MOODY'S CONFIRMS KIMBERLY-CLARK'S RATINGS; OUTLOOK REMAINS STABLE
Moody's Investors Service confirmed the long and short term ratings of Kimberly-Clark Corporation ("Kimberly-Clark"), following the announcement of the acquisition of Safeskin, a manufacturer of disposable gloves for the healthcare industry. The ratings confirmation reflects the limited impact of the contemplated transaction on debt protection measures, as well as the strong market positions of Kimberly-Clark in tissue-based and personal care products, the strength of the company's brands and its successful track record in innovation. It also reflects the limited pricing flexibility of the company and unfavorable demographics for infant personal care products in developed economies. The rating outlook remains stable and is updated as follows:
"The outlook is stable. The company's successful turnaround of its European operations contributes to the strength of its debt protection measures. Moody's expects Kimberly-Clark to maintain a conservative financial policy."
Aa2 for senior unsecured
Prime-1 for commercial paper
Scott Paper Company:
Aa3 for senior unsecured
The $850 million acquisition of Safeskin will be financed as a stock swap. As part of the transaction, Kimberly-Clark will assume $155 million in Safeskin debt. The acquisition fits within Kimberly-Clark's strategy of developing its healthcare activity. In this segment, the company builds on its expertise in non-woven materials technology to supply hospitals with products such as protective gowns, packs and sterilization wraps. While the healthcare segment represents only approximately 10% of total revenue and assets, its operating margin is high, at 18% and Kimberly-Clark's market share in this niche segment is strong. Moody's believes that the structure of the transaction as well as the potential to increase Safeskin's sales by taking advantage of Kimberly-Clark's existing relationships with hospitals are positives for the credit.
The other activities of Kimberly-Clark are tissue-based products (55% of total sales) and personal care products (37%). In both of these segments, the company 's market shares in the US are high for many product lines, such as training pants (apporximately 80%) or facial tissue (approximately 50%). Regarding these segments, Kimberly-Clark faces two main obstacles in developed markets: a generally declining number of births since the beginning of the decade -- which compresses demand for personal care products -- and increasing retail power -- which constrains pricing flexibility. However, the company has been able to offset these factors through recurrent innovation in the premium segment -- which allows Kimberly-Clark to reach high price points -- and brand power. The strength of the company's brands,such as Kleenex and Huggies, enhanced by product differentiation, allows it to compete successfully against private label, although to a lesser degree in Europe.
In recent years the company has been increasing the outsourcing of pulp, a major component of Kimberly-Clark's cost of goods sold. Moody's believes that the increased reliance on outside suppliers should contribute to margin stability by lowering the level of the company's fixed costs. Moody's also believes that the restructuring actions undertaken by the company in 1998 and 1999 contribute to sustain profitability.
Kimberly-Clark is likely to continue buying back its stock on a recurrent basis. However, Moody's believes that free cash flow should satisfy the majority of the funding requirements of these repurchases, and that management will continue to maintain a conservative finacial policy.
Based in Irving, Texas, Kimberly-Clark is a leading global manufacturer of tissue, personal care and health care products.
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