Kimberly-Clark Up Big from 3Q08

Kimberly-Clark Corporation (KMB - Analyst Report) reported strong third quarter results with earnings of $1.40 per share. Earnings were well above the Zacks Consensus Estimate of $1.04 and up a record 37.3% year over year. Profits were driven by higher prices and lower commodity and energy costs.

However, net sales for the quarter declined 1.7% year-over-year to $4.9 billion, due to the adverse effect of weaker foreign currency exchange rates and flat volumes, which was more than offset by an organic sales growth of about 3%. In addition, the weak economic environment, especially in North America, impacted the top-line. Three of the four operating divisions: Personal Care (-0.7%), Consumer Tissue (-5.0%) and K-C (-4.5%) experienced revenue declines, while the Health Care segment increased 15.8% year-over-year.

The Personal Care segment was impacted by negative currency translations and volume declines in Huggies diapers. Sales in the Consumer Tissue segment were down due to increased emphasis on revenue realization together with slower category growth and consumer trade-down. Sales in the K-C Professional & Other Products segment were down attributable to the economic weakness and rising unemployment levels, which lowered sales volumes. Growth in the Health Care segment was driven by strong results in nitrile gloves, including the new Lavender offering introduced in 2008.

In October 2009, the company made two acquisitions to complement its Health Care segment. On October 6 it acquired Baylis Medical Company's pain management business. This transaction will enable Kimberly-Clark to accelerate its growth in the pain management business around the world while strengthening its commitment to patients suffering from chronic spinal pain.

On October 9, it acquired I-Flow Corporation (IFLO - Analyst Report), a leading healthcare company. The acquisition is considered to be a strategic fit to the company’s existing business and is also consistent with the company’s global business plan to expand its Health Care business by including higher-growth, higher-margin medical devices.

Furthermore, the I-Flow acquisition is expected to boost Kimberly-Clark’s sales by more than 50% and thereby expand its gross margins as well. The acquisition is also expected to add an innovative and successful technology to the company’s growing portfolio of pain management and surgical solution products.

Gross margin for the quarter expanded 588 basis points (bps) to 35.2% versus 29.3% in the comparable prior-year quarter. The increase was primarily due to moderation of costs of fiber, oil-based products and energy. The operating margin also expanded 553 bps to 17.7% from 12.2% in the prior-year quarter.

The company had cash and cash equivalents of $750 million and a debt-to-capitalization ratio of 44.7%.

Based on the performance of the company year-to-date and its controlled approach to revenue realization, management has revised guidance for fiscal 2009. Net sales are now expected to decline about 2% versus the previous guidance of a decline of 4% to 6%.

Currency volatility is now expected to reduce full-year sales by approximately 5%, compared to the previous guidance for a negative impact of 6% to 7%.

Organic sales are expected to grow about 3%, up from the previous guidance of 1% to 2%. Volumes are expected to be flat-to-down slightly for the year, and product mix is expected be flat-to-up modestly. Based on performance-to-date and plans for the fourth quarter, the full-year benefit from higher net selling prices is expected to be at least 3%.

Deflation in key cost inputs is expected at approximately $600 to $700 million, consistent with the previous guidance. The company expects to generate cost savings from the company's FORCE program and strategic cost reduction plan of approximately $250 million, compared to savings of at least $200 million, stated earlier.

However, management raised its annual earnings guidance to a range of $4.50 to $4.60 per share, significantly up from the previous estimate of $4.10 to $4.25. The improvement is primarily driven by a combination of increased cost savings, better organic sales growth and a further recovery in currency exchange rates.