KMB

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Kimberly-Clark Corporation for the period ended March 31, 2003. The company operates in three global segments: Personal Care, Consumer Tissue, and Business-to-Business. As of May 2, 2003, there were 508,725,269 shares of common stock outstanding.

Key Financial Metrics

Margins: Gross margin was 34.8% in Q1 2003 compared to 36.4% in Q1 2002. Operating margin was 16.7% in Q1 2003 compared to 19.9% in Q1 2002.

Material Changes vs. Prior Period

• Revenue: Net sales increased 3.9% year-over-year, driven by a 3% benefit from favorable currency exchange rates and approximately 2% volume growth across all segments. Net selling prices declined 1% due to competitive pressures.
• Profitability: Operating profit declined 12.9% to $579.3 million. This decrease was primarily due to lower net selling prices, increased raw material costs (fiber and resin), and a $35 million increase in pension expense. These factors offset cost savings of over $40 million.
• Unusual Items: Q1 2003 included a $15.6 million charge ($0.02 per share) related to a legal judgment regarding a 1987 European government grant. Q1 2002 included a $11.4 million cumulative effect of an accounting change.
• Segment Performance:
  • Personal Care: Sales up 2.0%; Operating profit down 1.5% due to North American price competition.
  • Consumer Tissue: Sales up 5.6%; Operating profit down 4.6% due to promotional spending and raw material costs.
  • Business-to-Business: Sales up 4.1%; Operating profit down 9.6% due to lower selling prices and fiber costs.

Guidance, Outlook, and Risks

• Full Year 2003 Guidance: Management expects diluted earnings per share of $3.34 or better, inclusive of the $0.02 Q1 legal charge.
• Q2 2003 Outlook: Earnings per share are expected to be similar to Q1, excluding the one-time legal charge. Management anticipates inflationary pressures from fiber, energy, and oil-based products but plans to mitigate these through pricing and cost reductions.
• Capital Allocation: The company plans to repurchase approximately 2% of outstanding common stock in 2003. A 13% increase in the quarterly dividend was recently announced.
• Acquisitions: On March 6, 2003, the company announced the purchase of the Klucze tissue business in Poland from International Paper Company; transaction details were not disclosed.
• Risks and Contingencies:
  • Credit Rating: Standard & Poor's placed the company on credit watch in April 2003 due to a change in how pension liabilities are evaluated. Management believes this will not materially impact access to credit.
  • Accounting Changes: The company may be required to consolidate certain Variable Interest Entities (FIN 46) starting in Q3 2003, though no material adverse effect is expected.
  • Legal: A settlement regarding Safeskin lawsuits was approved in March 2003, dismissing all claims. Management does not expect other pending legal proceedings to have a material adverse effect.

Investor Verification Checklist

• Verify the impact of rising raw material costs (fiber, resin, energy) on future gross margins.
• Monitor the outcome of the Standard & Poor's credit watch review regarding pension liabilities.
• Confirm the final purchase price and integration details of the Klucze tissue business acquisition in Poland.
• Track the execution of the 2003 cost reduction programs to ensure they offset inflationary pressures.
• Review the potential impact of FIN 46 consolidation requirements in Q3 2003 on the balance sheet.