KMB

Business Context and Reporting Period

Company: Kimberly-Clark Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A multinational manufacturer of consumer and professional tissue, personal care, and health care products. The company operates four global segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care.

Key Financial Metrics

All figures in millions of dollars, except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 5.6% in Q2 and 6.1% YTD compared to 2008. This was driven by unfavorable currency effects (-8% to -9%), lower sales volumes (-2% to -3%), partially offset by higher net selling prices (+5%).
• Profitability: Operating profit decreased 6.3% in Q2 and 5.9% YTD. Net income attributable to Kimberly-Clark decreased 3.4% in Q2 and 5.6% YTD.
• Segment Performance:
  • Health Care: Strongest performer with operating profit up 106.7% in Q2, driven by volume growth (including H1N1 demand for masks) and cost deflation.
  • Consumer Tissue: Operating profit increased 23.8% in Q2 due to price increases and cost savings, despite volume declines.
  • Personal Care & K-C Professional: Both segments saw operating profit declines due to volume softness, currency headwinds, and optimization charges.
• Cost Deflation: Significant benefit from lower input costs, including approximately $125 million in lower fiber costs and $40 million in other raw materials.
• Currency Impact: Unfavorable currency effects reduced operating profit by approximately $125 million in Q2 and $275 million YTD, primarily due to the weakening of the Euro, Brazilian Real, and Australian Dollar.

Guidance, Outlook, and Risks

• Updated Guidance: Management raised full-year 2009 earnings per share guidance to a range of $4.10 to $4.25, up from the previous $4.00 to $4.20. This estimate includes approximately $0.15 per share in net costs for the organization optimization initiative.
• Organization Optimization: In June 2009, the company announced a plan to reduce its worldwide salaried workforce by approximately 1,600 positions. A pretax charge of $110 million was recorded in Q2, with total cumulative charges expected to be $140-$150 million by year-end.
• Pension Plan Changes: The company froze its U.S. defined benefit pension plans for future service (effective Jan 1, 2010) and discontinued contributions to certain 401(k) plans, resulting in a $21 million curtailment charge in Q2. Pension contributions for 2009 are expected to total $530 million.
• Acquisitions: Acquired Jackson Products, Inc. in Q2 for approximately $155 million to accelerate growth in workplace safety products.
• Risks:
  • Currency Volatility: Continued weakness in foreign currencies relative to the U.S. dollar remains a significant headwind.
  • Venezuela Operations: Currency exchange restrictions in Venezuela resulted in a $45 million expense in Q2 related to importing finished goods at parallel market rates.
  • Raw Material Costs: While currently benefiting from deflation, future fluctuations in fiber, polymer, and energy prices pose a risk.

Investor Verification Checklist

• Optimization Charges: Verify the timing and total cost of the $140-$150 million workforce reduction initiative and its impact on future operating expenses.
• Currency Hedging: Review the effectiveness of hedging strategies given the significant translation losses reported in Europe and emerging markets.
• Pension Liability: Assess the long-term impact of the U.S. pension freeze and the $530 million contribution requirement on future cash flows.
• Volume Trends: Monitor sales volume trends in the Personal Care and K-C Professional segments, which showed double-digit declines in some regions.
• Venezuela Exposure: Evaluate the sustainability of operations in Venezuela given the parallel market currency exchange issues.