KMB

Business Context and Reporting Period

Company: Kimberly-Clark Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Corporation operates four global business segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. The company is a large accelerated filer with 415,216,107 shares of common stock outstanding as of July 31, 2008.

Key Financial Metrics

Note: Q2 Cash Flow figures derived from MD&A commentary; 6-month figures from Cash Flow Statement. Total Debt calculated as Current Debt ($1,348.4) + Long-Term Debt ($4,995.5) + Redeemable Preferred Securities ($1,011.0).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11.2% in Q2 2008 and 10.5% for the six-month period, driven by volume growth (3%), price increases (3-4%), and favorable currency effects (4%).
• Profitability Pressure: While Operating Profit remained flat (+0.2% in Q2), Net Income declined 9.8% in Q2. This was primarily due to significant cost inflation (fiber, raw materials, energy, and distribution totaling ~$180 million in Q2) and higher interest expense.
• Extraordinary Loss: The company recorded a non-cash extraordinary loss of $7.7 million (net of tax) in Q2 2008 due to the consolidation of two financing entities (Variable Interest Entities) following a restructuring of contractual arrangements.
• Segment Performance:
  • Personal Care: Operating profit increased 11.0% (Q2) and 16.8% (6mo) due to volume and price gains.
  • Consumer Tissue: Operating profit declined 22.8% (Q2) and 24.0% (6mo) as cost inflation and volume declines offset price increases.
  • Health Care: Operating profit dropped 42.7% (Q2) due to unfavorable mix and lower selling prices.
• Debt Increase: Total debt increased by approximately $850 million compared to year-end 2007, largely due to the consolidation of financing entities adding ~$612 million in debt obligations.

Guidance, Outlook, and Risks

• Strategic Cost Reduction Plan: The company is in the final stages of a multi-year plan. Cumulative pretax charges are now expected to total $880-$900 million (revised down from previous estimates). Approximately $859 million in pretax charges have been incurred to date.
• Capital Spending: Expected to range between $850 million and $950 million for the full year 2008. YTD spending was $434 million.
• Share Repurchases: The company expects to repurchase $700 million to $800 million of common stock in 2008. YTD repurchases totaled approximately $420 million.
• Outlook: Management expects earnings to improve sequentially in the fourth quarter as recent price increases gain traction, assuming no further material increases in input costs. However, cost inflation currently outpaces the ability to offset costs through pricing.
• Risks: Significant exposure to raw material (fiber, oil-based), energy, and distribution cost inflation. Foreign currency exchange rate fluctuations remain a key variable. Environmental liabilities exist but are not expected to be material.

Investor Verification Checklist

• Cost Inflation Impact: Verify the sustainability of margin recovery given the $180 million+ inflation headwind in Q2 and the lag in passing costs to consumers.
• Extraordinary Loss Details: Review Note 2 regarding the consolidation of Variable Interest Entities (FIN 46(R)) and the resulting $7.7 million charge and balance sheet impact.
• Consumer Tissue Volume: Monitor volume trends in the Consumer Tissue segment, which saw declines in North America and Europe despite price hikes.
• Debt Service: Assess the impact of increased interest expense (up ~$21 million in Q2) resulting from debt issued for the Accelerated Share Repurchase (ASR) program.
• Cost Reduction Savings: Track the realization of the $38 million in savings reported for Q2 against the remaining projected costs of the strategic plan.