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KMB > SEC Filings for KMB > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for KIMBERLY CLARK CORP


1-Nov-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 Third Quarter 2013 Results

Results of Operations and Related Information

Liquidity and Capital Resources

Legal Matters

Business Outlook

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

Operating profit and net income attributable to Kimberly-Clark Corporation increased 3 percent and 6 percent, respectively.

Diluted earnings per share increased to $1.42 versus $1.30 in the prior year.

Results of Operations and Related Information This section presents a discussion and analysis of our third 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 September 30                      Nine Months Ended September 30
                                         2013                   2012           Change          2013                 2012          Change
NET SALES
Personal Care                     $         2,383         $         2,414      -1.3  %   $        7,170       $        7,196      -0.4  %
Consumer Tissue                             1,626                   1,605      +1.3  %            4,969                4,852      +2.4  %
K-C Professional                              843                     822      +2.6  %            2,477                2,458      +0.8  %
Health Care                                   403                     396      +1.8  %            1,201                1,212      -0.9  %
Corporate & Other                               7                       9      N.M.                  30                   38      N.M.
TOTAL NET SALES                   $         5,262         $         5,246      +0.3  %   $       15,847       $       15,756      +0.6  %

OPERATING PROFIT
Personal Care                     $           427         $           436      -2.1  %   $        1,300       $        1,241      +4.8  %
Consumer Tissue                               233                     216      +7.9  %              713                  652      +9.4  %
K-C Professional                              155                     144      +7.6  %              459                  407     +12.8  %
Health Care                                    70                      59     +18.6  %              168                  168         -
Corporate & Other(a)                          (70 )                   (77 )    N.M.                (242 )               (246 )    N.M.
Other (income) and expense, net                 8                      (5 )    N.M.                  12                  (15 )    N.M.
TOTAL OPERATING PROFIT            $           807         $           783      +3.1  %   $        2,386       $        2,237      +6.7  %


N.M. - Not meaningful

                                       17
--------------------------------------------------------------------------------


Results By Geography
                                       Three Months Ended September 30                      Nine Months Ended September 30
                                         2013                   2012           Change          2013                 2012         Change
NET SALES
North America                     $         2,727         $         2,688      +1.5  %   $        8,104       $        8,085      +0.2 %
Outside North America                       2,719                   2,763      -1.6  %            8,301                8,278      +0.3 %
Intergeographic sales                        (184 )                  (205 )    N.M.                (558 )               (607 )    N.M.
TOTAL NET SALES                   $         5,262         $         5,246      +0.3  %   $       15,847       $       15,756      +0.6 %

OPERATING PROFIT
North America                     $           530         $           522      +1.5  %   $        1,618       $        1,500      +7.9 %
Outside North America                         355                     333      +6.6  %            1,022                  968      +5.6 %
Corporate & Other(a)                          (70 )                   (77 )    N.M.                (242 )               (246 )    N.M.
Other (income) and expense, net                 8                      (5 )    N.M.                  12                  (15 )    N.M.
TOTAL OPERATING PROFIT            $           807         $           783      +3.1  %   $        2,386       $        2,237      +6.7 %

(a) For the three and nine months ended September 30, 2013, Corporate & Other includes charges related to the European strategic changes of $11 and $64, respectively. For the three and nine months ended September 30, 2012, Corporate & Other includes charges related to the pulp and tissue restructuring actions of $31 and $85, respectively.

Percentage Change 2013 Versus 2012
NET SALES                                                          Changes Due To
                                            Organic   Restructuring
Third Quarter                      Total    Volume      Impact(a)     Net Price   Mix/Other(b)   Currency
Consolidated                        0.3        3           (2)            1            -           (2)
Personal Care                      (1.3)       5           (4)            -            1           (3)
Consumer Tissue                     1.3        1           (2)            3            1           (2)
K-C Professional                    2.6        2           (1)            2            2           (2)
Health Care                         1.8        3            -             -            1           (2)

Year-to-Date
Consolidated                        0.6        3           (2)            1            1           (2)
Personal Care                      (0.4)       4           (3)            1            -           (2)
Consumer Tissue                     2.4        2           (1)            2            -           (1)
K-C Professional                    0.8        -            -             1            1           (1)
Health Care                        (0.9)       -            -             -            -           (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
Third Quarter        Total      Volume    Net Price   Costs(a)   Cost Savings   Translation   Other(b)
Consolidated          3.1         2           9         (7)           9             (3)         (7)
Personal Care        (2.1)        4           2         (6)           12            (3)         (11)
Consumer Tissue       7.9        (4)         21         (13)          2             (2)          4
K-C Professional      7.6         1          12         (2)           8             (2)         (9)
Health Care           18.6        13          -          5            5             (4)          -

Year-to-Date
Consolidated          6.7         3           7         (5)           11            (2)         (7)
Personal Care         4.8         3           4         (4)           12            (2)         (8)
Consumer Tissue       9.4         4          13         (12)          4             (1)          1
K-C Professional      12.8        -           8         (3)           11            (2)         (1)
Health Care            -          4           -          11           7             (2)         (20)

(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 consolidated also includes the impact of the February 2013 devaluation of the Venezuelan bolivar.

Commentary - Third Quarter of 2013 Compared to Third Quarter of 2012 Consolidated
Net sales of $5.3 billion in the third quarter of 2013 were even with the year-ago period with increased organic sales volumes of 3 percent, higher net selling prices of 1 percent and improved product mix of 1 percent. Changes in foreign currency exchange rates, and lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions, each reduced net sales by more than 2 percent.
Operating profit was $807 in the third quarter of 2013, up 3 percent from $783 in 2012. The increase in operating profit included benefits from organic volume growth and $70 in cost savings from the company's FORCE (Focused On Reducing Costs Everywhere) program. Input costs increased $55 overall versus 2012, with $30 of higher costs for raw materials other than fiber, $15 of increased fiber costs and $10 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 $25. Currency transaction effects also negatively impacted the operating profit comparison. Results include charges in 2013 of $14 for European strategic changes and in 2012 of $31 for pulp and tissue restructuring actions.
The third quarter effective tax rate was 30.3 percent in 2013 compared to 31.1 percent in 2012.
Kimberly-Clark's share of net income of equity companies in the third quarter was $49 in 2013 and $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.
Diluted earnings per share for the third quarter were $1.42 in 2013 and $1.30 in 2012. The increase was primarily due to higher sales volumes and net selling prices, cost savings, a lower effective tax rate and a lower share count, partially offset by input cost inflation and unfavorable foreign currency rates. 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 4 percent and currency rates were unfavorable by 3 percent. Organic sales volumes rose 5 percent and the combined impact of changes in net selling prices and product mix added 1 percent of net sales growth. Third quarter operating profit of $427 decreased 2 percent. The comparison was negatively impacted by input cost inflation, unfavorable currency rates and higher marketing, research and general expenses, mostly offset by benefits from organic volume growth and cost savings.
Net sales in North America were even with the year-ago period. Volumes increased 2 percent, while product mix was down 1 percent and net selling prices fell 1 percent, primarily due to increased promotion activity in the diaper category. Feminine care volumes were up high-single digits, driven by growth on the U by Kotex brand. Adult care volumes increased mid-single digits,


including benefits from product innovation on the Depend and Poise brands. Huggies diaper volumes were up mid-single digits, with benefits from improved Huggies Snug & Dry diapers. Child care volumes decreased high-single digits and were impacted by the timing of promotions, category softness and competitive activity.
Net sales in K-C International ("KCI") increased 3 percent despite a 6 percent negative impact from changes in currency rates. Sales volumes were up 7 percent and the combined impact of higher net selling prices and improved product mix added 3 percent of growth. Volumes increased in Australia, China, Russia, South Africa, Vietnam and throughout most of Latin America, including Brazil, but declined in South Korea and Venezuela.
Net sales in Europe decreased 40 percent, including a 48 percent negative impact from lost sales in conjunction with European strategic changes. Organic sales volumes rose 7 percent, including growth in Huggies baby wipes and child care products, and currency rates were favorable by 1 percent. Consumer Tissue Segment
Net sales of $1.6 billion increased 1 percent. Net selling prices rose 3 percent and higher organic sales volumes and favorable product mix each added 1 percent of growth. Changes in currency rates, and lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions, each reduced net sales by 2 percent. Third quarter operating profit of $233 increased 8 percent. The comparison benefited from net sales growth, cost savings and lower marketing, research and general expenses, partially offset by input cost inflation and unfavorable currency rates.
Net sales in North America were up 4 percent. Net selling prices increased 4 percent, driven by sheet count reductions accompanying product innovation launched earlier in the year on Kleenex facial tissue and Cottonelle and Scott Extra Soft bathroom tissue. Product mix improved 2 percent, while sales volumes fell 2 percent and were negatively impacted by the sheet count reductions, partially offset by higher shipments of paper towels.
Net sales in KCI increased 4 percent despite a 7 percent negative impact from changes in currency rates. Sales volumes increased 7 percent and net selling prices improved 3 percent. The growth in volume and price was driven by increases in Latin America, primarily in Brazil and Venezuela.
Net sales in Europe decreased 9 percent. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced sales volumes by 11 percent. Higher organic sales volumes and favorable currency rates each added 1 percent of growth.
K-C Professional ("KCP") Segment
Net sales of $0.8 billion increased 3 percent. Net selling prices improved 2 percent, organic sales volumes increased 2 percent and product mix was favorable by 1 percent. Currency rates were unfavorable by 2 percent and lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced sales volumes by approximately 1 percent. Third quarter operating profit of $155 increased 8 percent. The comparison benefited from net sales growth and cost savings, partially offset by higher manufacturing-related costs and unfavorable currency rates.
Net sales in North America increased 3 percent, with volumes, net selling prices and product mix each up 1 percent. The volume improvement was driven by increases in wiper products, partially offset by the exit of certain lower-margin safety product offerings.
Net sales in KCI increased 4 percent despite a 7 percent decrease from unfavorable currency rates. Net selling prices rose 5 percent and sales volumes and product mix each improved 3 percent. The growth was driven by broad-based increases in Latin America.
Net sales in Europe were even with year-ago levels. Lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions reduced sales volumes 4 percent, while currency rates were favorable by 2 percent. Product mix improved 2 percent and net selling prices increased 1 percent. Organic sales volumes were down 1 percent, including declines in Southern Europe where economic conditions remain difficult. Health Care Segment
Net sales of $0.4 billion increased 2 percent. Sales volumes rose 3 percent and product mix improved slightly, while currency rates were unfavorable by 2 percent. Third quarter operating profit of $70 increased 19 percent, driven by net sales growth, reduced marketing, research and general expenses and cost savings.


Medical device volumes were up high-single digits, with strong growth in pain management products and solid increases in airway management and digestive health offerings. Surgical and infection prevention volumes were up slightly, as higher sales of surgical products and face masks were mostly offset by declines in exam gloves.

Commentary - First Nine Months of 2013 Compared to First Nine Months of 2012 For the first nine months of 2013, net sales of $15.8 billion increased 1 percent with higher organic sales volumes of 3 percent and increased net selling prices of 1 percent. Changes in foreign currency rates, and lost sales in conjunction with European strategic changes and pulp and tissue restructuring actions, each reduced net sales by approximately 2 percent.
Year-to-date operating profit of $2,386 in 2013 increased 7 percent compared to $2,237 in 2012. Operating profit comparisons benefited from net sales growth and FORCE cost savings of $235. Input costs were $120 higher overall versus 2012 and foreign currency translation effects reduced operating profit by $45. Currency transaction effects also negatively impacted the operating profit comparison. Results include charges in 2013 of $67 for European strategic changes and in 2012 of $85 for pulp and tissue restructuring actions.
Other (income) and expense, net was $12 of expense in the first nine months of 2013 and $15 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. The year-to-date effective tax rate was 31.3 percent in 2013 compared to 30.5 percent in 2012.
Through nine months, diluted earnings per share were $4.13 in 2013 and $3.73 in 2012. The increase was primarily due to higher operating profit, along with increased equity income and a lower share count.

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 have exited the diaper category in that region, with the exception of the Italian market, and divested or exited 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 $0.5 billion 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. 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 at the high end of the range of $350 to $400 pre-tax ($300 to $350 after tax) over that period. Cash costs related to severance and other expenses are expected to be toward the low end of the range of 50 to 60 percent of the charges. Noncash charges will consist primarily of asset impairment charges and incremental depreciation. During the three months ended September 30, 2013, $14 of pre-tax charges were recognized for the strategic changes, including $6, $5, and $3 recorded in cost of products sold, marketing, research and general expenses, and other (income) and expense, net, respectively. A related benefit of $4 was recorded in provision for income taxes. On a segment basis, $1, $7, and $3 of the charges were related to personal care, consumer tissue and KCP, respectively. During the nine months ended September 30, 2013, $67 of pre-tax charges were recognized for the strategic changes, including $44, $20, and $3 recorded in cost of products sold, marketing, research and general expenses, and other (income) and expense, net, respectively. A related benefit of $15 was recorded in provision for income taxes. On a segment basis, $30, $22, and $12 of the charges were related to personal care, consumer tissue and KCP, respectively. Cash payments of $132 related to the restructuring were made during the nine months ended September 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 seven 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 September 30, 2013, we have recognized cumulative operating profit benefits of $70 from the restructuring actions.
During the three months ended September 30, 2012, charges of $30 and $1 were recorded in cost of products sold and marketing, research and general expenses, respectively, for the restructuring actions. A related benefit of $15 was recorded in provision for income taxes. On a segment basis, all $31 of the charges were related to consumer tissue. On a geographic basis, charges of $10 and $22 and a credit of $1 were recorded in the United States, Australia and other countries, respectively.
During the nine months ended September 30, 2012, charges of $83 and $2 were recorded in cost of products sold and marketing, research and general expenses, respectively, for the restructuring actions. A related benefit of $29 was recorded in provision for income taxes. On a segment basis, $80 and $5 of the charges were related to consumer tissue and KCP, respectively. On a geographic basis, $58 and $27 of the charges were recorded in the United States and Australia, respectively.

Liquidity and Capital Resources
Cash Provided by Operations
Cash provided by operations was $2.1 billion compared to $2.2 billion in the prior year. Despite higher earnings and improvements in our cash conversion cycle, cash from operations decreased as a result of higher tax payments, pension contributions and cash payments for restructuring versus last year. Investing
During the first nine months of 2013, our capital spending was $697 compared to $763 in the prior year. We anticipate that full year 2013 capital spending will be toward the low end of the previously communicated range of $1.0 billion to $1.1 billion.
Financing
At September 30, 2013, total debt and redeemable securities was $7.0 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 were 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 nine months of 2013, we repurchased 10.0 million shares of our common stock at a cost of $950 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 September 30, 2013 was $374 (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 third quarter of 2013 was $472. 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 nine months ended September 30, 2013. In the Consolidated Cash Flow Statement, this non-cash charge is included in other in cash provided by operations. At September 30, 2013, K-C Venezuela had a bolivar-denominated net monetary asset position of $285 and our net investment in K-C Venezuela was $414, both valued at 6.3


bolivars per U.S. dollar. Net sales of K-C Venezuela represented approximately 2 percent of Consolidated Net Sales for the three and nine month periods ended September 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 . . .

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