KMB

Business Context and Reporting Period

Company: Kimberly-Clark Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2003
Business Overview: The Corporation operates three global segments: Personal Care (diapers, feminine care), Consumer Tissue (facial/bathroom tissue, paper towels), and Business-to-Business (health care products, professional tissue). As of August 1, 2003, there were approximately 506.7 million shares of common stock outstanding.

Key Financial Metrics

Note: Total Debt calculated as Debt payable within one year ($1,004.5M) + Long-Term Debt ($2,807.8M).

Material Changes vs. Prior Period

• Revenue: Consolidated net sales increased 4.0% in Q2 2003 and 3.9% for the first six months compared to 2002. Growth was primarily driven by favorable currency exchange rates (approx. 4% benefit in Q2). Organic sales volumes were essentially flat due to intense competition and weaker growth in key North American categories.
• Profitability: Operating profit declined 2.8% in Q2 and 8.0% for the six-month period. Despite cost reduction savings of nearly $50 million in Q2, margins were compressed by higher fiber and energy costs (~$40 million), increased pension expense (~$35 million in Q2), and higher promotional spending.
• Net Income: Diluted EPS increased 1.2% to $0.82 in Q2 but decreased 3.0% to $1.60 for the six-month period compared to 2002. The six-month decline was partially influenced by a $15.6 million legal judgment charge in Europe and currency transaction losses.
• Cash Flow: Cash provided by operations decreased $108.5 million (8%) for the first six months, impacted by higher finished goods inventory levels and a $100 million contribution to the U.S. defined benefit pension plan.

Guidance, Outlook, and Risks

• Outlook: Management expects a difficult business environment for the remainder of 2003 due to soft category growth, intense competition, and elevated raw material and energy costs. The focus remains on increasing sales volumes and aggressively reducing costs.
• Credit Ratings: In July 2003, Standard & Poor's revised the long-term debt rating from AA to AA-. Moody's changed the outlook to negative from stable, citing recent business performance and changes in pension liability evaluation. Management believes access to credit remains strong.
• Debt Management: The Corporation issued $500 million of 5.0% Notes in August 2003 to retire commercial paper. It also redeemed $400 million of higher-interest debentures in June/July 2003. Net debt and preferred securities to capital ratio stood at 36.4% at June 30, 2003.
• Acquisitions: The company closed the acquisition of a minority owner in Kimberly-Clark Peru (July 2003) and expects to close the acquisition of a joint tissue venture in Brazil (August 2003), with a combined cash cost of approximately $200 million.
• Accounting Risks: The company is evaluating the impact of FIN 46 (Consolidation of Variable Interest Entities), which may require the consolidation or deconsolidation of certain entities in the third quarter of 2003, though no material adverse effect is currently expected.

Investor Verification Checklist

• Cost Pressures: Verify the trajectory of fiber and energy costs and the effectiveness of cost-reduction programs in offsetting these increases.
• Volume Trends: Monitor sales volume trends in North America, specifically for diapers and consumer tissue, where growth has been weaker than expected.
• Pension Obligations: Review the impact of increased pension expenses and the $100 million cash contribution on future liquidity and operating margins.
• Credit Rating Impact: Assess the potential implications of the negative outlook from Moody's and the downgrade by S&P on future borrowing costs.
• Legal Contingencies: Track the resolution of the European legal judgment ($15.6 million charge) and any further developments regarding environmental liabilities.