41 | $1.49 | -5.4% | $1.85 | $4.08 |
| Cash dividends declared per share | $0.88 | $0.84 | +4.8% | $2.64 | $2.52 |
- Q3 gross margin was approximately 35.6%, compared with 34.9% in the prior-year quarter. Operating margin was approximately 16.5%, compared with 17.3%; attributable net margin was approximately 11.0%, compared with 11.1%.
- Q3 sales volumes increased approximately 5%, but unfavorable currency reduced sales by approximately 12%. Cost savings, volume growth, lower input costs, and favorable mix partly offset currency pressure.
- Q3 segment sales declined 4.8% in Personal Care, 10.0% in Consumer Tissue, and 5.4% in K-C Professional. Personal Care operating profit was essentially flat; Consumer Tissue and K-C Professional operating profit declined 8.8% and 6.7%, respectively.
- Cash provided by operations for the first nine months was $1,641, down from $2,255. The decrease reflected higher pension contributions, increased operating working capital, and the health care spin-off.
- Capital spending was $798 for the first nine months, compared with $730 in 2014. Investing cash outflow was $823 and financing cash outflow was $859.
- Cash and cash equivalents were $643 at September 30, 2015, versus $789 at December 31, 2014. Current assets were $5,442 and current liabilities were $6,201.
- Total debt was approximately $7.6 billion at September 30, 2015, versus $7.0 billion at year-end 2014. The company had $659 of short-term debt and a currently unused $2.0 billion revolving credit facility expiring in 2019.
- During the first nine months, the company paid $952 of dividends, repurchased $450 of common stock, and acquired the remaining interests in its Israel and Turkey subsidiaries for $151.
Material changes versus the prior comparable period
- Nine-month operating profit fell 58.4%, primarily because 2015 included $1,350 of pre-tax pension settlement charges, largely associated with the purchase of group annuity contracts transferring $2.5 billion of pension obligations for approximately 21,000 U.S. retirees.
- The pension settlement charges reduced nine-month 2015 earnings per share by approximately $2.26. Excluding those charges, management reported nine-month pre-tax earnings of $2,126 and an effective tax rate of 32.3%.
- Foreign currency translation reduced Q3 operating profit by approximately $115 and nine-month operating profit by approximately $275. Foreign currency transaction losses also adversely affected results.
- Other 2015 items included $17 of Turkey restructuring charges, $36 of 2014 Organization Restructuring charges, and a $45 Venezuelan balance-sheet remeasurement charge. The 2014 comparison included a $39 Middle East regulatory-dispute charge.
- Other comprehensive income attributable to Kimberly-Clark was a loss of $31 in Q3 and income of $677 for the first nine months, with currency translation losses of $847 for the nine-month period.
Guidance, outlook, risks, and unusual items
- Management expects 2015 combined volume, net selling price, and product mix growth of 4% to 5%, revised from 3% to 5%.
- Unfavorable currency is expected to reduce 2015 net sales by 10% to 11% and operating profit growth by 11% to 12%; Venezuela is expected to contribute approximately 3% of the sales impact and 4% of the operating-profit impact.
- Expected commodity cost deflation is $100 to $200. FORCE cost savings are expected to be at least $350, with an additional $60 to $80 from the 2014 restructuring.
- Full-year capital spending is expected toward the high end of the $950 to $1,050 target range, and share repurchases are targeted at $800, subject to market conditions.
- Defined benefit pension contributions are expected to total $440 to $500 for 2015; $437 had been contributed through September 30.
- The 2014 restructuring is expected to be completed by the end of 2016, with total after-tax costs of $130 to $160 and cumulative pre-tax savings expected to reach $120 to $140 by the end of 2017. Cumulative pre-tax charges were $169 through September 30, 2015.
- Venezuelan operations remain subject to foreign-exchange restrictions, production curtailments, regulated pricing, inflation, and limited liquidity. The SIMADI rate was 199 bolivars per U.S. dollar at September 30, 2015; Venezuelan sales were less than 1% of consolidated nine-month sales.
- Key ongoing risks include foreign currency movements, raw-material and energy costs, competitive pricing pressure, retail customer actions, global economic and political conditions, and execution of cost savings and growth initiatives. Management stated that pending litigation and environmental compliance matters were not expected to have a material adverse effect.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2015, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported nine-month earnings and EPS with the $1,350 pre-tax pension settlement charge and related tax benefit.
- Assess the sustainability of operating performance excluding pension, restructuring, Venezuela, and other unusual items.
- Monitor foreign currency exposure, particularly the effects on international sales, operating profit, and Venezuelan operations.
- Review debt maturities, commercial paper reliance, interest costs, and available capacity under the $2.0 billion revolving credit facility.
- Compare operating cash flow with dividends, capital spending, pension contributions, share repurchases, and other financing uses.
- Track progress toward the 2015 guidance targets for cost savings, commodity deflation, capital spending, pension contributions, and share repurchases.
- Verify restructuring charges, expected completion costs, and whether projected savings offset stranded costs from the health care spin-off.