KMB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on the same date for Kimberly-Clark Corporation. The company operates three global business segments: Personal Care, Consumer Tissue, and Business-to-Business. During the quarter, the company consolidated its joint tissue venture in Brazil (Klabin Kimberly S.A.) and acquired the remaining interest in Kimberly-Clark Peru S.A.

Key Financial Metrics

Note: Free Cash Flow calculated as Cash from Operations minus Capital Spending ($653.2M for 9M 2003).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 4.4% in Q3 and 4.1% for the nine months ended Sept 30, 2003. Growth was driven by favorable currency exchange rates (~3%) and higher sales volumes (~2%), partially offset by lower net selling prices due to competitive promotions.
• Profitability Decline: Operating profit decreased 6.3% in Q3 and 7.4% for the nine-month period. This decline was caused by higher pension expenses (~$35M in Q3, ~$105M for 9M), increased fiber, distribution, and energy costs (~$40M in Q3), and lower net selling prices.
• Segment Performance:
  • Personal Care: Sales up 1.3% (Q3); Operating profit up 3.1% due to cost savings and currency benefits.
  • Consumer Tissue: Sales up 7.3% (Q3); Operating profit down 18.9% due to high promotional spending and input costs.
  • Business-to-Business: Sales up 4.6% (Q3); Operating profit flat, with record sales in the global health care business.
• Acquisitions: The company spent approximately $200 million to acquire remaining interests in Peru and Brazil operations, consolidating Klabin Kimberly S.A. into the financial statements.

Guidance, Outlook, and Risks

• Outlook: Management expects continued pressure on the Consumer Tissue segment in the fourth quarter due to higher fiber costs and sustained high levels of promotional spending. However, the company remains focused on cost reduction and expects to generate cost savings across all businesses.
• Forward-Looking Items: The company signed an agreement to acquire a 49.5% interest in a synthetic fuel partnership. This is expected to result in approximately $100 million in expenses and $120 million in federal tax benefits in the fourth quarter, yielding a net annual benefit of ~$20 million. This transaction is expected to lower the effective tax rate by about 4 percentage points in 2003.
• Capital Allocation: The company repurchased approximately 7 million shares of common stock for $339 million during the first nine months of 2003. Dividends declared were $0.34 per share for the quarter.
• Risks: Key risks include intense competition leading to price erosion, volatility in raw material (fiber) and energy costs, and foreign currency fluctuations. Environmental liabilities exist but are not expected to be material.

Investor Verification Checklist

• Cost Inflation: Verify the trajectory of fiber, energy, and distribution costs, which significantly impacted margins in Q3.
• Pension Expense: Confirm the sustainability of the increased pension expense (~$35M quarterly impact) and its effect on future operating profits.
• Promotional Spending: Assess the long-term impact of aggressive promotional spending in the Consumer Tissue segment on brand equity and pricing power.
• Acquisition Integration: Monitor the financial performance of the newly consolidated Klabin Kimberly S.A. (Brazil) and Kimberly-Clark Peru S.A. operations.
• Synthetic Fuel Tax Credits: Verify the realization of the anticipated $120 million tax benefit from the synthetic fuel partnership in the fourth quarter.