KIMBERLY CLARK CORP quarterly report, Q2 FY2011

Business Context and Reporting Period

Kimberly-Clark Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company operates through Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care segments. The filing was signed August 5, 2011.

Financial Performance and Position

Metric	Three months ended June 30, 2011	Three months ended June 30, 2010	Six months ended June 30, 2011	Six months ended June 30, 2010
Net sales	$5,259 million	$4,857 million	$10,288 million	$9,692 million
Gross profit	$1,557 million	$1,644 million	$3,020 million	$3,291 million
Operating profit	$625 million	$711 million	$1,169 million	$1,376 million
Net income attributable to Kimberly-Clark	$408 million	$498 million	$758 million	$882 million
Diluted EPS	$1.03	$1.20	$1.89	$2.11
Cash dividends declared per share	$0.70	$0.66	$1.40	$1.32

Second-quarter sales increased 8.3%, while operating profit declined 12.1% and net income attributable to Kimberly-Clark declined 18.1%. Six-month sales increased 6.1%, while operating profit declined 15.0% and attributable net income declined 14.1%.

Calculated margins were approximately 29.6% gross and 11.9% operating in the second quarter, compared with 33.8% and 14.6%, respectively, in the prior-year quarter. Six-month gross and operating margins were approximately 29.4% and 11.4%, compared with 34.0% and 14.2% in the prior-year period.

Second-quarter sales growth reflected approximately 2% volume growth, 1% net price growth, and a 5% currency benefit. Six-month growth reflected approximately 2% volume growth, 1% net price growth, and a 3% currency benefit.
Second-quarter operating profit was pressured by approximately $180 million of input-cost inflation, including raw materials, fiber, energy, and distribution costs. Cost savings contributed approximately $45 million.
At June 30, 2011, cash and cash equivalents were $908 million, compared with $876 million at December 31, 2010.
Cash provided by operations was $771 million in the second quarter and $1,021 million for the six months, compared with $1,051 million for the six-month 2010 period.
Capital spending was $435 million for the six months, compared with $363 million in the prior-year period.
Total debt and redeemable securities were approximately $7.5 billion at June 30, 2011, compared with $6.5 billion at December 31, 2010. Reported balance-sheet debt included $1,008 million payable within one year and $5,424 million of long-term debt; fair-value disclosures included additional debt and redeemable securities.
Inventories increased to $2,521 million from $2,373 million at year-end 2010. Total stockholders’ equity declined to $5,857 million from $6,202 million.

Material Changes Versus the Prior Comparable Period

Personal Care second-quarter sales increased 7.3%, but segment operating profit declined 9.7% to $400 million, principally because of input-cost inflation.
Consumer Tissue sales increased 9.2% and operating profit increased 14.6% to $173 million, supported by pricing, volume, cost savings, and currency benefits, partly offset by inflation.
K-C Professional & Other sales increased 5.6%, while operating profit declined 3.0% to $129 million.
Health Care sales increased 13.7% and operating profit increased 26.2% to $53 million.
Foreign currency translation produced a $440 million after-tax other comprehensive income gain for the six months, compared with a $351 million loss in the prior-year period.
Cash dividends paid increased to $549 million from $525 million. The company repurchased 18.4 million shares for approximately $1.2 billion during the first six months, compared with approximately $486 million in the prior-year period.
Interest expense increased to $135 million for the six months from $121 million, primarily because of higher debt levels.
The six-month effective tax rate declined to 31.2% from 33.3%; the second-quarter rate increased to 31.0% from 27.5%.

Guidance, Outlook, Risks, and Unusual Items

The company initiated a pulp and tissue restructuring plan expected to be completed by December 31, 2012. It involves streamlining, selling, or closing five to six facilities and exiting certain non-strategic products.
Expected cumulative restructuring charges are approximately $400 million to $600 million before tax, or $280 million to $420 million after tax. Charges recorded were $90 million pretax and $59 million after tax in the second quarter, and $172 million pretax in the first six months.
Of the six-month restructuring charges, $124 million was noncash and $48 million was cash-related; $18 million of the cash charges had been paid by June 30.
Management expects the restructuring to reduce annual net sales by $250 million to $300 million by 2013 while increasing operating profit by at least $75 million.
Management expects full-year 2011 capital spending of $950 million to $1,050 million and plans to complete $1.5 billion of share repurchases during 2011.
Management stated that worsening commodity costs would be addressed through additional cost savings and overhead reductions, and expected currency exchange rates to benefit results in the second half of 2011.
A $32 million nondeductible business tax charge related to a Colombian law change affected first-half 2011 results. The prior-year period included a $98 million after-tax charge related to highly inflationary accounting for Venezuela.
Venezuelan operations represented approximately 1% of consolidated sales. At June 30, 2011, the Venezuelan subsidiary had a bolivar-denominated net monetary asset position of approximately $115 million and a net investment of approximately $205 million, both valued using 5.4 bolivars per U.S. dollar.
The company is exposed to commodity, currency, interest-rate, pension, inflation, market-demand, restructuring, legal, environmental, and Venezuelan currency-repatriation risks. Management stated that existing litigation and environmental matters were not expected to have a material adverse effect.
Management stated that operating cash generation and debt capacity were adequate to fund operations, capital spending, dividends, and other foreseeable needs.

Important Facts for Investors to Verify

Whether pricing and cost savings can offset continuing raw-material, fiber, energy, and distribution inflation.
The ultimate cost, timing, cash requirements, facility impacts, and realized savings from the pulp and tissue restructuring.
Whether the planned $1.5 billion share repurchase program is consistent with rising debt and liquidity requirements.
The sustainability of operating cash flow after increased pension contributions, capital spending, dividends, and share repurchases.
The effect of currency movements, Venezuelan exchange controls, and potential changes in currency-repatriation rates.
Whether management’s second-half 2011 currency and commodity-cost assumptions are achieved; the filing does not provide a specific earnings or sales-per-share forecast.