Kimberly-Clark Corporation (KMB) has reported diminutive results for the third quarter of 2010 as earnings plunged 18.6% year-over-year to $1.14 per share from $1.40 per share in the year-ago period. EPS was also below the Zacks Consensus Estimate of $1.28 per share. Earnings were primarily impacted by significant cost inflation.

Kimberly-Clark has lowered its guidance and now expects to report fiscal 2010 adjusted earnings of $4.60–$4.70 per share. The earlier guidance was in the lower range of $4.80 to $5.00 per share. The current Zacks Consensus Estimate $4.82 per share is above the company’s guidance.

Consolidated Revenue and Margins

During the quarter, net sales grew 1.3% to $5.0 billion, boosted by the acquisition of I-Flow Corp. (a health care company that develops and markets drug delivery systems and products) which was partially offset by unfavorable currency exchange rates. Revenues were above the Zacks Consensus Estimate of $1.29 billion.

For fiscal 2010, the company narrowed its net sales growth to 3% compared to earlier guidance of 3%–5% annually. The guidance includes 1% benefit from the combined impact of the 2009 acquisitions.

Compared with the year-ago period, gross margin contracted 274 basis points (bps) and operating margin reduced 371 bps in the reported quarter. The margin contracted as benefits from the company’s FORCE program was fully offset by significant cost inflation of $265 million. Key costs included $170 million in higher fiber costs, $90 million for raw materials primarily polymer resin and other oil-based materials and $5 million in distribution costs.

Kimberly-Clark assumes input cost inflation at the high end of the $700 million–$800 million guidance range.

Segment Details

In terms of segments, Personal Care grew 2.4% year over year to $2.18 billion, Consumer Tissue grew 1.1% to $1.64 billion, K-C Professional dipped 3.0% to $781 million, while Health Care recorded a growth of 4.6% to $367 million.

Financial and Cost Saving Update

At the end of the quarter, Kimberly-Clark had cash and cash equivalents of $533 million and long-term debt of $4.71 billion, compared with $798 million and $4.79 billion, respectively, at the end of fiscal 2009.Total debt and redeemable securities was $6.5 billion at the end of the quarter.

Kimberly-Clark repurchased shares worth $200 million in the reported quarter, after buying back shares for $500 million for the first half of 2010.

The company generated lower year over year operational cash flow of $745 million in the quarter on account of lower earnings. Capital expenditure in the quarter came in at $248 million and anticipates fiscal 2010 spending to be in the range of $900 million to $1 billion compared to the range of $1.0–$1.1 billion.

Kimberly-Clark’s ‘Focused on Reducing Costs Everywhere’ (FORCE) program generated savings of approximately $95 million.

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 brand enhancement and marketing programs.

Zacks Rank

Kimberly Clark Corporation maintains Zacks #3 Rank, which translates into short-term Hold recommendation.

 
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