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KMB > SEC Filings for KMB > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for KIMBERLY CLARK CORP


2-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction
This management's discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of our recent performance, financial condition and prospects. The following will be discussed and analyzed:
Overview of First Quarter 2013 Results

Results of Operations and Related Information

Liquidity and Capital Resources

Legal Matters

Business Outlook

Overview of First Quarter 2013 Results
Net sales increased 1 percent primarily due to increases in sales volumes and net selling prices partially offset by unfavorable currency effects.

Operating profit and net income attributable to Kimberly-Clark Corporation increased 12 percent and 13 percent, respectively.

Net income in 2013 includes $21 in charges for European strategic changes and a $26 charge related to the balance sheet remeasurement from the devaluation of the Venezuelan bolivar. The prior year results include $24 in charges for pulp and tissue restructuring actions.

Results of Operations and Related Information This section presents a discussion and analysis of our first quarter of 2013 net sales, operating profit and other information relevant to an understanding of the results of operations.
First Quarter of 2013 Compared With First Quarter of 2012

By Business Segment
                                      Three Months Ended March 31
                                      2013          2012       Change
NET SALES
Personal Care                     $   2,397       $ 2,367      +1.3  %
Consumer Tissue                       1,718         1,659      +3.6  %
K-C Professional                        793           797      -0.5  %
Health Care                             397           405      -2.0  %
Corporate & Other                        13            13      N.M.
TOTAL NET SALES                   $   5,318       $ 5,241      +1.5  %

OPERATING PROFIT
Personal Care                     $     441       $   399     +10.5  %
Consumer Tissue                         260           217     +19.8  %
K-C Professional                        143           125     +14.4  %
Health Care                              44            53     -17.0  %
Corporate & Other(a)                    (93 )         (86 )    N.M.
Other (income) and expense, net          12             8     +50.0  %
TOTAL OPERATING PROFIT            $     783       $   700     +11.9  %


By Geography
                                      Three Months Ended March 31
                                      2013           2012      Change
NET SALES
North America                     $    2,700       $ 2,678      +0.8 %
Outside North America                  2,807         2,758      +1.8 %
Intergeographic sales                   (189 )        (195 )    N.M.
TOTAL NET SALES                   $    5,318       $ 5,241      +1.5 %

OPERATING PROFIT
North America                     $      553       $   479     +15.4 %
Outside North America                    335           315      +6.3 %
Corporate & Other(a)                     (93 )         (86 )    +8.1 %
Other (income) and expense, net           12             8     +50.0 %
TOTAL OPERATING PROFIT            $      783       $   700     +11.9 %

(a) For the three months ended March 31, 2013, Corporate & Other includes charges related to the European strategic changes of $31. For the three months ended March 31, 2012, Corporate & Other includes charges related to the pulp and tissue restructuring actions of $35.

Percentage Change Versus Prior Year
NET SALES                                                          Changes Due To
                                            Organic   Restructuring
                                   Total    Volume      Impact(a)     Net Price   Mix/Other(b)   Currency
Consolidated                        1.5        2           (1)            1            -           (1)
Personal Care                       1.3        3           (2)            1            -           (1)
Consumer Tissue                     3.6        4           (1)            1            -            -
K-C Professional                   (0.5)      (1)           -             -            1           (1)
Health Care                        (2.0)      (2)           -             -            1           (1)

(a) Lost sales related to the European strategic changes and pulp and tissue restructuring actions.

(b) Mix/Other includes rounding.

OPERATING PROFIT                                           Changes Due To
                                                       Input                     Currency
                     Total      Volume    Net Price   Costs(a)   Cost Savings   Translation   Other(b)
Consolidated          11.9        3           7         (5)           12            (1)         (4)
Personal Care         10.5        2           6         (2)           10            (2)         (3)
Consumer Tissue       19.8        9          10         (12)          7              -           6
K-C Professional      14.4        -           2         (2)           12            (1)          3
Health Care          (17.0)      (4)         (1)         6            11            (1)         (28)

(a) Includes inflation/deflation in raw materials, energy and distribution costs.

(b) Consolidated includes the impact of the charges in 2013 related to the European strategic changes and devaluation of the Venezuelan bolivar, and in 2012 related to the pulp and tissue restructuring actions.

Results Commentary
Consolidated
Net sales of $5.3 billion increased 1 percent overall with organic sales volumes up 2 percent and net selling prices up 1 percent. Foreign currency exchange rates were unfavorable by 1 percent and lost sales in conjunction with the restructurings associated with the European strategic changes and the pulp and tissue actions reduced net sales by 1 percent.
Operating profit was $783 in the first quarter of 2013, up 12 percent from $700 in 2012. The increase in operating profit included benefits from net sales growth and $85 in cost savings from our FORCE (Focused On Reducing Costs Everywhere) program. Current year operating profit was also impacted by $31 of restructuring costs for the European strategic changes, compared to


prior year costs of $35 for the pulp and tissue restructuring actions. Input costs were $35 higher overall versus 2012, with $15 of higher fiber costs, a $10 increase for other raw materials and $10 of higher distribution costs. Overall, Marketing, research and general expenses increased versus the year-ago period, driven by higher administrative costs.
Other (income) and expense, net was $12 of expense in the first quarter of 2013 and $8 of expense in the prior year. Current period results were negatively impacted by the balance sheet remeasurement charge of $36 due to the February 2013 devaluation of the Venezuelan bolivar, partially offset by gains on the sales of some non-core assets.
The first quarter effective tax rate was 30.9 percent in 2013 and 29.2 percent in 2012. The rate in 2012 was impacted by favorable resolutions of matters with tax authorities.

Kimberly-Clark's share of net income of equity companies in the first quarter of 2013 was $53 compared to $39 in 2012. At Kimberly-Clark de Mexico, S.A.B. de C.V., results benefited from sales growth, increased operating profit margin and a stronger Mexican peso versus the U.S. dollar.

Personal Care Segment
Organic sales volumes rose 3 percent and net selling prices improved 1 percent. Lost sales as a result of European strategic changes reduced net sales by 2 percent and currency rates were unfavorable by 1 percent. First quarter operating profit of $441 increased 11 percent. The comparison benefited from net sales growth, cost savings and higher production volumes, partially offset by input cost inflation, increased Marketing, research and general expenses and unfavorable currency rates.

Net sales in North America were even with the prior year, as higher net selling prices of 1 percent were offset by slightly lower sales volumes. Child care and adult care volumes rose high-single digits and mid-single digits, respectively, with market share gains and benefits from innovation. Huggies baby wipes volumes advanced low-single digits, while Huggies diaper volumes were down low-single digits. Feminine care volumes were down mid-single digits, with declines on Kotex Natural Balance products partially offset by gains on the U by Kotex brand.

Net sales increased 4 percent in K-C International ("KCI"). Sales volumes were up 4 percent compared to 12 percent growth in the year-ago period. Net selling prices rose 2 percent, primarily in Latin America, and product mix advanced 1 percent, while currency rates were unfavorable by approximately 2 percent. Volumes improved in China, Russia, South Korea, Vietnam and throughout most of Latin America, partially offset by declines elsewhere, primarily in Australia and Venezuela.

Net sales in Europe decreased 10 percent, including a 24 point negative impact from lost sales in conjunction with European strategic changes. Organic sales volumes rose 14 percent, driven by growth in non-branded offerings, Huggies baby wipes and child care products, and currency rates were favorable by 1 percent. Overall net selling prices were down approximately 2 percent.

Consumer Tissue Segment
Organic sales volumes improved 4 percent and net selling prices were up 1 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced net sales by 1 percent. First quarter operating profit of $260 increased 20 percent. The improvement included benefits from net sales growth, cost savings, and lower Marketing, research and general expenses, partially offset by input cost inflation.

Net sales in North America were up 5 percent, including a 1 point negative impact from lost sales in conjunction with pulp and tissue restructuring actions. Organic sales volumes increased 6 percent, while changes in product mix reduced net sales 1 percent. Kleenex facial tissue volumes improved at a low double-digit rate, reflecting a strong cold and flu season and market share gains. Paper towel volumes advanced high-single digits, including benefits from improved distribution levels and support behind the Viva brand. Bathroom tissue volumes were up mid-single digits, driven by growth on Cottonelle that included benefits from incremental promotion support and continued market share momentum. Consumer tissue net sales increased 2 percent in KCI. Net selling prices increased approximately 5 percent, reflecting strategies to improve net realized revenue and profitability. Currency rates were unfavorable 2 percent and sales volumes were down 1 percent.
Consumer tissue net sales in Europe increased 3 percent. Organic sales volumes rose 4 percent, driven by gains in bathroom tissue compared to a soft year-ago performance. Changes in product mix and currency exchange rates each benefited net sales by 1 percent. Net selling prices were down 2 percent in a continued difficult environment and lost sales from European strategic changes reduced net sales by 1 percent.


K-C Professional ("KCP") Segment
Sales volumes were down 1 percent and currency exchange rates were unfavorable 1 percent, while the combined impact of higher net selling prices and changes in product mix improved net sales by 1 percent. First quarter operating profit of $143 increased 14 percent, driven by cost savings.
Net sales in North America fell 1 percent, mostly due to lower volumes. Safety product volumes were down, including the impact of exiting certain lower-margin offerings, mostly offset by a low-single digit increase in washroom products. Net sales increased 1 percent in KCI. Net selling prices rose 2 percent and sales volumes were up 1 percent, while currency rates were unfavorable by 2 percent.
Net sales in Europe decreased 2 percent. Organic sales volumes were down 2 percent, primarily due to declines in Southern Europe where economic conditions remain difficult, and lost sales in conjunction with pulp and tissue restructuring actions reduced sales volumes an additional 1 percent. The combined impact of changes in net selling prices and currency rates improved net sales by 1 percent.
Health Care Segment
Sales volumes were down 2 percent and currency rates were unfavorable 1 percent, while changes in product mix improved net sales 1 percent. First quarter operating profit of $44 decreased 17 percent. The decline was driven by higher manufacturing costs and increased Marketing, research and general expenses, partially offset by cost savings.
Surgical and infection prevention volumes were down low-single digits, as declines in exam gloves and surgical products were mostly offset by increased sales of face masks. Medical device volumes were even with year-ago levels.

European Strategic Changes
In October 2012, we approved strategic changes related to our Western and Central European consumer and professional businesses to focus our resources and investments on stronger market positions and growth opportunities. We are exiting the diaper category in that region, with the exception of the Italian market, and divesting or exiting some lower-margin businesses, mostly in consumer tissue, in certain markets. The changes primarily affect our consumer businesses, with a modest impact on KCP. The impacted businesses generated annual net sales of approximately $500 and negligible operating profit. Restructuring actions related to the strategic changes involve the sale or closure of five of our European manufacturing facilities and a streamlining of our administrative organization. In total, these actions will result in reducing our European workforce by approximately 1,300 to 1,500 positions. The restructuring actions commenced in the fourth quarter of 2012 and are expected to be completed by December 31, 2014. The restructuring is expected to result in cumulative charges of approximately $300 to $350 after tax ($350 to $400 pre-tax) over that period. Cash costs related to severance and other expenses are expected to account for approximately 50 to 60 percent of the charges. Noncash charges will consist primarily of asset impairment charges and incremental depreciation.
During the three months ended March 31, 2013, $31 of pre-tax charges were recognized for the strategic changes, including $20 recorded in Cost of products sold and $11 recorded in Marketing, research and general expenses. A related benefit of $10 was recorded in Provision for income taxes. On a segment basis, $18, $8, and $5 of the charges were related to personal care, consumer tissue and KCP, respectively.
Cash payments of $13 related to the restructuring were made during the three months ended March 31, 2013.
For additional information on the European strategic changes, see Note 2 to the Consolidated Financial Statements.

Pulp and Tissue Restructuring Actions
In 2011 and 2012, we executed pulp and tissue restructuring actions in order to exit our remaining integrated pulp manufacturing operations and improve the underlying profitability and return on invested capital of our consumer tissue and KCP businesses. These actions involved the streamlining, sale or closure of six of our manufacturing facilities around the world. In conjunction with these actions, we exited certain non-strategic products, primarily non-branded offerings, and transferred some production to lower-cost facilities in order to improve overall profitability and returns. The actions were substantially complete at December 31, 2012, including the pending sale of one facility that is expected to close in the second quarter of 2013.
As a result of the restructuring activities, versus the 2010 baseline, we expect that by 2013 annual net sales will decrease by $250 to $300, and operating profit will increase by at least $75 in 2013 and at least $100 in 2014. Through March 31, 2013, we have recognized cumulative operating profit benefits of $65 from the restructuring actions.


During the three months ended March 31, 2012, charges of $35 were recorded in Cost of products sold for the restructuring actions. A related benefit of $11 was recorded in Provision for income taxes. On a segment basis, $32 and $3 of the charges were related to consumer tissue and KCP, respectively. On a geographic basis, $33 and $2 of the charges were recorded in North America and Australia, respectively.
For additional information on the pulp and tissue restructuring actions, see Note 3 to the Consolidated Financial Statements.

Liquidity and Capital Resources
Cash Provided by Operations
Cash provided by operations was $607 compared to $585 in the prior year. The improvement was driven by earnings growth and a smaller increase in working capital versus last year, partially offset by higher tax payments. Investing
During the first three months of 2013, our capital spending was $274 compared to $259 in the prior year. We anticipate that full year 2013 capital spending will be $1.0 billion to $1.1 billion.
Financing
At March 31, 2013, total debt and redeemable securities was $7.0 billion compared to $6.7 billion at December 31, 2012.
We repurchase shares of Kimberly-Clark common stock from time to time pursuant to publicly announced share repurchase programs. During the first three months of 2013, we repurchased 5.5 million shares of our common stock at a cost of $500 through a broker in the open market. In 2013, we plan to repurchase $1.0 billion to $1.2 billion of shares through open market purchases, subject to market conditions.
We maintain a $1.5 billion revolving credit facility, scheduled to expire in October 2016, as well as the option to increase this facility by an additional $500. This facility, currently unused, supports our commercial paper program and would provide liquidity in the event our access to the commercial paper markets is unavailable for any reason.

Our short-term debt as of March 31, 2013 was $692 (included in Debt payable within one year on the Consolidated Balance Sheet) and consisted of U.S. commercial paper with original maturities up to 90 days and other similar short-term debt issued by non-U.S. subsidiaries. The average month-end balance of short-term debt for the first quarter of 2013 was $695. These short-term borrowings provide supplemental funding for supporting our operations. The level of short-term debt generally fluctuates depending upon the amount of operating cash flows and the timing of customer receipts and payments for items such as dividends and income taxes.
We account for our operations in Venezuela using highly inflationary accounting. On February 13, 2013, the Venezuelan government announced a devaluation of the Central Bank of Venezuela ("Central Bank") regulated currency exchange system rate to 6.3 bolivars per U.S. dollar and the elimination of the SITME rate. As a result of the devaluation, we recorded a $26 after tax charge ($36 pre-tax) related to the remeasurement of the local currency-denominated balance sheet to the new exchange rate in the quarter ended March 31, 2013. Prior to devaluation, we used the Central Bank SITME rate of 5.4 bolivars per U.S. dollar to measure K-C Venezuela's bolivar-denominated transactions into U.S. dollars. The $36 pre-tax charge is reflected in the Consolidated Income Statement in Other (income) and expense, net. In the Consolidated Cash Flow Statement, this non-cash charge is included in Other in Cash Provided by Operations.

At March 31, 2013, K-C Venezuela had a bolivar-denominated net monetary asset position of $219 and our net investment in K-C Venezuela was approximately $350, both valued at 6.3 bolivars per U.S. dollar. Net sales of K-C Venezuela represented less than 2 percent of Consolidated Net Sales for the three months ended March 31, 2013 and 2012.
Management believes that our ability to generate cash from operations and our capacity to issue short-term and long-term debt are adequate to fund working capital, capital spending, payment of dividends, pension plan contributions and other needs for the foreseeable future. Further, we do not expect restrictions or taxes on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Legal Matters
We are subject to various legal proceedings, claims and governmental inspections, audits or investigations pertaining to issues such as contract disputes, product liability, tax matters, patents and trademarks, advertising, governmental regulations, employment and other matters. Although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate


disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our business, financial condition, results of operations or liquidity. We are subject to federal, state and local environmental protection laws and regulations with respect to our business operations and are operating in compliance with, or taking action aimed at ensuring compliance with, these laws and regulations. We have been named a potentially responsible party under the provisions of the U.S. federal Comprehensive Environmental Response, Compensation, and Liability Act, or analogous state statutes, at a number of waste disposal sites. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.

Business Outlook
In 2013, we plan to continue to pursue targeted growth initiatives, with a particular emphasis on KCI, launch product innovations and support our brands and innovative product launches with increased strategic marketing spending. We expect to achieve cost savings, which should help us overcome moderate commodity cost inflation. We will continue to manage our company with financial discipline, including a focus on cash generation and shareholder-friendly capital allocation. We plan to continue our program of share repurchases, and have increased the amount of our regular quarterly dividend by 9 percent for 2013.

Information Concerning Forward-Looking Statements Certain matters contained in this report concerning the business outlook, including the anticipated costs, scope, timing and financial and other effects of the pulp and tissue restructuring actions and the Western and Central Europe strategic changes, cash flow and uses of cash, growth initiatives, marketing and other spending, raw material, energy and other input costs, anticipated currency rates and exchange risks, cost savings and reductions, contingencies and anticipated transactions of Kimberly-Clark, including share repurchases and pension contributions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are based upon management's expectations and beliefs concerning future events impacting Kimberly-Clark. There can be no assurance that these future events will occur as anticipated or that our results will be as estimated. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
The assumptions used as a basis for the forward-looking statements include many estimates that, among other things, depend on the achievement of future cost savings and projected volume increases. In addition, many factors outside our control, including fluctuations in foreign currency exchange rates, the prices and availability of raw materials, potential competitive pressures on selling prices for our products, energy costs and retail trade customer actions, as well as general economic and political conditions globally and in the markets in which we do business, could affect the realization of these estimates. For a description of certain factors that could cause our future results to differ from those expressed in these forward-looking statements, see Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 entitled "Risk Factors."

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