(The following statement was released by the rating agency)
Oct 5 - Fitch Ratings has affirmed Kimberly-Clark Corporations'
(KMB) ratings as follows:
--Long-Term Issuer Default Rating (IDR) at 'A'; --Short-Term IDR at 'F1'; --Commercial Paper (CP) at 'F1'; --$200 million dealer remarketable securities at 'A' and 'F1'; --$2 billion revolving credit facilities at 'A'; --Senior unsecured notes and debentures at 'A'.
Fitch has also affirmed Kimberly-Clark Worldwide, Inc.'s, CP and short-term IDR at 'F1'. Commercial paper, issued by Kimberly-Clark Worldwide, Inc., is fully guaranteed by KMB.
The Rating Outlook is Stable. Approximately $5 billion of senior unsecured notes, remarketable securities, and debentures are affected by this action as well as the $272 million in commercial paper at June 30, 2012. The revolvers are unutilized.
The ratings reflect the company's scale with over $20 billion in revenues, leading market shares in the relatively non-cyclical consumer products industry, and ample liquidity. KMB has generated at least $2.3 billion in operating cash flow in each of the past 10 years.
In recent years the company used its strong cash flow to address its pension deficit. KMB's pension deficit in 2008 was sizeable at $1.9 billion and the obligation increased $5 billion in 2008 to $5.9 billion in 2011 given declines in the discount rate. However, after $1.8 billion in contributions over the past three years the deficit is now a comfortable $0.7 billion. Pension contributions going forward are likely to be materially smaller allowing cash from operations (CFO) to move consistently into the $2.7 billion range.
Free cash flow (FCF) has exceeded $500 million annually over the past 10 years except for 2011 when KMB made $434 million in incremental contributions. Fitch expects FCF to exceed $500 million during the next two years.
KMB's ability to generate ample levels of FCF despite the pressure on margins due to rapid escalations in commodity input costs for much of the past seven years is a key strength. The company has a long track record of successfully reducing costs, and that should continue. Pulp, resin and energy are key commodities. Pulp prices have been declining, but in October suppliers announced modest price increases. It may be difficult to maintain these new prices given an expected increase in global capacity. Resin prices, reflecting supply/demand imbalances are likely to remain high but relatively stable. Given this, Fitch does not expect overall rapid escalations in KMB's raw material cost, which should benefit margins and profitability over the next year. Commodities, however, have proven to be highly volatile, as have foreign exchange movements. These two items are the caveats to Fitch's expectations.
Fitch would be concerned if CFO fell below $2.1 billion. KMB has a relatively large dividend of more than $1 billion and sizeable capital expenditures which are also in the $1 billion range. These are relatively large draws on CFO. Fitch is comforted by the fact that KMB has demonstrated an ability to scale back discretionary activities such as share repurchases, capital expenditures or slow the rate of dividend growth when cash flows experience pressure or if pension contributions or fill-in acquisitions are required. Further, as discussed above, pension contributions are expected to decline, supporting higher levels of CFO going forward.
The Rating Outlook is Stable based on KMB's liquidity, strong debt protection measures, and commitment to its current ratings. As is typical in a scenario where commodity prices are relatively stable, the company's cushion within the rating category expands. Leverage is back under 2x with 1.7x at the latest 12 months (LTM). Debt balances are expected to remain in the low $7 billion range which includes the redeemable preferred securities. At present, KMB could increase debt by$500 million with minimal impact on the rating as long as its current business momentum is sustained. Fitch expects the company to continue balancing its shareholder-friendly activities against its solid credit protection measures, and execute such activities in a prudent manner.
For the first half of 2012 (1H'12), revenues increased 2% to $10.5 billion supported by pricing of 3% and volume growth of 2%. These were partially offset by negative foreign exchange translation of 2% and 1%, respectively, due to the exit of some non-branded product lines as part of the company's tissue restructuring efforts. With 2011 price increases fully implemented by 2H'12 and a general global economic slowdown, revenue growth next year will be primarily dependent on low single-digit volume growth and foreign exchange movements. Cost savings efforts during the more benign commodity environment this year led to a 150 basis point improvement in EBIT (excluding restructuring charges and other income). With improved profitability and $370 million less in pension contributions, FCF improved to $272 million in 1H'12 2012 vs. $37 million in the prior year.
Liquidity at June 30, 2012 is ample with cash balances of $994 million, a $1.5 billion revolver due in 2016 and a 364-day revolver due in October 2012, and strong access to the capital markets. Debt maturities are meaningful in the next two years with $700 million due in 2013, while in 2014 two notes totaling $497 million are due in addition to $506 million in redeemable preferred securities. These are expected to be at least partially refinanced.
Rating Action Triggers: Positive: The company has the financial flexibility to manage its credit metrics at higher levels given stable cash flows. Operating with leverage closer to 1X and demonstrating a commitment to staying within that at this level would support upward migration of KMB's rating. Negative: A change in financial strategy to operate with higher leverage, or completing a large debt-financed share buyback or acquisition is likely to trigger a negative rating action. None of these actions are expected.
Additional information is available at '
Applicable Criteria and Related Research: Corporate Rating Methodology (Aug. 2012). Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)