The maker of Kleenex tissues, Kimberley-Clark, has posted a three per cent decrease of its second-quarter earnings. While the company is selling more products, it is also costing it more money to produce them.

During the months of April, May and June of this year, it sold $5.3 billion worth of products, including diapers, tissues, hand sanitizers and gowns for doctors. The figure represents a 1.4 per cent increase from the same period last year.

However, costs of input also went up by 1.9 per cent, which grows at a faster rate than the rate for sales. As a result, the company’s second-quarter revenue only edged up by half a per cent.

Accroding to the latest earnings report, product costs increased $60 million over all. Seventy-five per cent of that was contributed by higher non-fiber raw material costs and the rest by higher fiber costs. The report says the price hike was in part due to the weakening of several foreign currencies against the U.S. dollar.

Peter Secord, who teaches accounting at Saint Mary’s University, says cost increase is the main reason for the three per cent revenue slip.

Over all, unfavorable foreign currency exchange rates brought up the second quarter input costs by two per cent. Kimberley-Clark is particularly vulnerable to currency exchange rate fluctuations in foreign markets because the 86-year-old business has manufacturing facilities in 38 countries, sells products in more than 175 countries.

Mark Buthman, the company’s senior vice president and chief financial officer, told reporters during a conference call that there was “significant currency headwind” during the second quarter, which brought down earnings by about $0.11 per share.

Meanwhile, Buthman says the price inflation of raw materials is likely to continue so he expects input costs for the whole year to be “towards the high end of the previously estimated range of $150-250 million.” That’s about 11 per cent of last year’s profit.

Kimberley-Clark’s second-quarter cost increase is also due to the fact that the company spent $15 million more in advertising. Tom Falk, chairman and chief executive officer of the company, says spending has helped brands, such as Poise, Depend, U by Kotex, Viva and Huggies baby wipes, to have a solid market position in North America. In its latest annual report, the company says it competes against other “well-known, branded products and low-cost or private label products” in both domestic and international markets. As a result, it has to lower product prices and spend more on advertising, both of which could adversely affect the financial results.

To stay competitive in the long term, the company announced a plan last November to spin off its health care unit. It hopes to turn the smallest division, which is not performing very well, into a separate, tax-free company so that Kimberley-Clark pays less tax.

The health care division, which offers products, including medical gloves, masks, generates about $1.7 billion annually – the lowest compared to the other three units. And it is the only business that saw a decrease in net sales in the second quarter than the same period last year.

However, things didn’t go as the company had planed. Last year, the U.S. Internal Revenue Service stopped offering tax-free arrangements for companies wanting to unload business divisions. That means Kimberley-Clark can’t avoid tax payments as it had hoped.

Instead, the company has been footing the bills since it started transition last year. During the second-quarter, it paid $68 million for the spin-off process, which amounts for 13 per cent of its quarterly revenue.

However, the company still wants to continue with plan. During the conference call, Falk says Kimberley-Clark is aiming to complete the transaction by the end of October, and it’s in the process of assessing the impact of the separation on its other business operations.

Earlier this year, the company said the new publicly traded company, Halyard Health, Inc., would be based outside of Atlanta, Georgia.

Professor Secord says a lot of the costs related to the health care unit that Kimberley-Clark is paying now wouldn’t go away after the creation of the new company. It’s called “stranded costs.” But at the same time, the company can no long collecting revenues from the new health care company to pay for those costs. So it could further reduce Kimberley-Clark’s profitability.

Falk estimates the stranded costs could amount to about two to three per cent of the company’s annual operating profit, but he says they plan to offset the cost by repurchasing more of its own shares and charge the new company with fees for the transition services it provides.

Professor Secord says, in the long run, it still makes sense for Kimberley-Clark to put forward the new company because stock markets have been on an upward stretch for a couple of years now, which means most investors are looking to buy shares. And he says, hopefully, by getting rid of the least profitable unit, the company could eventually focus on increasing the competitiveness of its traditional business, such as diapers and tissues.

Secord says three per cent decrease in last quarter’s profit isn’t significant enough to alarm investors, and it did not appear to have an impact on its stock prices.

Kimberley-Clark’s shares have reversed to an upward trend from its lowest point two weeks ago after the second-quarter earnings report came out. The company’s stocks closed at $108 per share yesterday, up from $103 a share on July 31, a week after the release of its latest earnings report.