KMB

Business Context and Reporting Period

Company: Kimberly-Clark Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second Quarter and Six Months ended June 30, 2002
Business Overview: The Corporation operates in three segments: Personal Care (diapers, incontinence products), Consumer Tissue (facial/bathroom tissue, paper towels), and Business-to-Business (away-from-home products, health care). A significant event during the period was the acquisition of the remaining 45% ownership of Kimberly-Clark Australia Pty. Ltd. (KCA) on June 30, 2002, for approximately $390 million.

Key Financial Metrics

Note: Total Debt calculated as Debt payable within one year ($895.7M) + Long-term debt ($2,815.9M) as of June 30, 2002. Net debt (total debt less cash) was $3.9 billion.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 5% in Q2 2002 and 2.6% for the six-month period compared to 2001. Excluding currency effects, sales rose approximately 6% in Q2, driven by higher volumes in Consumer Tissue and Personal Care.
• Profitability: Operating profit increased 5.7% in Q2 and 5.5% for the six months. Excluding "Unusual Items," operating profit increased 7.6% in Q2, driven by lower raw material costs, productivity gains, and the consolidation of KCA.
• Accounting Changes: The company adopted SFAS 142 on January 1, 2002, discontinuing goodwill amortization. This resulted in a $22.5 million increase in operating profit for Q2 2002 compared to Q2 2001 (where $22.5M was amortized).
• Unusual Items: Q2 2002 included a $26.5 million pretax charge related to invalid tax credits in Latin America and $15.1 million for business improvement programs. Q2 2001 included $28.5 million in unusual items.
• Equity Income: Share of net income of equity companies dropped significantly from $52.6 million in Q2 2001 to $21.5 million in Q2 2002, primarily due to currency impacts on Kimberly-Clark de Mexico and the consolidation of KCA.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year 2002 results to be consistent with November 2001 planning assumptions. The company anticipates improved earnings compared to the prior year, driven by new product introductions and a recovering economy in North America's business-to-business sector.
• Capital Spending: Revised downward to approximately $900 million for 2002 (previously $1 billion).
• Risks and Challenges:
  • Competition: Intense competitive activity in Personal Care and Consumer Tissue segments, leading to lower net selling prices and higher promotional spending.
  • Geographic Challenges: Difficult business environments in Mexico, Argentina, and Brazil, including recession impacts in Argentina.
  • Currency: Unfavorable currency effects, particularly regarding the Mexican peso and Argentine peso.
  • Environmental: Named as a potentially responsible party at various waste disposal sites, though management does not expect a material adverse effect.
• Liquidity: Management believes cash from operations and debt capacity are adequate to fund working capital and capital spending. The net debt to capital ratio was 38.3% at June 30, 2002, within the target range of 35-45%.

Investor Verification Checklist

• Latin American Tax Credits: Verify the status of recovery efforts regarding the $26.5 million write-off of invalid tax credits in Latin America.
• Goodwill Impairment: Confirm the results of the goodwill impairment testing required under SFAS 142, as the company currently reports no impairment.
• KCA Integration: Monitor the financial impact and integration progress of the full acquisition of Kimberly-Clark Australia (KCA).
• Raw Material Costs: Track pulp and other raw material costs, as management noted recent upward movement despite expectations of lower costs for the year.
• Equity Earnings Volatility: Assess the sensitivity of equity income (specifically Kimberly-Clark de Mexico) to currency fluctuations and local tax law changes.