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

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Form 10-Q for KIMBERLY CLARK CORP


2-Aug-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 Second Quarter 2013 Results

Results of Operations and Related Information

Liquidity and Capital Resources

Legal Matters

Business Outlook

Overview of Second Quarter 2013 Results
Net sales were even with the year-ago period as increases in net selling prices were offset by unfavorable currency effects.

Both operating profit and net income attributable to Kimberly-Clark Corporation increased 6 percent.

Net income includes $21 in charges for European strategic changes. The prior year results include $16 in charges for pulp and tissue restructuring actions.

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

Results By Business Segment
                                     Three Months Ended June 30                     Six Months Ended June 30
                                       2013               2012         Change         2013              2012        Change
NET SALES
Personal Care                     $      2,390       $      2,415      -1.0  %   $      4,787       $    4,782      +0.1  %
Consumer Tissue                          1,625              1,588      +2.3  %          3,343            3,247      +3.0  %
K-C Professional                           841                839      +0.2  %          1,634            1,636      -0.1  %
Health Care                                401                411      -2.4  %            798              816      -2.2  %
Corporate & Other                           10                 16      N.M.                23               29      N.M.
TOTAL NET SALES                   $      5,267       $      5,269         -      $     10,585       $   10,510      +0.7  %

OPERATING PROFIT
Personal Care                     $        432       $        406      +6.4  %   $        873       $      805      +8.4  %
Consumer Tissue                            220                219      +0.5  %            480              436     +10.1  %
K-C Professional                           161                138     +16.7  %            304              263     +15.6  %
Health Care                                 54                 56      -3.6  %             98              109     -10.1  %
Corporate & Other(a)                       (79 )              (83 )    N.M.              (172 )           (169 )    N.M.
Other (income) and expense, net             (8 )              (18 )   -55.6  %              4              (10 )    N.M.
TOTAL OPERATING PROFIT            $        796       $        754      +5.6  %   $      1,579       $    1,454      +8.6  %


Results By Geography
                                     Three Months Ended June 30                     Six Months Ended June 30
                                       2013               2012         Change         2013             2012        Change
NET SALES
North America                     $      2,677       $      2,718      -1.5  %   $      5,377       $   5,397      -0.4  %
Outside North America                    2,775              2,757      +0.7  %          5,582           5,515      +1.2  %
Intergeographic sales                     (185 )             (206 )    N.M.              (374 )          (402 )    N.M.
TOTAL NET SALES                   $      5,267       $      5,269         -      $     10,585       $  10,510      +0.7  %

OPERATING PROFIT
North America                     $        535       $        498      +7.4  %   $      1,088       $     977     +11.4  %
Outside North America                      332                321      +3.4  %            667             636      +4.9  %
Corporate & Other(a)                       (79 )              (83 )    N.M.              (172 )          (169 )    N.M.
Other (income) and expense, net             (8 )              (18 )   -55.6  %              4             (10 )    N.M.
TOTAL OPERATING PROFIT            $        796       $        754      +5.6  %   $      1,579       $   1,454      +8.6  %

(a) For the three and six months ended June 30, 2013, Corporate & Other includes charges related to the European strategic changes of $22 and $53, respectively. For the three and six months ended June 30, 2012, Corporate & Other includes charges related to the pulp and tissue restructuring actions of $19 and $54, respectively.

Percentage Change 2013 Versus 2012
NET SALES                                                          Changes Due To
                                            Organic   Restructuring
Second Quarter                     Total    Volume      Impact(a)     Net Price   Mix/Other(b)   Currency
Consolidated                         -         2           (2)            1            -           (1)
Personal Care                      (1.0)       3           (3)            -            -           (1)
Consumer Tissue                     2.3        3           (1)            1            -           (1)
K-C Professional                    0.2        -           (1)            2            -           (1)
Health Care                        (2.4)      (1)           -             -            -           (1)

Year-to-Date
Consolidated                        0.7        2           (1)            1            -           (1)
Personal Care                       0.1        3           (2)            1           (1)          (1)
Consumer Tissue                     3.0        3           (1)            1            1           (1)
K-C Professional                   (0.1)       -           (1)            1            1           (1)
Health Care                        (2.2)      (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
Second Quarter       Total      Volume    Net Price   Costs(a)   Cost Savings   Translation   Other(b)
Consolidated          5.6         3           6         (4)           11            (2)         (8)
Personal Care         6.4         3           3         (2)           13            (2)         (9)
Consumer Tissue       0.5         5           9         (12)          3             (1)         (4)
K-C Professional      16.7       (1)         10         (3)           14            (3)          -
Health Care          (3.6)        1           1          21           5             (2)         (30)

Year-to-Date
Consolidated          8.6         3           6         (4)           11            (2)         (5)
Personal Care         8.4         2           4         (2)           12            (2)         (6)
Consumer Tissue       10.1        7          10         (12)          5             (1)          1
K-C Professional      15.6        -           6         (3)           13            (2)          2
Health Care          (10.1)      (1)          -          14           7             (1)         (29)

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

(b) Other includes the impact of changes in marketing, research and general expenses and manufacturing costs not separately listed in the table. In addition, consolidated includes the impact of the charges in 2013 related to the European strategic changes, and in 2012 related to the pulp and tissue restructuring actions. Year-to-date also includes the impact of the February 2013 devaluation of the Venezuelan bolivar.

Commentary - Second Quarter of 2013 Compared to Second Quarter of 2012 Consolidated
Net sales of $5.3 billion in the second quarter of 2013 were even with the year-ago period with increased organic sales volumes of 2 percent and higher net selling prices of 1 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced net sales by 2 percent and foreign currency exchange rates were unfavorable by 1 percent.
Operating profit was $796 in the second quarter of 2013, up 6 percent from $754 in 2012. The increase in operating profit included $80 in cost savings from the company's FORCE (Focused On Reducing Costs Everywhere) program. Input costs were $30 higher overall versus 2012, with $15 of higher fiber costs, a $10 increase in energy and $5 of higher distribution costs. Foreign currency translation effects, as a result of the weakening of several currencies relative to the U.S. dollar, reduced operating profit by $15. Currency transaction effects also negatively impacted the operating profit comparison. Current year operating profit includes $22 of restructuring costs for the European strategic changes, and prior year operating profit includes costs of $19 for the pulp and tissue restructuring actions.
Other (income) and expense, net was $8 of income in 2013 and $18 of income in 2012. The change was driven by the resolution of a legal matter in the prior year.
The second quarter effective tax rate was 32.6 percent in 2013 compared to 31.0 percent in 2012. The lower rate in 2012 was driven primarily by favorable activities with tax authorities.
Kimberly-Clark's share of net income of equity companies in the second quarter of 2013 was $55 compared to $43 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
Net sales of $2.4 billion decreased 1 percent. Lost sales as a result of European strategic changes reduced net sales by 3 percent and currency rates were unfavorable by 1 percent, while organic sales volumes rose 3 percent. Second quarter operating profit of $432 increased 6 percent. The comparison benefited from organic volume growth and cost savings, partially offset by input cost inflation and unfavorable currency rates.
Net sales in North America were down 3 percent, as volumes and product mix each decreased more than 1 percent. Feminine care volumes fell high-single digits compared to strong growth in the year-ago period. Child care volumes decreased mid-single digits, including lower shipments for Huggies Little Swimmers swim pants. Volumes for non-branded personal care offerings were also below year-ago levels. Adult care volumes increased mid-single digits, with benefits from product innovation and market share gains on the Depend brand. Huggies baby wipe volumes increased low-single digits, while Huggies diaper volumes were similar to the prior year.


Net sales increased 5 percent in K-C International ("KCI"), despite a 3 percent negative impact from changes in currency rates. Sales volumes were up 6 percent and net selling prices and product mix each added 1 percent of growth. Volumes increased significantly in China, Russia, Vietnam and throughout most of Latin America, including Brazil, but declined in Venezuela.
Net sales in Europe decreased 29 percent, including a 36 percent negative impact from lost sales in conjunction with European strategic changes and a 1 percent decrease from currency rates. Organic sales volumes rose 8 percent, driven by growth in non-branded offerings, Huggies baby wipes and child care products.

Consumer Tissue Segment
Net sales of $1.6 billion increased 2 percent. Organic sales volumes improved 3 percent and net selling prices were up 1 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced sales volumes by 1 percent and currency rates were unfavorable by 1 percent. Second quarter operating profit of $220 was essentially even with the prior year. The comparison benefited from net sales growth and higher production volumes in 2013, offset by input cost inflation and other manufacturing cost increases.
Net sales in North America were up 3 percent. Sales volumes increased 2 percent, driven by growth in Cottonelle bathroom tissue. Net selling prices increased 2 percent, including benefits from sheet count reductions accompanying product innovation launched late in the quarter on Kleenex facial tissue and Cottonelle bathroom tissue.
Net sales increased 8 percent in KCI, despite a 3 percent negative impact from changes in currency rates. Sales volumes increased 7 percent and net selling prices and product mix each improved 2 percent. The growth in volume, price and mix was driven by increases in Latin America, including Venezuela, and the Middle East/Eastern Europe/Africa region.
Net sales in Europe decreased 8 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced sales volumes by 4 percent and currency rates were unfavorable by 2 percent. Organic sales volumes decreased 2 percent, driven by declines in bathroom tissue. K-C Professional ("KCP") Segment
Net sales of $0.8 billion were even with the year-ago level. Net selling prices increased 2 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced sales volumes by 1 percent and currency rates were unfavorable by 1 percent. Second quarter operating profit of $161 increased 17 percent, driven by higher net selling prices and cost savings. Net sales in North America fell 1 percent. Sales volumes decreased 3 percent, mostly due to lower sales of washroom products and the exit of certain lower-margin safety product offerings. Higher net selling prices and changes in product mix combined to add 2 percent of growth.
Net sales increased 5 percent in KCI, despite a 3 percent decrease from unfavorable currency rates. Sales volumes rose 5 percent and net selling prices improved 3 percent. The growth in sales volumes and net selling prices included a double-digit increase in Latin America.
Net sales in Europe decreased 3 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced net sales by 3 percent and currency rates were unfavorable by 1 percent. Organic sales volumes decreased 1 percent, including declines in Southern Europe where economic conditions remain difficult. Changes in net selling prices and product mix each added 1 percent of growth.
Health Care Segment
Net sales of $0.4 billion decreased 2 percent. Sales volumes decreased 1 percent and currency rates were unfavorable 1 percent. Second quarter operating profit of $54 decreased 4 percent. The decline was driven by increased marketing, research and general expenses and higher manufacturing costs, mostly offset by input cost deflation.
Surgical and infection prevention volumes were down low-single digits, primarily due to declines in exam gloves. Medical device volumes were up slightly compared to double-digit growth in the year-ago period.

Commentary - First Six Months of 2013 Compared to First Six Months of 2012 For the first six months of 2013, net sales of $10.6 billion increased 1 percent with higher organic sales volumes of 2 percent and increased net selling prices of 1 percent. Changes in foreign currency rates decreased net sales by 1 percent and lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced net sales by 1 percent.


Year-to-date operating profit of $1,579 increased 9 percent compared to $1,454 in 2012. The increase in operating profit included benefits from net sales growth and FORCE cost savings of $165. In addition, higher production volumes positively affected the operating profit comparison by $25. Input costs were $65 higher overall in 2013 versus 2012. Marketing, research and general expenses also increased versus the year-ago period, driven by higher administrative costs. Foreign currency translation effects reduced operating profit by $25. Currency transaction effects also negatively impacted the operating profit comparison. Current year operating profit includes $53 of restructuring costs for the European strategic changes, compared to prior year costs of $54 for the pulp and tissue restructuring actions.
Other (income) and expense, net was $4 of expense in the first half of 2013 and $10 of income in the prior year. The year-on-year comparison was 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 in the current year. The favorable resolution of a legal matter in the prior year also impacted the comparison.
Through six months, diluted net income per share was $2.72 in 2013 and $2.43 in 2012. The increase in earnings per share was primarily due to higher operating profit, increased equity income and a lower share count, partially offset by a higher effective tax rate.

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 June 30, 2013, $22 of pre-tax charges were recognized for the strategic changes, including $18 recorded in cost of products sold and $4 recorded in marketing, research and general expenses. A related benefit of $1 was recorded in provision for income taxes. On a segment basis, $11, $7, and $4 of the charges were related to personal care, consumer tissue and KCP, respectively.
During the six months ended June 30, 2013, $53 of pre-tax charges were recognized for the strategic changes, including $38 recorded in cost of products sold and $15 recorded in marketing, research and general expenses. A related benefit of $11 was recorded in provision for income taxes. On a segment basis, $29, $15, and $9 of the charges were related to personal care, consumer tissue and KCP, respectively. Cash payments of $90 related to the restructuring were made during the six months ended June 30, 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.
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 June 30, 2013, we have recognized cumulative operating profit benefits of $65 from the restructuring actions.


During the three months ended June 30, 2012, charges of $18 and $1 were recorded in cost of products sold and marketing, research and general expenses, respectively, for the restructuring actions. A related benefit of $3 was recorded in provision for income taxes. On a segment basis, $17 and $2 of the charges were related to consumer tissue and KCP, respectively. On a geographic basis, $15, $3 and $1 of the charges were recorded in the United States, Australia and other countries, respectively.
During the six months ended June 30, 2012, charges of $53 and $1 were recorded in cost of products sold and marketing, research and general expenses, respectively, for the restructuring actions. A related benefit of $14 was recorded in provision for income taxes. On a segment basis, $49 and $5 of the charges were related to consumer tissue and KCP, respectively. On a geographic basis, $48, $5 and $1 of the charges were recorded in the United States, Australia and other countries, respectively.

Liquidity and Capital Resources
Cash Provided by Operations
Cash provided by operations was $1.2 billion compared to $1.3 billion in the prior year. The decrease was driven by higher tax payments and pension contributions versus last year.
Investing
During the first six months of 2013, our capital spending was $494 compared to $486 in the prior year. We anticipate that full year 2013 capital spending will be $1.0 billion to $1.1 billion.
Financing
At June 30, 2013, total debt and redeemable securities was $7.2 billion compared to $6.7 billion at December 31, 2012.
On May 23, 2013, we issued $250 aggregate principal amount of floating rate notes due May 15, 2016, $350 aggregate principal amount of 2.4% notes due June 1, 2023, and $250 aggregate principal amount of 3.7% notes due June 1, 2043. Proceeds from the offering will be used to repay our $500 aggregate principal amount of 5.0% notes due August 15, 2013, to fund investment in our business and for general corporate purposes.
We repurchase shares of Kimberly-Clark common stock from time to time pursuant to publicly announced share repurchase programs. During the first six months of 2013, we repurchased 8.5 million shares of our common stock at a cost of $800 through a broker in the open market. In 2013, we plan to repurchase $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 June 30, 2013 was $86 (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 second quarter of 2013 was $421. 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 for the six months ended June 30, 2013. In the Consolidated Cash Flow Statement, this non-cash charge is included in other in cash provided by operations.

At June 30, 2013, K-C Venezuela had a bolivar-denominated net monetary asset position of $244 and our net investment in K-C Venezuela was $375, 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 and six month periods ended June 30, 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
We plan to continue to execute our Global Business Plan strategies for our long-term success. In 2013, we expect to remain focused on targeted growth initiatives, innovation and brand building, cost savings programs and shareholder-friendly capital allocation. We continue to expect full-year growth in organic volume, price and mix in the 3 to 5 percent target range, led by KCI.
We expect to achieve increased cost savings, which we expect will help offset . . .

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