Kimberly-Clark (KMB) Outpaces Estimates

Kimberly-Clark Corporation (KMB) has reported a 23.7% year-over-year growth in the second quarter to $1.20 per share from 97 cents per share in the year-ago period. Reported EPS topped the Zacks Consensus Estimate of $1.13 per share. Earnings benefited from net sales and margin growth.

Kimberly-Clark expects to report fiscal 2010 adjusted earnings of $4.80–$5.00 per share toward the low end of that range. The current Zacks Consensus Estimate $4.76 per share is below the company’s guidance.

Consolidated Revenue and Margins

During the quarter, net sales grew 2.8% to $4.9 billion boosted by increased net selling prices, as well as the acquisition of I-Flow Corp. (a health care company that develops and markets drug delivery systems and products) and Jackson Products Inc. (a privately held safety products company) during 2009.

For fiscal 2010, the company lowered its net sales growth to 3%–5% annually from the prior range of 4%–6%. The guidance includes 1% benefit from the combined impact of the 2009 acquisitions.

Compared with the year-ago period, gross margin expanded 50 basis points (bps) and operating margin jumped 170 bps in the reported quarter. The margin amplified due to higher net selling prices, notable cost-saving efforts, lower pension expenses and severance charges incurred in 2009. Further, the company took an input cost inflation of $235 million and additional strategic marketing expenses of over $40 million to underpin product innovation and accomplish goals. Kimberly-Clark assumes input cost inflation of $700–$800 million versus its prior estimate of $600–$700 million.

Segment Details

In terms of segments, Personal Care grew 2.8% year over year to $2.18 billion, Consumer Tissue dipped 1.7% to $1.53 billion, K-C Professional increased 8.8% to $801 million, while Health Care recorded a growth of 2.7% to $344 million.

Financial and Cost Saving Update

At the end of the quarter, Kimberly-Clark had cash and cash equivalents of $585 million and long-term debt of $4.44 billion, compared with $798 million and $4.79 billion, respectively, at the end of fiscal 2009. At the end of the quarter, total debt and redeemable securities was $6.7 billion, compared with $6.5 billion at the end of fiscal 2009.

Kimberly-Clark repurchased shares worth $350 million in the reported quarter, after buying back shares for $150 million in the previous quarter. Based on a robust cash flow assumption, the company increased its fund allocation by $200 million to $700–$800 million for repurchasing shares in fiscal 2010.

The company generated lower year over year operational cash flow of $587 million in the quarter on account of higher working capital, partially offset by lower pension contributions. Capital expenditure in the quarter came in at $179 million and anticipates fiscal 2010 spending to be at low end, or potentially slightly below, the range of $1.0–$1.1 billion.

Kimberly-Clark’s ‘Focused on Reducing Costs Everywhere’ (FORCE) program generated savings of $105 million. The company expects savings of more than $300 million in fiscal 2010.

Our Take

Despite the challenging environment, Kimberly-Clark continues to strengthen its brands, achieve set goals and invest for long-term returns. The company aims to launch products in the rest of fiscal 2010, backed by brands enhancement and marketing programs.

Kimberly-Clark has good appetite for higher input cost inflation, which allows it to compete with its peers. Cost saving strategies, particularly in sourcing and supply chain activities, makes the company capable of sustainable growth.

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