Fitch affirms K-C's IDR at A, short-term IDR and US$2B commercial paper program at F1; outlook stable
October 2, 2013
– Fitch Ratings affirms Kimberly-Clark Corporations' (KMB) ratings as follows:
--Long-Term Issuer Default Rating (IDR) at 'A';
--Short-Term IDR at 'F1';
--$2 billion commercial paper (CP) program at 'F1';
--$200 million dealer remarketable securities at 'A'/'F1';
--$1.5 billion revolving credit facility at 'A';
--Senior unsecured notes and debentures at 'A'.
Fitch also affirms Kimberly-Clark Worldwide, Inc.'s CP at 'F1'. Commercial paper, issued by Kimberly-Clark Worldwide, Inc., is fully guaranteed by KMB.
The Rating Outlook is Stable. Approximately $5.9 billion of senior unsecured notes, remarketable securities, debentures and commercial paper outstandings are affected by this action. The revolver is unutilized. Total consolidated debt is $7.2 billion and encompasses the $5.9 billion mentioned above and certain unrated facilities such as the $506 million redeemable preferred security, the $397 million monetization loan, and approximately $400 million of other debt.
Sizeable Scale, Stable Sector:
The ratings reflect the company's scale with over $21 billion in revenues, leading market shares in the relatively non-cyclical household and personal care products sector, and strong liquidity.
Emblematic of the household and personal care sector's stability, organic revenue growth is typically in the 1% to 5% range. KMB's performance has been within this range in each of the past seven years. Fitch expects low single-digit organic growth in 2013. However, exiting $500 million of low-margin business including diapers and consumer tissue in much of Western and Central Europe and some drag from negative foreign exchange translation is likely to lead to flat or modestly lower revenues this year.
Commitment to Credit Protection Measures:
The company's commitment to maintain its current credit protection measures underpins the rating. Fitch is comforted by the fact that KMB has demonstrated an ability to scale back discretionary activities such as share repurchases and a portion of capital expenditures when cash flows experience pressure or if pension contributions or fill-in acquisitions are required. Management appears mindful of the company's rating.
Moderate Leverage to Be Maintained:
Fitch expects debt and leverage (debt/EBITDA) to remain near $7.2 billion and below 2x in the near term. Leverage has been at or below 2x since 2008. At present, KMB could increase debt to near the $1 billion range with minimal impact on the rating as long as its current business momentum, with solid organic growth, improved operating margins and moderate leverage is sustained. Fitch expects the company to balance shareholder-friendly activities against its solid credit protection measures, and execute such activities in a prudent manner.
Intermittent Input Cost Pressures:
Commodities used in the manufacturing process such as resin, pulp, and energy can experience periods of price volatility, pressuring margins. On-going cost saving programs along with pricing in some markets have led to sequential improvement in EBIT margins since 2011; margins improved sequentially from 13.8% in 2011 to 15.9% in the first half of 2013. Fitch expects margins to improve further in 2013 with mix improvement in Europe and overall cost savings offsetting moderate increases in some commodities, such as resin.
Ample Operating Earnings and Cash Flow:
At June 30, 2013, KMB had almost $2.7 billion in liquidity with $1.2 billion in cash on hand and $1.5 billion in revolving credit availability. The company's sole financial covenant to maintain stockholders equity of at least $2.3 billion has a significant cushion, at $4.7 billion at June 30, 2013. Both of these features support the company's strong liquidity.
The company's strong financial flexibility is derived from its ability to consistently generate at least $2.3 billion in operating cash flow (OCF) since 2009. From 2009 through 2011, however, almost $1.8 billion in pension contributions (roughly $590 million on average annually for three years) dampened OCF. Pension contributions are expected to remain well below those levels, given improved market returns and a stabilized or improving discount rate. Further, EBITDA margins have improved sequentially since 2011 and were almost 20% at the last 12 months (LTM) ended June 30, 2013. Fitch expects further margin improvement due to the company's on-going cost savings program and restructuring actions. As a result, the new normal for OCF is approximately $3 billion, which provides a good cushion for discretionary activities such as the almost $2.3 billion annually in CAPEX and dividends. Fitch expects OCF to be in the $3 billion range and that FCF will exceed $600 million going forward.
Near-Term Refinancing Bulge:
The company has a refinancing bulge with a total of $1.2 billion in debt maturing in the next 15 months: dealer remarketable securities of $200 million due in December 2013, a $397 million LIBOR + 150 basis point (bps) loan due in January 2014, a $100 million 6.875% debenture maturing in February 2014 and a $506 million 5.417% redeemable preferred security also matures in December 2014. KMB is likely to access the capital market and refinance these maturities rather than use internally generated funds, in order to manage its capital structure and maintain credit metrics at levels commensurate with current ratings. Debt maturities are modest in 2015 and 2016 at less than $350 million annually.
Future developments that may, individually or collectively, lead to a negative rating action include:
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.
Future developments that may, individually or collectively, lead to a positive rating action include:
The company has the financial flexibility to manage its credit metrics at slightly higher levels given stable cash flows. Operating with leverage closer to 1x and demonstrating a commitment to staying within that band would support upward migration of KMB's rating. However, the company appears comfortable with its current ratings and an upgrade does not appear likely.
Additional information is available at www.fitchratings.com.
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