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| KMB > SEC Filings for KMB > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Introduction
This management's discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of the Corporation's recent performance, its financial condition and its prospects. The following will be discussed and analyzed:
· Overview of Third Quarter 2008 Results
· Results of Operations and Related Information
· Liquidity and Capital Resources
· New Accounting Standards
· Environmental Matters
· Business Outlook
Overview of Third Quarter 2008 Results
· Net sales increased 8.2 percent.
· Operating profit and net income decreased 10.7 percent and 8.8 percent, respectively.
· Cash provided by operations was $640.9 million, an increase of 12.9 percent over last year.
Results of Operations and Related Information
This section presents a discussion and analysis of the Corporation's third quarter and first nine months of 2008 net sales, operating profit and other information relevant to an understanding of the results of operations.
Third Quarter of 2008 Compared With Third Quarter of 2007
Analysis of Net Sales
By Business Segment
(Millions of dollars)
Net Sales 2008 2007
Personal Care $ 2,146.4 $ 1,920.8
Consumer Tissue 1,711.4 1,629.8
K-C Professional & Other 842.8 780.5
Health Care 302.8 292.1
Corporate & Other 16.7 10.5
Intersegment sales (21.9 ) (13.1 )
Consolidated $ 4,998.2 $ 4,620.6
Commentary:
Percent Change in Net Sales Versus Prior Year
Changes Due To
Total Volume Net Mix/
Change Growth Price Currency Other
Consolidated 8.2 (1 ) 4 3 2
Personal Care 11.7 4 4 3 1
Consumer Tissue 5.0 (7 ) 7 3 2
K-C Professional & Other 8.0 (1 ) 4 3 2
Health Care 3.7 5 (2 ) 1 -
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· Personal care net sales in North America improved about 7 percent versus the year-ago quarter, reflecting higher net selling prices of 4 percent, along with sales volume growth and favorable product mix of more than 1 percent each. Price increases were implemented for Depend and Poise incontinence and Kotex feminine care products in the second quarter and for Huggies diapers and Pull-Ups training pants in both the first and third quarters. Sales volumes for Huggies diapers were up slightly, while volumes for the Corporation's child care, feminine care and incontinence care brands were down low single-digits. Meanwhile, sales volumes rose at a double-digit rate for Huggies baby wipes.
In Europe, personal care net sales rose approximately 2 percent in the quarter. Favorable currency effects increased sales by 9 percent, while net selling prices overall were unchanged. Sales volumes decreased nearly 8 percent, driven primarily by lower sales of Huggies diapers in the Corporation's four core markets of the U.K., France, Italy and Spain, where promotional activity remained intense.
In developing and emerging markets, personal care net sales climbed almost 20 percent, as the Corporation continued to benefit from strong product and customer programs in rapidly growing markets. Sales volumes increased by more than 9 percent, while net selling prices improved about 4 percent and product mix was better by more than 2 percent. Stronger foreign currencies positively impacted sales comparisons by more than 4 percent. The growth in sales volumes was broad-based, with particular strength throughout Latin America and in South Korea, Russia, Turkey and Vietnam.
· In North America, net sales of consumer tissue products decreased 2 percent in the third quarter, as an increase in net selling prices of about 6 percent and improved product mix of 1 percent were more than offset by a 9 percent decline in sales volumes. The improvement in net selling prices was primarily attributable to price increases for bathroom tissue and paper towels implemented during the first and third quarters in the U.S. List prices for facial tissue were raised late in the third quarter. Sales volumes were down mid-single digits in bathroom tissue and facial tissue and double-digits in paper towels, primarily as a result of the Corporation's focus on improving revenue realization. A portion of the overall volume decline is also due to the Corporation's decision in late 2007 to shed certain low-margin private label business. Although branded bathroom tissue volumes declined, revenue growth was solid, with particular strength in the mainline Scott 1000 and super premium Cottonelle Ultra brands. Meanwhile, sales of Viva and Scott paper towels have been impacted by high levels of competitive spending and a shift in the category toward lower-priced, private label products.
In Europe, consumer tissue net sales increased about 7 percent compared with the third quarter of 2007. Currency exchange rates strengthened by an average of more than 6 percent, accounting for virtually all of the increase. Sales volumes were down approximately 4 percent, due mainly to lower sales of Andrex and Scottex bathroom tissue and Kleenex facial tissue in response to higher prices and a slowdown in category sales, particularly in the U.K. Net selling prices improved 4 percent, reflecting list price increases across multiple markets, partially offset by competitive promotional activity, while product mix also was better by 1 percent.
Consumer tissue net sales in developing and emerging markets rose approximately 18 percent. Net selling prices and product mix increased 12 percent and 4 percent, respectively, as the Corporation has raised prices in response to higher raw materials costs and improved mix with more differentiated, value-added products. Currency gains also benefited sales by nearly 5 percent. Although sales volumes grew in a number of key markets, including Australia, Russia, Israel and Brazil, volumes declined about 3 percent overall, mainly as a result of the Corporation's strategies to drive price and mix.
· Globally, KCP continued to generate double-digit growth in sales of higher-margin workplace and safety products. In North America, improvements of 3 percent in both price and mix were partially offset by a 4 percent reduction in sales volumes. Sales volumes softened somewhat as a result of slowing economic growth in combination with the Corporation's strategies to raise prices and enhance the mix of products sold and in comparison to strong growth in the year-ago quarter. In Europe, KCP achieved 20-plus percent net sales growth, as innovative product offerings contributed to a 10 percent rise in sales volumes, net selling prices were about 2 percent higher and favorable currency effects added 9 percent to sales. Across developing and emerging markets, net sales were up 16 percent on sales volume gains of 2 percent, net selling price/mix improvements of 10 percent and currency benefits of 4 percent.
· The improvement in sales volumes for health care was paced by double-digit growth in exam gloves, while overall sales volumes for both surgical supplies and medical devices were up at a mid-single digit rate. The price decline was mainly attributable to competitive conditions affecting surgical supplies in North America and Europe.
By Geography (Millions of dollars) Net Sales 2008 2007 North America $ 2,664.5 $ 2,590.1 Outside North America 2,501.9 2,191.6 Intergeographic sales (168.2 ) (161.1 ) Consolidated $ 4,998.2 $ 4,620.6 |
· Net sales in North America increased 2.9 percent primarily due to higher net selling prices for personal care and consumer tissue, and favorable product mix in both of those segments, partially offset by lower consumer tissue sales volumes.
· Net sales outside North America increased 14.2 percent due to higher sales volumes for personal care and increased net selling prices, favorable product mix and favorable currency for both personal care and consumer tissue.
Analysis of Operating Profit By Business Segment (Millions of dollars) Operating Profit 2008 2007 Personal Care $ 404.4 $ 396.3 Consumer Tissue 132.9 166.1 K-C Professional & Other 119.5 125.1 Health Care 21.9 43.4 Other income and (expense), net(a) (4.7 ) 22.9 Corporate & Other(a) (b) (64.5 ) (71.1 ) Consolidated $ 609.5 $ 682.7 |
Notes:
(a) Other income and (expense), net and Corporate & Other include the following
pretax amounts for the strategic cost reductions:
Three Months
Ended September 30
(Millions of dollars) 2008 2007
Other income and (expense), net $ (.1 ) $ 3.9
Corporate & Other (16.0 ) (26.7 )
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(b) In 2007, Corporate & Other also includes the incremental implementation costs of $2.0 million related to the transfer of certain administrative processes to third-party providers.
Commentary:
Percentage Change in Operating Profit Versus Prior Year
Changes Due To
Raw Energy and
Total Net Materials Distribution
Change Volume Price Cost Expense Currency Other (a)
Consolidated (10.7 ) (3 ) 30 (25 ) (11 ) 1 (3 ) (b)
Personal Care 2.0 7 17 (21 ) (4 ) 2 1
Consumer Tissue (20.0 ) (22 ) 67 (33 ) (26 ) 2 (8 )
K-C Professional &
Other (4.5 ) (15 ) 23 (19 ) (13 ) 5 15
Health Care (49.5 ) 10 (12 ) (25 ) (5 ) (2 ) (16 )
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(a) Includes cost savings.
(b) Charges for the strategic cost reductions were $6.7 million lower in 2008 than in 2007.
Consolidated operating profit for the third quarter of 2008 was 10.7 percent lower than in the prior year. Charges for the strategic cost reductions of $16.1 million in the third quarter of 2008 were $6.7 million lower than in the prior year. Charges for the strategic cost reductions, discussed later in this MD&A and in Note 4 to the Consolidated Financial Statements, are not included in the results of the business segments. The effect of higher net sales, primarily due to increased net selling prices, plus approximately $47 million in cost savings were more than offset by significant inflation in key manufacturing cost inputs and higher manufacturing costs. Cost inflation for the quarter totaled $250 million, an all-time high, consisting of approximately $110 million for raw materials other than fiber, primarily polymer resins and other oil-based materials, more than $60 million in fiber costs, nearly $50 million of energy costs and about $30 million in distribution costs. The higher manufacturing costs included downtime to reduce inventory levels. Cost savings in the quarter from the company's FORCE (Focused On Reducing Costs Everywhere) program and strategic cost reduction plan totaled $19 million and $28 million, respectively.
Strategic marketing expense increased by $25 million. In addition, administrative and general expenses increased about $20 million, in part to support growth in the developing and emerging markets. Operating profit benefited from about $9 million of favorable currency effects compared with the prior year, including gains and losses from currency transactions reported in other income and (expense), net. The third quarter of 2007 included a gain of $16.4 million for a litigation settlement.
· Personal care segment operating profit increased 2.0 percent as the benefits of increased net selling prices and cost savings more than offset raw materials and other cost inflation. In North America, operating profit increased primarily because of the higher net selling prices tempered by materials and other cost inflation. In Europe, operating profit declined as cost savings were more than offset by inflation and the effect of the lower sales volumes. Operating profit in the developing and emerging markets increased because the higher sales volumes and net selling prices more than offset increased marketing and general expenses.
· Consumer tissue segment operating profit decreased 20.0 percent. Increased net selling prices and cost savings were more than offset by cost inflation, the lower sales volumes and the effect of planned production downtime. Operating profit in North America decreased due to the same factors that affected the overall segment. In Europe, operating profit declined as higher net selling prices were more than offset by cost inflation and the lower sales volumes. Operating profit in the developing and emerging markets increased due to higher net selling prices, tempered by the lower sales volumes, cost inflation and increased marketing expenses.
· Operating profit for K-C Professional & Other products declined 4.5 percent as higher net selling prices, improved product mix and cost savings were more than offset by cost inflation and lower sales volumes.
· Health care operating profit decreased principally due to significant raw materials cost inflation. In addition, higher sales volumes and cost savings were more than offset by lower net selling prices and cost for planned production downtime.
· Other income and (expense), net for 2008 includes approximately $4 million of foreign currency transaction losses compared with gains of about $3 million in 2007. Also included in 2007 was the previously mentioned litigation settlement gain of $16.4 million.
By Geography (Millions of dollars) Operating Profit 2008 2007 North America $ 440.4 $ 491.1 Outside North America 238.3 239.8 Other income and (expense), net(a) (4.7 ) 22.9 Corporate & Other(a) (b) (64.5 ) (71.1 ) Consolidated $ 609.5 $ 682.7 |
Notes:
(a) Other income and (expense), net and Corporate & Other include the previously mentioned pretax amounts for the strategic cost reductions.
(b) In 2007, Corporate & Other also includes incremental implementation costs of $2.0 million related to the transfer of certain administrative processes to third-party providers.
· Operating profit in North America decreased 10.3 percent due to cost inflation and higher manufacturing costs, tempered by higher net selling prices and cost savings.
· Operating profit outside of North America declined .6 percent primarily due to lower earnings in Europe.
The Corporation is in the final stages of implementing the strategic cost reduction plan that supports the targeted growth initiatives announced in 2005.
During the third quarter of 2008, the Corporation continued to successfully execute planned cost reduction activities, the most significant of which involved consolidating infant and child care operations in North America, improving the cost structure in health care and streamlining administrative operations in North America and Europe. Savings for the third quarter and nine months year-to-date totaled approximately $28 million and $94 million, respectively.
Employees have been notified about workforce reductions and other actions at all 23 facilities slated for sale, closure or streamlining as part of the cost reduction plan. To date, pretax charges of $875 million (about $610 million after tax), have been incurred. Cumulative charges for implementing the plan, through its completion by the end of this year, are expected to total $880 to $900 million pretax ($610 to $620 million after tax).
The strategic cost reductions are corporate decisions and are not included in the business segments' operating profit performance. See Note 10 to the Consolidated Financial Statements for the costs of the strategic cost reductions related to the activities in the Corporation's business segments. Third quarter 2008 charges have been recorded in cost of products sold ($11.0 million) and marketing, research and general expenses ($5.0 million); and a loss on the disposal of assets totaling (($.1) million) has been included in other income and (expense), net. See Note 4 to the Consolidated Financial Statements for detail on the costs incurred during the third quarter of 2008.
· Nonoperating expense of $6.5 million for the third quarter of 2007 was the Corporation's pretax loss associated with its ownership interest in the synthetic fuel partnerships described in Note 6 to the Consolidated Financial Statements. No expense was incurred in 2008 since the law giving rise to the related tax benefits for these investments expired at the end of 2007.
· Interest expense for the third quarter of 2008 decreased approximately $3 million from the prior year, primarily due to lower interest rates partially offset by a higher average level of debt as a result of the consolidation of the financing entities described in Note 2 to the Consolidated Financial Statements and long-term debt issued to fund the Corporation's $2.0 billion accelerated share repurchase ("ASR") program in July 2007.
· Interest income for the third quarter of 2008 increased $5.6 million primarily due to the consolidation of the financing entities described in Note 2 to the Consolidated Financial Statements.
· The Corporation's effective income tax rate was 28.1 percent in 2008 compared with 27.6 percent in 2007.
· The Corporation's share of net income of equity companies in the third quarter increased to about $53 million from approximately $39 million in 2007, primarily as a result of higher net income at Kimberly-Clark de Mexico, S.A.B. de C.V. ("KCM"). Results at KCM benefited from double-digit growth in net sales and a favorable income tax settlement, partially offset by cost inflation and currency losses incurred on approximately $300 million of U.S. dollar-denominated debt. The benefit to the Corporation in the third quarter from KCM's tax settlement was equivalent to 3 cents per share, while the negative impact of the currency losses amounted to 1 cent per share.
· Minority owners' share of subsidiaries' net income was approximately $34 million in the third quarter of 2008 compared with about $25 million in the prior year. The increase was due mainly to minority owners' share of increased earnings at majority-owned subsidiaries in Latin America and the Middle East and higher returns payable on the redeemable preferred securities issued by the Corporation's consolidated financing subsidiary.
· As a result of the Corporation's ongoing share repurchase program the average number of common shares outstanding declined, which benefited third quarter 2008 net income by about $.04 per share. This benefit was partially offset by the higher interest expense associated with the July 2007 debt issuances that funded the ASR program.
First Nine Months of 2008 Compared With First Nine Months of 2007 Analysis of Net Sales By Business Segment (Millions of dollars) Net Sales 2008 2007 Personal Care $ 6,357.5 $ 5,599.9 Consumer Tissue 5,108.0 4,791.5 K-C Professional & Other 2,443.6 2,240.9 Health Care 907.0 891.5 Corporate & Other 61.5 27.5 Intersegment sales (60.5 ) (43.4 ) Consolidated $ 14,817.1 $ 13,507.9 |
Commentary:
Percent Change in Net Sales Versus Prior Year
Changes Due To
Total Volume Net Mix/
Change Growth Price Currency Other
Consolidated 9.7 2 3 4 1
Personal Care 13.5 7 2 4 1
Consumer Tissue 6.6 (3 ) 5 4 1
K-C Professional & Other 9.0 1 3 4 1
Health Care 1.7 3 (2 ) 2 (1 )
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· Personal care net sales increased 13.5 percent due to higher sales volumes and net selling prices in the developing and emerging markets and in North America, and favorable currency effects, principally in Europe, Brazil and Australia.
· Consumer tissue net sales increased 6.6 percent on overall higher net selling prices and favorable currency effects, in the same countries as in personal care, tempered by lower sales volumes, primarily in North America.
· Net sales of K-C Professional & Other products increased 9.0 percent due to favorable currency effects, primarily in Europe, higher net selling prices in each geographic region and improved product mix, mainly in North America.
· Health care net sales increased 1.7 percent as higher sales volumes and favorable currency effects were nearly offset by lower net selling prices and a less favorable product mix.
By Geography (Millions of dollars) Net Sales 2008 2007 North America $ 7,860.5 $ 7,596.0 Outside North America 7,450.8 6,388.1 Intergeographic sales (494.2 ) (476.2 ) Consolidated $ 14,817.1 $ 13,507.9 |
Commentary:
· Net sales in North America increased 3.5 percent due to higher personal care sales volumes and higher net selling prices for both personal care and consumer tissue, partially offset by lower consumer tissue sales volumes.
· Net sales outside North America increased 16.6 percent due to higher sales volumes, net selling prices and favorable currency effects for personal care and higher selling prices and favorable currency effects for consumer tissue in the developing and emerging markets.
Analysis of Operating Profit By Business Segment (Millions of dollars) Operating Profit 2008 2007 Personal Care $ 1,269.0 $ 1,136.7 Consumer Tissue 418.8 542.1 K-C Professional & Other 327.1 353.7 Health Care 97.9 151.0 Other income and (expense), net(a) (5.0 ) 19.6 Corporate & Other(a) (b) (184.1 ) (255.6 ) Consolidated $ 1,923.7 $ 1,947.5 |
Notes:
(a) Other income and (expense), net and Corporate & Other include the following pretax amounts for the strategic cost reductions:
Nine Months
Ended September 30
(Millions of dollars) 2008 2007
Other income and (expense), net $ (1.7 ) $ 13.2
Corporate & Other (52.7 ) (94.4 )
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(b) In 2007, Corporate & Other also includes the incremental implementation costs of $25.2 millionrelated to the transfer of certain administrative processes to third-party providers.
Commentary:
Percentage Change in Operating Profit Versus Prior Year
Changes Due To
Raw Energy and
Total Net Materials Distribution
Change Volume Price Cost Expense Currency Other (a)
Consolidated (1.2 ) 5 21 (22 ) (9 ) 4 -
Personal Care 11.6 13 11 (15 ) (3 ) 3 3
Consumer Tissue (22.7 ) (7 ) 44 (31 ) (18 ) 1 (12 )
K-C Professional &
Other (7.5 ) (5 ) 20 (21 ) (9 ) 5 2
Health Care (35.2 ) 7 (10 ) (9 ) (2 ) 3 (24 )
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(a) Includes cost savings.
Consolidated operating profit decreased $23.8 million or 1.2 percent from the prior year. Charges for the strategic cost reductions were $26.8 million lower in 2008 compared with 2007. As previously stated, these charges are not included in the business segments. For the first nine months of 2008, the benefits of increased net sales, along with cost savings of $137 million, were more than offset by inflation in key cost components totaling approximately $590 million, an increase in strategic marketing spending of more than $70 million and higher levels of selling and administrative expenses, mainly to support growth in developing and emerging markets. The Corporation also incurred higher . . .
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