Packaging

Kimberly-Clark Announces Year-End 2010 Results, 2011 Outlook and Actions to Enhance Shareholder Value

Wednesday 26. January 2011 - Kimberly-Clark Corporation (NYSE: KMB) today reported year-end 2010 earnings in line with its previous expectations and provided guidance for growth in 2011 adjusted earnings per share consistent with its long-term Global Business Plan target.

The company also announced a series of actions to further enhance shareholder value, including the 39th consecutive annual increase in the company’s dividend, a pulp and tissue restructuring, and a plan to repurchase a significant amount of company stock in 2011, partially funded by incremental debt financing.
Executive Summary
— Fourth quarter 2010 net sales of $5.1 billion increased 2 percent.
Organic sales, which exclude the impacts of changes in foreign currency
rates and the I-Flow acquisition, rose 3 percent. Diluted net income
per share for the quarter was $1.20 compared with $1.17 in the year-ago
period. Performance benefited from organic sales growth, cost savings,
a decline in the effective tax rate and a lower share count, while
results were negatively impacted by significant input cost inflation.
— Diluted net income per share for full-year 2010 was $4.45. Adjusted
earnings per share of $4.68, which excludes a first quarter charge for
the balance sheet remeasurement in Venezuela described later in this
news release, were in line with the company’s previous guidance of $4.60
to $4.70.
— Adjusted earnings per share in 2011 are expected to be $4.90 to $5.05,
up 5 to 8 percent compared to 2010. Adjusted earnings per share in 2011
exclude costs associated with the pulp and tissue restructuring.
— The company’s Board of Directors has approved a 6 percent increase in
the quarterly dividend, taking the dividend to 70 cents per share, up
from 66 cents per share in 2010. The dividend will be payable on April
4, 2011, to stockholders of record on March 4, 2011.
— The company has initiated a two-year pulp and tissue restructuring that
is expected to cost $280 to $420 million after tax. As a result of the
restructuring, by 2013 annual net sales are expected to decrease by
approximately $250 to $300 million and operating profit is expected to
increase by at least $75 million annually.
— Share repurchases are expected to total $1.5 billion in 2011, subject to
market conditions, including $700 million that will be funded by
incremental debt financing. In conjunction with this plan, the company’s
Board of Directors has approved a new 50 million share repurchase
authorization, augmenting the current 50 million share authorization
from July 2007 that is expected to be completed in 2011.
Chairman and Chief Executive Officer Thomas J. Falk said, “We achieved our earnings per share commitment for the fourth quarter of 2010 despite a continued challenging environment. Reflecting on the full year, we invested in our brands and growth opportunities, reduced costs and allocated capital in shareholder-friendly ways. Moreover, our overall market positions are strong, which bodes well for our future prospects. Looking ahead to 2011, we expect that adjusted earnings per share will grow in line with our Global Business Plan target while we continue to leverage our strong brands, bring innovations to market and pursue targeted growth initiatives. At the same time, we will continue to manage our company with financial discipline, with a strong focus on cost savings and cash generation.”
Falk added, “We are also taking additional, aggressive steps to improve shareholder value. We will be increasing our dividend for the 39th consecutive year, helping us maintain our top-tier payout. In addition, we are initiating a pulp and tissue restructuring in order to exit our remaining integrated pulp manufacturing operations and improve the underlying profitability and returns of our consumer tissue and K-C Professional businesses. This is further evidence of the financial discipline embedded in our Global Business Plan. Finally, we will be repurchasing $1.5 billion of KMB stock in 2011, as we leverage our strong cash flow and balance sheet and take advantage of the current low interest rate environment. All told, even though we expect the environment to remain difficult, I’m encouraged by our prospects in 2011 while we take further actions to strengthen our company and improve returns to shareholders.”
Fourth Quarter 2010 Operating Results
Total company sales of $5.1 billion increased 2 percent compared with the fourth quarter of 2009. Organic sales rose 3 percent, driven by higher net selling prices of 2 percent and improved product mix of 1 percent, while overall sales volumes were even with year-ago levels. Volumes benefited from product innovations and targeted growth initiatives, while overall performance was negatively impacted by declines in Venezuela that reduced overall company volumes by 1 percent and the difficult economic environment in developed markets. Changes in foreign currency exchange rates reduced sales by 1 percent.
Operating profit was $699 million in the fourth quarter of 2010, down 3 percent from $717 million in 2009. Comparisons benefited from organic sales growth and $90 million in cost savings from the company’s FORCE (Focused On Reducing Costs Everywhere) program. In addition, pension expense fell $20 million, as expected, with a majority of the decrease reflected in cost of sales. Meanwhile, inflation in key cost inputs amounted to $220 million overall versus 2009, including $130 million in higher fiber costs, $75 million for raw materials other than fiber, primarily polymer resin and other oil-based materials, $10 million in distribution costs and $5 million for energy. In addition, lower production volumes as a result of production curtailment to manage inventory levels adversely affected fourth quarter operating profit comparisons by $20 million. Other (income) and expense, net was $8 million of income in the fourth quarter of 2010, driven by foreign currency transaction gains. Prior year other (income) and expense, net was $25 million of income, which included favorable settlement of value-added tax matters.
The company’s effective tax rate for the fourth quarter of 2010 was 26.7 percent compared to 28.0 percent in the year-ago period. The full-year 2010 adjusted effective tax rate, which excludes the effects of the balance sheet remeasurement in Venezuela, was 29.8 percent, in line with the company’s target for a rate between 29.0 and 31.0 percent.
Kimberly-Clark’s share of net income of equity companies in the fourth quarter of 2010 was $51 million compared to $48 million in the fourth quarter of 2009. The increase was driven by higher earnings at Kimberly-Clark de Mexico, S.A.B. de C.V. (KCM). Although KCM continues to experience input cost inflation, overall earnings rose in the quarter and included benefits from double-digit sales growth and a lower effective tax rate.
Cash Flow and Balance Sheet
Cash provided by operations in the fourth quarter of 2010 totaled $948 million compared to $1,001 million in the prior year. The decrease was driven by a smaller level of improvement in primary working capital (accounts receivable + inventories – accounts payable) compared to the prior year, mostly offset by lower pension plan contributions. Fourth quarter contributions to the company’s defined benefit pension plans totaled $15 million in 2010 versus $127 million in 2009. Full-year contributions totaled $245 million in 2010, consistent with company expectations.
Capital spending for the quarter was $353 million compared with $285 million in 2009. Full-year spending for 2010 totaled $964 million, in line with the company’s previous expectation for spending between $900 million and $1 billion. During the fourth quarter, the company repurchased approximately 1.6 million shares of its common stock at a cost of $100 million. Full-year repurchases of 12.8 million shares totaled $800 million, equaling the company’s target. Total debt and redeemable securities was $6.5 billion at December 31, 2010, even with the prior year.
Fourth Quarter 2010 Business Segment Results
Personal Care Segment
Fourth quarter sales of $2.2 billion increased 2 percent. Sales volumes rose 2 percent and net selling prices advanced 1 percent, while changes in currency rates reduced sales by 1 percent. Fourth quarter operating profit of $421 million decreased 3 percent. Despite benefits from organic sales growth and cost savings, segment operating profit declined, primarily due to input cost inflation and changes in currency rates.
Sales in North America increased 3 percent. Sales volumes were up 2 percent and net selling prices increased 1 percent. Feminine care volumes grew at a double-digit rate for the fourth consecutive quarter as a result of the U by Kotex line extension. Adult care volumes also increased double-digits, with benefits from innovation on the Poise and Depend brands and supporting marketing campaigns. Baby wipes volumes rose at a double-digit rate, including increased shipments to support customer promotion activity. Child care and infant care volumes fell low- to mid-single digits, partly reflecting continued soft category demand.
Sales in Europe decreased 4 percent, including a negative currency effect of 6 percent. Net selling prices advanced 2 percent, while overall sales volumes were even with the year-ago period, as growth in baby wipes and child care was offset by declines in infant care. Sales increased 4 percent in K-C’s international operations in Asia, Latin America, the Middle East, Eastern Europe and Africa (K-C International). Sales volumes were up 4 percent, spurred by double-digit growth in Australia, China, Turkey, South Africa and most of Latin America, while volumes fell significantly in Venezuela in a continued difficult foreign currency exchange environment. Changes in product mix benefited sales by 1 percent. Overall net selling prices were even with the year-ago period, as increases in Venezuela were offset by modest declines elsewhere, primarily in the Middle East, Eastern Europe and Africa. Changes in currency rates reduced sales by 2 percent.
Consumer Tissue Segment
Fourth quarter sales of $1.7 billion increased 4 percent. Net selling prices increased 5 percent and product mix improved 2 percent, while sales volumes fell 1 percent and changes in currency rates reduced sales 1 percent. Fourth quarter operating profit of $172 million increased 15 percent. The improvement was driven by sales growth, cost savings and lower marketing, research and general expenses, partially offset by input cost inflation.
Sales in North America increased 3 percent. Net selling prices were up 3 percent, including benefits from sheet count reductions and the timing of promotion activity, and changes in product mix improved sales 2 percent. Sales volumes declined 2 percent. Bathroom tissue volumes fell mid-single digits, primarily due to the timing of promotion activity, while paper towel volumes fell at a double-digit rate and continue to be impacted by consumer trade-down. On the other hand, Kleenex facial tissue volumes rose mid-single digits and market shares improved behind innovation and marketing activities. The Kleenex Hand Towel innovation also benefited results in the quarter.
Sales in Europe declined 1 percent, including unfavorable currency effects of 5 percent. Net selling prices improved 5 percent in response to input cost inflation, and changes in product mix benefited sales by about 2 percent, while sales volumes were down 2 percent. Sales increased 8 percent in K-C International. Net selling prices increased 7 percent, driven by improvements in Latin America, and changes in product mix benefited sales by 1 percent. Sales volumes rose 1 percent, as gains in Asia were mostly offset by declines in Latin America, primarily in Venezuela. Changes in currency rates reduced sales by 1 percent.
K-C Professional (KCP) & Other Segment
Fourth quarter sales of $0.8 billion decreased 2 percent. Sales volumes fell 2 percent, reflecting the challenging economic environment in North America, and changes in currency rates reduced sales 1 percent, while net selling prices increased 1 percent. Fourth quarter operating profit of $112 million decreased 6 percent. Despite benefits from cost savings and lower marketing, research and general expenses, segment operating profit declined, primarily due to input cost inflation.
Sales in North America decreased 3 percent. Sales volumes were down 5 percent, while net selling prices rose 2 percent. Washroom product volumes declined at a double-digit rate as high unemployment and office vacancy levels continued to impact demand, while high-margin safety and wiper product volumes grew at low- to mid-single digit rates.
Sales in Europe fell 4 percent, including a negative currency effect of 6 percent and a 1 percent decline in product mix, while volumes advanced 4 percent. Sales increased 4 percent in K-C International. Sales volumes were up 2 percent, with continued gains in Asia. In addition, changes in net selling prices and product mix each benefited sales by 1 percent.
Health Care Segment
Fourth quarter sales of $0.4 billion decreased 1 percent. The acquisition of I-Flow Corporation benefited sales by 5 percent, while organic sales volumes declined 5 percent and net selling prices fell 2 percent. Fourth quarter operating profit of $26 million decreased 54 percent. The decline was driven by significantly higher marketing, research and general expenses, mostly for ongoing I-Flow litigation-related expenses.
The organic volume comparison was adversely affected by approximately 5 points due to increased demand in 2009 for face masks as a result of the H1N1 flu virus. In addition, overall North American supply volumes in 2010 were impacted by a modest slowdown in market demand. Meanwhile, organic sales volumes for medical devices rose at a high-single digit rate.
Full-Year Results
For the year of 2010, sales of $19.7 billion increased 3 percent. Organic sales rose 2 percent, including higher net selling prices of 1 percent and benefits from higher sales volumes and improved product mix. The combined impact of the I-Flow Corporation and Jackson Safety acquisitions completed in 2009 added an additional point of sales growth. Full year operating profit of $2,773 million was down 2 percent compared to $2,825 million in 2009. Adjusted operating profit in 2010 of $2,871 million increased 2 percent versus operating profit in the year-ago period. Diluted net income per share in 2010 was $4.45 and adjusted earnings per share were $4.68 compared with diluted net income per share of $4.52 in 2009. Adjusted operating profit and adjusted earnings per share in 2010 exclude the first quarter charge for the balance sheet remeasurement in Venezuela.
Adjusted operating profit comparisons benefited from organic sales growth, FORCE cost savings of $370 million, severance and related costs of $128 million in 2009 to streamline the organization and benefits of $80 million in 2010 from the streamlining initiative. In addition, pension expense decreased $120 million. These positive factors were partially offset by inflation in key cost inputs of about $790 million and increased marketing, research and general expenses, which included higher strategic marketing spending of about $100 million and increases related to I-Flow and to support future growth in K-C International.
Pulp and Tissue Restructuring
The company has initiated a pulp and tissue restructuring in order to exit its remaining integrated pulp manufacturing operations and improve the underlying profitability and return on invested capital of its consumer tissue and K-C Professional businesses. The restructuring is expected to be completed by the end of 2012 and will involve the streamlining, sale or closure of 5 to 6 manufacturing facilities around the world. In conjunction with these actions, the company will be exiting certain non-strategic products, primarily non-branded offerings, and transferring some production to lower-cost facilities in order to improve overall profitability and returns.
The total cost of the restructuring is expected to be $280 to $420 million after tax ($400 to $600 million pre-tax). Cash costs are projected to be 25 to 50 percent of the total charges. As a result of the restructuring, the company expects that by 2013 annual net sales will decrease by $250 to $300 million and operating profit will increase by at least $75 million. Most of the restructuring will impact the consumer tissue business segment.
At this point in time, the company expects that $195 to $265 million of the after tax charges ($280 to $380 million pre-tax) will occur in 2011, while benefits from the restructuring in 2011 are expected to be immaterial. In 2011 and 2012 the company will report adjusted results, which will exclude the costs of the restructuring. The company will report on the progress of the restructuring on a quarterly basis or when material developments occur.
2011 Outlook
The company’s key planning and guidance assumptions for 2011 areas follows:
— Net sales increase of approximately 3 to 4 percent.
— Organic sales are expected to grow 2 to 3 percent. Volumes are
anticipated to grow 1 to 2 percent, and the combination of higher
net selling prices and improved product mix should contribute an
additional point of growth. The volume estimate includes a combined
1 point negative impact from continued declines in Venezuela and the
impact of the pulp and tissue restructuring, and assumes continued
relatively soft market demand overall in developed markets.
— Currency rates are expected to increase sales by approximately 1
percent.
— Adjusted operating profit growth of 3 to 5 percent, while adjusted gross
profit is expected to grow at a faster rate.
— Savings from the company’s FORCE program totaling $200 to $250
million.
— Inflation in key cost inputs of $200 to $250 million. This reflects
estimated average market pricing for benchmark northern softwood
pulp of $925 to $940 per metric ton and average oil prices of $90 to
$95 per barrel for the year. Nearly all of the expected inflation
is due to higher costs for oil-based materials, energy, secondary
fiber and distribution expenses. Virgin pulp costs are anticipated
to be down slightly.
— Strategic marketing spending is planned to increase faster than
sales, supporting product innovation and targeted growth
initiatives.
— Interest expense is expected to increase significantly in 2011,
primarily due to the anticipated $700 million incremental debt
financing.
— The adjusted effective tax rate for the year is expected to be in a
range of 30 to 32 percent compared to the 2010 rate of 29.8 percent.
The year-over-year increase at the midpoint is equivalent to an
approximate 1 1/2 point reduction in adjusted earnings per share growth.
— The company’s share of net income of equity companies is expected to be
similar to, or up slightly, compared to 2010’s level.
— Capital spending should total $950 to $1,050 million, in line with the
company’s long-term target of 4 1/2 to 5 1/2 percent of net sales.
— Cash contributions to the company’s defined benefit pension plans are
expected to be $400 to $500 million.
— Average primary working capital cash conversion cycle is anticipated to
improve by 3 days.
— Adjusted earnings per share in a range of $4.90 to $5.05, up 5 to 8
percent compared to adjusted earnings of $4.68 per share in 2010.
Non-GAAP Financial Measures
This press release and the accompanying tables include the following financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as nonGAAP financial measures.
— Adjusted earnings and earnings per share
— Adjusted gross and operating profit
— Adjusted effective tax rate
These non-GAAP financial measures exclude the following items:
— Adoption of highly inflationary accounting for our Venezuelan
operations. The company recorded a one-time after tax loss in first
quarter 2010 for the remeasurement of the local currency balance sheet
in Venezuela as a result of the adoption of highly inflationary
accounting in that country effective January 1, 2010. Management does
not consider this loss to be part of our earnings from ongoing
operations for the purposes of evaluating the performance of its
business units and their managers and excludes this loss when making
decisions to allocate resources among its business units. This item was
excluded from the calculation of the company’s earnings and earnings per
share, operating profit and effective tax rate, calculated in accordance
with GAAP, for the twelve months ended December 31, 2010.
— Pulp and tissue restructuring. In January 2011, the company initiated a
pulp and tissue restructuring to exit its remaining integrated pulp
manufacturing operations and improve the underlying profitability and
return on invested capital of its consumer tissue and K-C Professional
businesses. The restructuring is expected to be completed by December
31, 2012. Management also excludes these charges when evaluating the
operating performance of the company. This item was excluded from the
calculation of the company’s estimated earnings per share and estimated
effective tax rate, calculated in accordance with GAAP, for 2011.
In accordance with the SEC’s requirements, reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures are attached.
The company provides these non-GAAP financial measures as supplemental information to our GAAP financial measures. Management and the company’s Board of Directors use adjusted earnings, adjusted earnings per share and adjusted gross and operating profit to (a) evaluate the company’s historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources and (c) measure the operational performance of the company’s business units and their managers. Management also believes that the use of adjusted effective tax rate provides improved insight into the tax effects of our ongoing business operations.
Additionally, the Management Development and Compensation Committee of the company’s Board of Directors has used the non-GAAP financial measures when setting and assessing achievement of incentive compensation goals. These goals are based, in part, on the company’s adjusted earnings per share and improvement in the company’s adjusted return on invested capital and adjusted operating profit return on sales determined by excluding the charges that are used in calculating these non-GAAP financial measures.
In addition, Kimberly-Clark management believes that investors’ understanding of the company’s performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing the company’s ongoing results of operations. Many investors are interested in understanding the performance of our businesses by comparing our results from ongoing operations from one period to the next. By providing these non-GAAP financial measures, together with reconciliations, we believe we are enhancing investors’ understanding of our businesses and our results of operations. Also, many financial analysts who follow our company focus on and publish both historical results and future projections based on nonGAAP financial measures. We believe that it is in the best interests of our investors for us to provide this information to analysts so that those analysts accurately report the non-GAAP financial information.
These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measure. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation and items being excluded. The company compensates for these limitations by using these non-GAAP financial measures as a supplement to the GAAP measures and by providing reconciliations of the non-GAAP and comparable GAAP financial measures. The non-GAAP financial measures should be read only in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP.