UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2006

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from.............to.....................

 

Commission file number 1-225

 

KIMBERLY-CLARK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

39-0394230

 

(State or other jurisdiction of

(I.R.S. Employer

 

incorporation or organization)

Identification No.)

 

P. O. Box 619100

Dallas, Texas

75261-9100

(Address of principal executive offices)

(Zip Code)

 

(972) 281-1200

(Registrant’s telephone number, including area code)

 

No change

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   X  .

No

___.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   X  .

Accelerated filer

___.

Non-accelerated filer ___.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

___.

No   X  .

 

As of October 31, 2006, there were 458,305,998 shares of the Corporation’s common stock outstanding.

 


PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(Millions of dollars, except per share amounts)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

4,210.4

 

$

4,000.8

 

$

12,439.7

 

$

11,893.7

 

Cost of products sold

 

 

2,934.9

 

 

2,844.4

 

 

8,723.5

 

 

8,108.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

1,275.5

 

 

1,156.4

 

 

3,716.2

 

 

3,785.6

 

Marketing, research and general expenses

 

 

749.2

 

 

679.5

 

 

2,203.6

 

 

2,021.5

 

Other (income) and expense, net

 

 

(.1

)

 

12.3

 

 

21.7

 

 

25.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

526.4

 

 

464.6

 

 

1,490.9

 

 

1,738.4

 

Nonoperating expense

 

 

(17.2

)

 

(43.2

)

 

(40.6

)

 

(137.4

)

Interest income

 

 

6.8

 

 

7.4

 

 

19.8

 

 

21.7

 

Interest expense

 

 

(56.5

)

 

(48.0

)

 

(165.9

)

 

(138.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Interests

 

 

459.5

 

 

380.8

 

 

1,304.2

 

 

1,484.5

 

Provision for income taxes

 

 

(114.6

)

 

(66.3

)

 

(344.9

)

 

(324.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Equity Interests

 

 

344.9

 

 

314.5

 

 

959.3

 

 

1,160.2

 

Share of net income of equity companies

 

 

42.8

 

 

33.0

 

 

124.7

 

 

99.4

 

Minority owners’ share of subsidiaries’ net

 

 

 

 

 

 

 

 

 

 

 

 

 

income

 

 

(23.5

)

 

(22.2

)

 

(67.1

)

 

(62.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

364.2

 

$

325.3

 

$

1,016.9

 

$

1,197.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.80

 

$

.69

 

$

2.22

 

$

2.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

.79

 

$

.68

 

$

2.21

 

$

2.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared

 

$

.49

 

$

.45

 

$

1.47

 

$

1.35

 

 

See Notes to Consolidated Financial Statements.

2

 


KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

 

 

September 30,

 

December 31,

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

399.2

 

 

$

364.0

 

Accounts receivable

 

 

2,192.6

 

 

 

2,101.9

 

Inventories

 

 

1,888.3

 

 

 

1,752.1

 

Other current assets

 

 

560.7

 

 

 

565.1

 

Total Current Assets

 

 

5,040.8

 

 

 

4,783.1

 

 

 

 

 

 

 

 

 

 

Property

 

 

15,044.6

 

 

 

14,616.2

 

Less accumulated depreciation

 

 

7,563.6

 

 

 

7,121.5

 

Net Property

 

 

7,481.0

 

 

 

7,494.7

 

 

 

 

 

 

 

 

 

 

Investments in Equity Companies

 

 

494.2

 

 

 

457.8

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

2,731.9

 

 

 

2,685.6

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

877.9

 

 

 

882.0

 

 

 

$

16,625.8

 

 

$

16,303.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Debt payable within one year

 

$

1,360.6

 

 

$

1,222.5

 

Accounts payable

 

 

1,400.5

 

 

 

1,354.3

 

Accrued expenses

 

 

1,530.1

 

 

 

1,399.6

 

Other current liabilities

 

 

592.0

 

 

 

666.5

 

Total Current Liabilities

 

 

4,883.2

 

 

 

4,642.9

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

2,272.1

 

 

 

2,594.7

 

Noncurrent Employee Benefit and Other Obligations

 

 

1,891.8

 

 

 

1,782.6

 

Deferred Income Taxes

 

 

407.9

 

 

 

572.9

 

Minority Owners’ Interests in Subsidiaries

 

 

419.6

 

 

 

394.5

 

Preferred Securities of Subsidiary

 

 

784.2

 

 

 

757.4

 

Stockholders’ Equity

 

 

5,967.0

 

 

 

5,558.2

 

 

 

$

16,625.8

 

 

$

16,303.2

 

 

See Notes to Consolidated Financial Statements.

3

 


KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(Unaudited)

 

 

 

Nine Months

 

 

 

Ended September 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

1,016.9

 

$

1,197.2

 

Depreciation and amortization

 

 

714.5

 

 

624.6

 

Asset impairments

 

 

3.4

 

 

67.0

 

Stock-based compensation

 

 

53.0

 

 

24.8

 

Changes in operating working capital

 

 

54.6

 

 

(254.5

)

Deferred income tax provision

 

 

(217.8

)

 

(76.3

)

Net losses on asset dispositions

 

 

81.4

 

 

27.7

 

Equity companies’ earnings in excess of dividends paid

 

 

(62.0

)

 

(40.9

)

Minority owners’ share of subsidiaries’ net income

 

 

67.1

 

 

62.4

 

Postretirement benefits

 

 

62.8

 

 

47.4

 

Other

 

 

(7.4

)

 

(43.7

)

 

 

 

 

 

 

 

 

Cash Provided by Operations

 

 

1,766.5

 

 

1,635.7

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Capital spending

 

 

(639.0

)

 

(451.9

)

Proceeds from sales of investments

 

 

29.4

 

 

20.9

 

Proceeds from dispositions of property

 

 

32.3

 

 

27.7

 

Net (increase) decrease in time deposits

 

 

(16.0

)

 

44.1

 

Investments in marketable securities

 

 

(18.7

)

 

(2.0

)

Other

 

 

(5.1

)

 

(21.4

)

 

 

 

 

 

 

 

 

Cash Used for Investing

 

 

(617.1

)

 

(382.6

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Cash dividends paid

 

 

(659.6

)

 

(625.7

)

Net (decrease) increase in short-term debt

 

 

(147.6

)

 

212.1

 

Proceeds from issuance of long-term debt

 

 

52.8

 

 

359.9

 

Repayments of long-term debt

 

 

(95.9

)

 

(550.5

)

Proceeds from exercise of stock options

 

 

220.0

 

 

131.4

 

Acquisitions of common stock for the treasury

 

 

(479.4

)

 

(1,013.6

)

Other

 

 

(3.5

)

 

(32.3

)

 

 

 

 

 

 

 

 

Cash Used for Financing

 

 

(1,113.2

)

 

(1,518.7

)

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(1.0

)

 

(15.0

)

Increase (Decrease) in Cash and Cash Equivalents

 

 

35.2

 

 

(280.6

)

Cash and Cash Equivalents, beginning of year

 

 

364.0

 

 

594.0

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, end of period

 

$

399.2

 

$

313.4

 

 

See Notes to Consolidated Financial Statements.

 

4

 


KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

New Accounting Standards

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements by standardizing the level of confidence needed to recognize uncertain tax benefits and the process for measuring the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings. The Corporation is currently evaluating the interpretation. However, adoption of FIN 48 is not expected to have a material effect on the Corporation’s financial statements.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements; however, it will apply under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after December 15, 2007 and interim periods within such years. The Corporation will adopt SFAS 157 as of January 1, 2008, as required. The Corporation is currently evaluating the new standard. However, adoption of SFAS 157 is not expected to have a material effect on the Corporation’s financial statements.

 

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87, 88, 106 and 132R (“SFAS 158”). SFAS 158 requires an employer that sponsors one or more postretirement defined benefit plan(s) to:

 

Recognize the funded status of postretirement defined benefit plans – measured as the difference between the fair value of plan assets and the benefit obligations – in its consolidated balance sheet.

 

Recognize changes in the funded status of postretirement defined benefit plans in other comprehensive income in the year in which the changes occur.

 

5

 


Note 1. (Continued)

 

Measure postretirement defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end. The Corporation presently uses December 31 as the measurement date for all of its postretirement defined benefit plans.

 

The Corporation will adopt SFAS 158 effective December 31, 2006, as required. Adoption of SFAS 158 is estimated to increase the Corporation’s liabilities, net of deferred income tax effects, by more than $350 million and decrease stockholders’ equity by a similar amount. Adoption of SFAS 158 is not expected to have a significant effect on the Corporation’s results of operations or liquidity.

 

In September 2006, the Securities and Exchange Commission published Staff Accounting Bulletin No. 108 (“SAB 108”), which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 describes the two techniques most commonly used in practice to quantify misstatements as the “rollover” and “iron curtain” approaches.

 

The rollover approach quantifies a misstatement based on the amount of the misstatement originating in the current year income statement, thereby ignoring the “carryover effects” of prior year misstatements. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination.

 

SAB 108 requires quantification of all misstatements on both the rollover and iron curtain approaches, and if either approach results in a material effect on the financial statements, the financial statements should be adjusted. The Corporation will adopt SAB 108 by December 31, 2006, as required. The Corporation is currently evaluating the effect that application of SAB 108 will have, but adoption is not expected to have a material effect on the Corporation’s financial statements.

 

Note 2.  Stock-Based Compensation

 

The Corporation has a stock-based Equity Participation Plan and an Outside Directors’ Compensation Plan (the “Plans”), under which it currently grants options, restricted shares and restricted share units to employees and restricted share units to outside directors. As of September 30, 2006, the number of shares of common stock available for grants under the Plans aggregated 24.9 million shares.

 

Stock options are granted at an exercise price equal to the market value of the underlying common stock on the date of grant. The Corporation’s stock options have a term of 10 years and are subject to graded vesting whereby options vest 30 percent at the end of each of the first two 12 month periods following the grant and 40 percent at the end of the third 12 month period.

 

Restricted shares, time-based restricted share units and performance-based restricted share units granted to employees generally vest over three to five years. The number of performance-based share units that ultimately vest ranges from zero to 150 percent of the number granted, based on improvement in return on invested capital (“ROIC”) during the three-year performance period. ROIC targets are set at the beginning of the performance period. Restricted share units granted to outside directors generally vest upon their departure from the board of directors.

 

At the time stock options are exercised or restricted shares and restricted share units vest, common stock is issued from the Corporation’s accumulated treasury shares. Cash dividends are paid on restricted shares, and cash dividends or dividend equivalents are paid or credited on restricted share units, on the same date and at the same rate as dividends are paid on the Corporation’s common stock. These cash dividends and dividend equivalents, net of estimated forfeitures, are charged to retained earnings. Previously paid cash dividends on subsequently forfeited restricted share units are charged to compensation expense.

 

6

 


Note 2. (Continued)

 

Prior to January 1, 2006, the Corporation accounted for these plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). No employee compensation cost for stock options was recognized in the Consolidated Income Statement for periods prior to January 1, 2006, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

Effective January 1, 2006, the Corporation adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payment (“SFAS 123R”), using the modified-prospective-transition method. Under that transition method, compensation cost is recognized in the periods after adoption for (i) all stock option awards granted or modified after December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R and (ii) all stock options granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods were not restated. Also in connection with the adoption of SFAS 123R, approximately $37 million was reclassified from accrued liabilities to additional paid-in capital, as accrued compensation for unvested restricted share units does not meet the definition of a liability under SFAS 123R.

 

Stock-based employee compensation cost of $16.9 million and $53.0 million were recognized for the three and nine months ended September 30, 2006, respectively. Related income tax benefits of $6.3 million and $18.8 million were recognized for the three and nine months ended September 30, 2006, respectively. The compensation cost for the nine months ended September 30, 2006 is net of a cumulative pretax adjustment of $3.9 million resulting from a change in estimating the forfeiture rate for unvested restricted share and restricted share unit awards as of January 1, 2006, as required by SFAS 123R.

 

As a result of adopting SFAS 123R, the Corporation’s income before income taxes for the three and nine months ended September 30, 2006 was $7.8 million and $23.4 million lower, respectively, than had it continued to account for stock-based compensation under APB 25. Also, the Corporation’s net income for the three and nine months ended September 30, 2006 was $5.1 million and $15.6 million lower, respectively, than had it continued to account for stock-based compensation under APB 25. Basic and diluted earnings per share for the three and nine month periods ended September 30, 2006 are lower than if the Corporation had continued to account for the stock-based compensation under APB 25 by $0.01 and $0.03, respectively.

 

The Corporation recognized stock-based compensation costs, for restricted shares and restricted share units only, of $8.7 million and $24.8 million for the three and nine months ended September 30, 2005, respectively.

 

The fair value of stock option awards granted on or after January 1, 2006 was determined using a Black-Scholes-Merton option-pricing formula utilizing a range of assumptions related to dividend yield, volatility, risk-free interest rate, and employee exercise behavior. Dividend yield is based on historical experience and expected future dividend actions. Expected volatility is based on a blend of historical volatility and implied volatility from traded options on the Corporation’s common stock. Prior to January 1, 2006, volatility was based on historical experience only. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Corporation estimates forfeitures based on historical data.

 

7

 


Note 2. (Continued)

 

The weighted-average fair value of the options granted for the three and nine months ended September 30, 2006 was estimated at $10.44 and $10.10 per option, respectively, on the date of grant based on the following assumptions:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2006

 

September 30, 2006

 

 

 

 

 

 

 

 

 

Dividend yield

 

 

3.50

%

 

 

3.50

%

Volatility

 

 

17.58

%

 

 

17.84

%

Risk-free interest rate

 

 

5.04

%

 

 

5.04

%

Expected life – years

 

 

6.0

 

 

 

6.0

 

 

 

As of September 30, 2006, the total remaining unrecognized compensation cost related to non-vested stock options, and non-vested restricted shares and time-based restricted share units, aggregated $46.0 million and $33.9 million, respectively, which will be amortized over the weighted-average service period of 1.1 years and 2.8 years, respectively. As of September 30, 2006, the total remaining unrecognized compensation cost related to non-vested, performance-based restricted share units aggregated $18.5 million, which will be amortized over the weighted-average service period of 1.8 years.

 

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Corporation has elected to adopt the shortcut method provided in the FASB Staff Position for determining the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation subsequent to the adoption of SFAS 123R. The shortcut method includes simplified procedures to establish the beginning balance of the pool of excess tax benefits (the “APIC Tax Pool”) and to determine the subsequent effect on the APIC Tax Pool and Cash Flow Statements of the tax effects of employee stock-based compensation awards.

 

Prior to the adoption of SFAS 123R, all tax benefits from deductions resulting from the exercise of stock options and the vesting of restricted shares and restricted share units were presented as operating cash flows in the Cash Flow Statement. SFAS 123R requires the cash flow tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) to be classified as financing cash flows. Excess tax benefits aggregating $17.9 million were classified as Other cash inflows under Financing Activities for the nine months ended September 30, 2006. As required by SFAS 123R, the prior period Cash Flow Statement was not restated.

 

In prior periods, the Corporation had calculated pro forma employee compensation cost for stock options on an accelerated method required by SFAS 123. The Corporation elected, for all stock option awards granted on or after January 1, 2006, to recognize compensation cost on a straight-line basis over the requisite service period for the entire award as permitted by SFAS 123R.

 

8

 


Note 2. (Continued)

 

The following presents information about net income and earnings per share (“EPS”) as if the Corporation had applied the fair value expense recognition requirements of SFAS 123 to all stock options granted under the Equity Participation Plan.

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(Millions of dollars)

 

 

September 30, 2005

 

September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

 

 

$

325.3

 

 

 

 

$

1,197.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:    Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in reported net income, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income taxes

 

 

 

 

5.4

 

 

 

 

 

15.6

 

 

 

Less:  Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

determined under the fair value requirements 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of SFAS 123, net of income taxes

 

 

 

 

(12.7

)

 

 

 

 

(44.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

 

 

$

318.0

 

 

 

 

$

1,168.4

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30, 2005

 

September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic – as reported

 

 

 

$

.69

 

 

 

 

$

2.51

 

 

 

Basic – pro forma

 

 

 

$

.67

 

 

 

 

$

2.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted – as reported

 

 

 

$

.68

 

 

 

 

$

2.49

 

 

 

Diluted – pro forma

 

 

 

$

.67

 

 

 

 

$

2.43

 

 

 

 

Note 3. Strategic Cost Reduction Plan

 

In July 2005, the Corporation authorized a multi-year plan to further improve its competitive position by accelerating investments in targeted growth opportunities and strategic cost reductions aimed at streamlining manufacturing and administrative operations, primarily in North America and Europe.

 

The strategic cost reductions commenced in the third quarter of 2005 and are expected to be substantially completed by December 31, 2008. Based on current estimates, the strategic cost reductions are expected to result in cumulative charges of approximately $1.0 to $1.1 billion before tax ($700 - $775 million after tax) over that three and one-half year period.

 

By the end of 2008, it is anticipated there will be a net workforce reduction of about 10 percent, or approximately 6,000 employees. Since the inception of the strategic cost reductions, a net workforce reduction of more than 2,600 has occurred. Approximately 20 manufacturing facilities, or 17 percent of the Corporation’s worldwide total, are expected to be sold or closed and an additional 4 facilities are expected to be streamlined. As of September 30, 2006, charges have been recorded related to strategic cost reduction initiatives for 23 facilities.

 

9

 


 

Note 3. (Continued)

 

In connection with the strategic cost reductions, pretax charges totaling $123.6 million were incurred in the third quarter of 2006; $91.2 million after tax. Year-to-date charges total $421.6 million; $306.5 million after tax.

 

The following table summarizes total pretax charges for the third quarter and year-to-date for 2006:

 

 

 

Three Months Ended

 

Nine Months Ended

(Millions of dollars)

 

September 30, 2006

 

September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Noncash charges

 

 

$

45.0

 

 

 

$

228.4

 

Charges for workforce reductions

 

 

 

61.4

 

 

 

 

156.4

 

Other cash charges

 

 

 

14.3

 

 

 

 

32.4

 

Charges for special pension benefits

 

 

 

2.9

 

 

 

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

Total pretax charges

 

 

$

123.6

 

 

 

$

421.6

 

 

The following table summarizes the noncash charges totaling $45.0 million for the third quarter and $228.4 million year-to-date.

 

 

Three Months Ended

 

Nine Months Ended

(Millions of dollars)

 

September 30, 2006

 

September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Incremental depreciation and amortization

 

 

$

35.1

 

 

 

$

169.5

 

Asset impairments

 

 

 

3.4

 

 

 

 

3.4

 

Asset write-offs

 

 

 

9.4

 

 

 

 

47.1

 

(Gain) loss on asset dispositions

 

 

 

(2.9

)

 

 

 

8.4

 

 

 

 

 

 

 

 

 

 

 

 

Noncash charges

 

 

$

45.0

 

 

 

$

228.4

 

 

In connection with the strategic cost reductions, pretax charges totaling $168.0 million were incurred in the third quarter of 2005; $126.4 million after tax. The following table summarizes the noncash charges totaling $140.4 million for the third quarter and year-to-date.

 

 

 

 

 

Three and Nine Months Ended

(Millions of dollars)

 

September 30, 2005

 

 

 

 

 

 

Incremental depreciation and amortization

 

 

$

41.9

 

Asset impairments

 

 

 

67.0

 

Asset write-offs

 

 

 

31.5

 

 

 

 

 

 

 

Noncash charges

 

 

$

140.4

 

 

 

10

 


Note 3. (Continued)

 

The following table summarizes the charges recorded for workforce reductions and other cash charges and reconciles such charges to accrued expenses at September 30, 2006:

 

 

Nine Months Ended

(Millions of dollars)

September 30, 2006

 

 

 

 

 

Accrued expenses at December 31, 2005

 

$

28.2

 

Charges for workforce reductions

 

 

156.4

 

Other cash charges

 

 

32.4

 

Cash payments

 

 

(120.3

)

Currency

 

 

(.3

)

 

 

 

 

 

Accrued expenses at September 30, 2006

 

$

96.4

 

 

During the three month and nine month periods ended September 30, 2006, the Corporation also recorded charges for special pension benefits aggregating $2.9 million and $4.4 million, respectively.

 

Termination benefits related to workforce reductions were accrued in accordance with the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), SFAS No. 112, Employers’ Accounting for Postemployment Benefits, and SFAS No. 88, Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination Benefits, as appropriate. Retention bonuses related to workforce reductions were accrued in accordance with SFAS 146. The majority of the termination benefits and retention bonuses will be paid within 12 months of accrual. The termination benefits were provided under: a special-benefit arrangement for affected employees in the U.S.; standard benefit practices in the U.K.; applicable union agreements; or local statutory requirements, as appropriate. Incremental depreciation and amortization was based on changes in useful lives and estimated residual values of assets that are continuing to be used, but will be removed from service before the end of their originally assumed service period.

 

Costs of the initiatives have not been recorded at the business segment level, as the strategic cost reductions are Corporate decisions. These charges are included in the following income statement captions:

 

 

 

Three Months Ended

 

Nine Months Ended

(Millions of dollars)

 

September 30, 2006

 

September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

$

80.2

 

 

 

$

302.3

 

Marketing, research and general expenses

 

 

 

46.7

 

 

 

 

111.7

 

Other (income) and expense, net

 

 

 

(3.3

)

 

 

 

7.6

 

 

 

 

 

 

 

 

 

 

 

 

Total pretax charges

 

 

 

123.6

 

 

 

 

421.6

 

Provision for income taxes

 

 

 

(32.4

)

 

 

 

(115.1

)

Minority owners’ share of subsidiaries net income

 

 

 

(.2

)

 

 

 

(1.6

)

 

 

 

 

 

 

 

 

 

 

 

Total after-tax charges

 

 

$

91.0

 

 

 

$

304.9

 

 

 

11

 


Note 3. (Continued)

 

 

 

Three and Nine Months Ended

(Millions of dollars)

 

September 30, 2005

 

 

 

 

 

 

Cost of products sold

 

 

$

160.5

 

Marketing, research and general expenses

 

 

 

7.5

 

 

 

 

 

 

 

Total pretax charges

 

 

 

168.0

 

Provision for income taxes

 

 

 

(41.6

)

 

 

 

 

 

 

Total after-tax charges

 

 

$

126.4

 

 

See Note 10 for additional information on the strategic cost reductions by business segment.

 

Actual pretax charges recorded for the three months ended September 30, 2006, for the strategic cost reductions relate to activities in the following geographic areas:

 

 

(Millions of dollars)

 

North

America

 

Europe

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental depreciation and amortization

 

$

23.5

 

 

$

8.1

 

 

$

3.5

 

$

35.1

 

Asset impairments

 

 

-

 

 

 

3.4

 

 

 

-

 

 

3.4

 

Asset write-offs

 

 

.5

 

 

 

7.4

 

 

 

1.5

 

 

9.4

 

Charges for workforce reductions and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

special pension benefits

 

 

13.4

 

 

 

48.0

 

 

 

2.9

 

 

64.3

 

Loss on asset disposals and other charges

 

 

5.0

 

 

 

4.9

 

 

 

1.5

 

 

11.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charges

 

$

42.4

 

 

$

71.8

 

 

$

9.4

 

$

123.6

 

 

Actual pretax charges recorded for the nine months ended September 30, 2006, for the strategic cost reductions relate to activities in the following geographic areas:

 

 

(Millions of dollars)

 

North

America

 

Europe

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental depreciation and amortization

 

$

101.1

 

 

$

46.5

 

 

$

21.9

 

$

169.5

 

Asset impairments

 

 

-

 

 

 

3.4

 

 

 

-

 

 

3.4

 

Asset write-offs

 

 

24.0

 

 

 

21.4

 

 

 

1.7

 

 

47.1

 

Charges for workforce reductions and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

special pension benefits

 

 

38.8

 

 

 

113.4

 

 

 

8.6

 

 

160.8

 

Loss on asset disposals and other charges

 

 

23.0

 

 

 

16.1

 

 

 

1.7

 

 

40.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charges

 

$

186.9

 

 

$

200.8

 

 

$

33.9

 

$

421.6

 

 

 

12

 


Note 4.  Inventories

 

The following schedule presents inventories by major class as of September 30, 2006 and December 31, 2005:

 

 

 

September 30,

 

December 31,

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

At lower of cost on the First-In, First-Out (FIFO) method or market:

 

 

 

 

 

 

 

 

 

Raw materials

 

 

$

358.6

 

 

 

$

338.9

 

Work in process

 

 

 

297.6

 

 

 

 

236.7

 

Finished goods

 

 

 

1,203.5

 

 

 

 

1,128.9

 

Supplies and other

 

 

 

238.0

 

 

 

 

232.3

 

 

 

 

 

2,097.7

 

 

 

 

1,936.8

 

Excess of FIFO cost over Last-In, First-Out (LIFO) cost

 

 

 

(209.4

)

 

 

 

(184.7

)

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

1,888.3

 

 

 

$

1,752.1

 

 

The Corporation uses the LIFO method of valuing inventory for financial reporting purposes for most U.S. inventories. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

 

FIFO cost of total inventories on the LIFO method was $891.9 million and $857.6 million at September 30, 2006 and December 31, 2005, respectively.

 

Note 5. Synthetic Fuel Partnerships

 

The Corporation has minority interests in two synthetic fuel partnerships. The production of synthetic fuel results in pretax losses that are reported as nonoperating expense on the Corporation’s Consolidated Income Statement. The production of synthetic fuel results in tax credits as well as tax deductions for the nonoperating losses, which reduce the Corporation’s income tax expense. The effects of those losses and benefits for 2006 and 2005 are shown in the following tables:

 

 

 

Three Months Ended September 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expense

 

 

 

 

$

(17.2

)

 

 

 

$

(43.2

)

Tax credits

 

$

15.5

 

 

 

 

$

41.0

 

 

 

 

Tax benefit of nonoperating expense

 

 

6.2

 

 

21.7

 

 

15.1

 

 

56.1

 

Net synthetic fuel benefit

 

 

 

 

$

4.5

 

 

 

 

$

12.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share basis – diluted

 

 

 

 

$

.01

 

 

 

 

$

.03

 

 

 

13

 


Note 5. (Continued)

 

 

 

Nine Months Ended September 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expense

 

 

 

 

$

(40.6

)

 

 

 

$

(137.4

)

Tax credits

 

$

35.9

 

 

 

 

$

129.7

 

 

 

 

Tax benefit of nonoperating expense

 

 

14.5

 

 

50.4

 

 

48.1

 

 

177.8

 

Net synthetic fuel benefit

 

 

 

 

$

9.8

 

 

 

 

$

40.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share basis – diluted

 

 

 

 

$

.02

 

 

 

 

$

.08

 

 

Note 6.  Employee Postretirement Benefits

 

The table below presents the interim period disclosure required by SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits.

 

 

 

Defined

 

Other Postretirement

 

 

Benefit Plans

 

Benefit Plans

 

 

Three Months Ended September 30

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

22.1

 

$

20.9

 

$

3.7

 

$

4.0

 

Interest cost

 

 

74.9

 

 

72.6

 

 

11.8

 

 

11.8

 

Expected return on plan assets

 

 

(84.7

)

 

(80.0

)

 

-

 

 

-

 

Recognized net actuarial loss

 

 

25.0

 

 

22.8

 

 

1.0

 

 

1.0

 

Other

 

 

3.7

 

 

(.7

)

 

.8

 

 

.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

41.0

 

$

35.6

 

$

17.3

 

$

17.1

 

 

 

 

Defined

 

Other Postretirement

 

 

Benefit Plans

 

Benefit Plans

 

 

Nine Months Ended September 30

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

65.8

 

$

62.2

 

$

11.2

 

$

12.0

 

Interest cost

 

 

223.1

 

 

219.9

 

 

35.3

 

 

35.3

 

Expected return on plan assets

 

 

(252.5

)

 

(241.6

)

 

-

 

 

-

 

Recognized net actuarial loss

 

 

75.2

 

 

68.3

 

 

3.0

 

 

2.9

 

Other

 

 

9.0

 

 

3.7

 

 

2.5

 

 

.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

120.6

 

$

112.5

 

$

52.0

 

$

51.1

 

 

During the first nine months of 2006 and 2005, the Corporation made cash contributions of approximately $58 million to its pension trusts outside the U.S. The Corporation currently anticipates contributing about $80 million for the full year 2006 to its pension trusts outside the U.S.

 

14

 


Note 7. Earnings Per Share

 

There are no adjustments required to be made to net income for purposes of computing basic and diluted EPS. The average number of common shares outstanding used in the basic EPS computations is reconciled to those used in the diluted EPS computation as follows:

 

 

 

Average Common Shares Outstanding

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

(Millions of shares)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Basic

 

457.6

 

473.6

 

459.0

 

477.2

 

Dilutive effect of stock options

 

.9

 

2.4

 

.8

 

2.9

 

Dilutive effect of restricted share and share unit

 

 

 

 

 

 

 

 

 

awards

 

1.3

 

.8

 

1.1

 

.7

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

459.8

 

476.8

 

460.9

 

480.8

 

 

Options outstanding during the three- and nine-month periods ended September 30, 2006 to purchase 8.6 million and 13.3 million shares of common stock, respectively, were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares.

 

Options outstanding during the three- and nine-month periods ended September 30, 2005 to purchase 9.0 million and 5.4 million shares of common stock, respectively, were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares.

 

The number of common shares outstanding as of September 30, 2006 and 2005 was 457.7 million and 469.8 million, respectively.

 

Note 8. Stockholders’ Equity

 

On September 14, 2006, the board of directors authorized the retirement of 90 million shares of treasury stock, which become authorized but unissued shares.

 

The following tables present the activity of the Corporation’s stock-based compensation plans for the nine-month period ended September 30, 2006:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

Shares

 

Exercise

 

Contractual

 

Value

Stock Options

 

(000’s)

 

Price

 

Term

 

($000)

Outstanding at January 1, 2006

 

 

32,622

 

 

$56.99

 

 

 

 

 

 

 

 

 

Granted

 

 

4,779

 

 

58.75

 

 

 

 

 

 

 

 

 

Exercised

 

 

(4,493

)

 

48.94

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(664

)

 

62.93

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2006

 

 

32,244

 

 

58.23

 

 

 

5.6

 

 

 

 

$230,052

Exercisable at September 30, 2006

 

 

23,308

 

 

57.43

 

 

 

4.4

 

 

 

 

$184,843

 

15

 


Note 8. (Continued)

 

The total intrinsic value of stock options exercised during the three- and nine-month periods ended September 30, 2006 was $28.4 million and $56.8 million, respectively.

 

 

 

 

 

Time-Based

 

Performance-Based

 

 

Restricted Shares

 

Restricted Share Units

 

Restricted Share Units

 

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

Shares

 

Grant-Date

 

Shares

 

Grant-Date

 

Shares

 

Grant-Date

Other Stock-Based Awards

 

(000’s)

 

Fair Value

 

(000’s)

 

Fair Value

 

(000’s)

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at January 1, 2006

 

 

624

 

 

$

51.82

 

 

 

873

 

 

$

58.95

 

 

 

467

 

 

$

62.82

 

Granted

 

 

-

 

 

 

-

 

 

 

290

 

 

 

58.83

 

 

 

253

 

 

 

58.74

 

Vested

 

 

(5

)

 

 

56.20

 

 

 

(26

)

 

 

62.18

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(32

)

 

 

48.18

 

 

 

(34

)

 

 

59.30

 

 

 

(19

)

 

 

62.77

 

Nonvested at September 30, 

2006

 

 

587

 

 

 

52.01

 

 

 

1,103

 

 

 

57.81

 

 

 

701

 

 

 

57.50

 

 

The total fair value of shares and share units that became vested during the three- and nine-month periods ended September 30, 2006 was $0.7 million and $1.9 million, respectively.

 

Note 9.  Comprehensive Income

 

Comprehensive income includes all changes in stockholders’ equity during the periods except those resulting from investments by and distributions to stockholders.

 

The following schedule presents the components of comprehensive income:

 

 

 

Nine Months Ended

 

 

 

September 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Net income

 

$

1,016.9

 

$

1,197.2

 

Unrealized currency translation adjustments, net of tax

 

 

222.5

 

 

(320.0

)

Deferred (losses) gains on cash flow hedges, net of tax

 

 

(11.0

)

 

27.4

 

Unrealized holding gains on available-for-sale securities

 

 

.1

 

 

-

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

1,228.5

 

$

904.6

 

 

Net unrealized currency gains or losses resulting from the translation of assets and liabilities of

non-U.S. subsidiaries, except those in highly inflationary economies, are accumulated in a separate section of stockholders’ equity. For these operations, changes in exchange rates generally do not affect cash flows; therefore, unrealized translation adjustments are recorded in stockholders’ equity rather than income. Upon sale or substantially complete liquidation of any of these subsidiaries, the applicable unrealized translation adjustment would be removed from stockholders’ equity and reported as part of the gain or loss on the sale or liquidation.

 

Also included are the effects of foreign exchange rate changes on intercompany balances of a long-term investment nature and transactions designated as hedges of net foreign investments.

 

16

 


Note 9. (Continued)

 

The net unrealized currency translation adjustments for the nine months ended September 30, 2006 is primarily due to a weakening of the U.S. dollar versus the euro, the South Korean won and the Brazilian real.

 

Note 10.  Description of Business Segments

 

The Corporation is organized into operating segments based on product groupings. These operating segments have been aggregated into four reportable global business segments: Personal Care; Consumer Tissue; K-C Professional & Other; and Health Care. The reportable segments were determined in accordance with how the Corporation’s executive managers develop and execute the Corporation’s global strategies to drive growth and profitability of the Corporation’s worldwide Personal Care, Consumer Tissue, K-C Professional & Other and Health Care operations. These strategies include global plans for branding and product positioning, technology, research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. Segment management is evaluated on several factors, including operating profit. Segment operating profit excludes other income and (expense), net; income and expense not associated with the business segments; and the costs of corporate decisions related to the strategic cost reductions described in Note 3. Corporate & Other includes the costs of the strategic cost reductions.

 

The principal sources of revenue in each global business segment are described below.

 

The Personal Care segment manufactures and markets disposable diapers, training and youth pants and swimpants; baby wipes; feminine and incontinence care products; and related products. Products in this segment are primarily for household use and are sold under a variety of brand names, including Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names.

 

The Consumer Tissue segment manufactures and markets facial and bathroom tissue, paper towels, napkins and related products for household use. Products in this segment are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page and other brand names.

 

The K-C Professional & Other segment manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers and other products to the away-from-home marketplace. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, Kimwipes, WypAll, Surpass and other brand names.

 

The Health Care segment manufactures and markets health care products such as surgical gowns, drapes, infection control products, sterilization wrap, disposable face masks and exam gloves, respiratory products and other disposable medical products. Products in this segment are sold under the Kimberly-Clark, Safeskin, Tecnol, Ballard and other brand names.

 

17

 


Note 10. (Continued)

 

The following schedules present information concerning consolidated operations by business segment.

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

1,714.7

 

$

1,606.7

 

$

5,054.8

 

$

4,741.2

 

Consumer Tissue

 

 

1,475.2

 

 

1,431.0

 

 

4,406.8

 

 

4,295.6

 

K-C Professional & Other

 

 

694.7

 

 

654.7

 

 

2,007.9

 

 

1,927.7

 

Health Care

 

 

331.0

 

 

306.7

 

 

992.9

 

 

921.8

 

Corporate & Other

 

 

6.8

 

 

6.7

 

 

23.5

 

 

22.3

 

Intersegment sales

 

 

(12.0

)

 

(5.0

)

 

(46.2

)

 

(14.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

4,210.4

 

$

4,000.8

 

$

12,439.7

 

$

11,893.7

 

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING PROFIT (reconciled to income

 

 

 

 

 

 

 

 

 

 

 

 

 

before income taxes):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

331.6

 

$

316.7

 

$

960.2

 

$

943.5

 

Consumer Tissue

 

 

180.2

 

 

189.8

 

 

566.8

 

 

596.4

 

K-C Professional & Other

 

 

119.1

 

 

114.2

 

 

321.1

 

 

319.3

 

Health Care

 

 

59.5

 

 

54.8

 

 

185.5

 

 

174.8

 

Other income and (expense), net

 

 

.1

 

 

(12.3

)

 

(21.7

)

 

(25.7

)

Corporate & Other

 

 

(164.1

)

 

(198.6

)

 

(521.0

)

 

(269.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Profit

 

 

526.4

 

 

464.6

 

 

1,490.9

 

 

1,738.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expense

 

 

(17.2

)

 

(43.2

)

 

(40.6

)

 

(137.4

)

Interest income

 

 

6.8

 

 

7.4

 

 

19.8

 

 

21.7

 

Interest expense

 

 

(56.5

)

 

(48.0

)

 

(165.9

)

 

(138.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

$

459.5

 

$

380.8

 

$

1,304.2

 

$

1,484.5

 

 

 

18

 


Note 10. (Continued)

 

Note:

Other income and (expense), net and Corporate & Other include the following amounts of pretax charges for the strategic cost reductions.

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

(Millions of dollars)

 

 

2006

 

 

2005

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and (expense), net

 

$

3.3

 

$

-

 

$

(7.6

)

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate & Other

 

 

(126.9

)

 

(168.0

)

 

(414.0

)

 

(168.0

)

 

The following table presents the pretax charges for the strategic cost reductions related to activities in the Corporation’s business segments:

 

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

(Millions of dollars)

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

45.2

 

 

$

117.0

 

 

$

217.1

 

 

$

117.0

 

 

Consumer Tissue

 

 

52.0

 

 

 

17.8

 

 

 

142.7

 

 

 

17.8

 

 

K-C Professional & Other

 

 

12.2

 

 

 

10.7

 

 

 

22.9

 

 

 

10.7

 

 

Health Care

 

 

14.2

 

 

 

22.5

 

 

 

38.9

 

 

 

22.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

123.6

 

 

$

168.0

 

 

$

421.6

 

 

$

168.0

 

 

 

Total pretax charges that are expected to be incurred for the strategic cost reduction plan by business segment are: Personal Care - $530 to $540 million; Consumer Tissue - $260 to $270 million;

K-C Professional & Other - $80 to $90 million; and Health Care - $140 to $150 million.

 

19

 


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 the Corporation’s recent performance, its financial condition and its prospects.  The following will be discussed and analyzed:

 

Overview of Third Quarter 2006 Results

 

Business Segments

 

Results of Operations and Related Information

 

Liquidity and Capital Resources

 

New Accounting Standards

 

Environmental Matters

 

Business Outlook

 

Overview of Third Quarter 2006 Results

 

Net sales increased 5.2 percent

 

Operating profit and net income increased by 13.3 percent and 12.0 percent, respectively

 

Cash provided by operations was $647.8 million

 

Business Segments

 

As a result of organizational changes that were effective January 1, 2006, the Corporation is reporting four business segments. The two new business segments, K-C Professional & Other and Health Care, had previously been combined into the Business-to-Business segment. The Personal Care and Consumer Tissue business segments were not affected by the organizational changes and will continue to be reported on their historical basis.

 

The K-C Professional & Other segment manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers and other products principally to the away-from-home marketplace. The Health Care segment manufactures and markets health care products such as surgical gowns, drapes, infection control products, sterilization wrap, disposable face masks and exam gloves, respiratory products and other disposable medical products.

 

Results of Operations and Related Information

 

This section presents a discussion and analysis of the Corporation’s third quarter and first nine months of 2006 net sales, operating profit and other information relevant to an understanding of the results of operations.

 

20

 


Third Quarter of 2006 Compared With Third Quarter of 2005

 

Analysis of Net Sales

 

By Business Segment

(Millions of dollars)

 

Net Sales

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Personal Care

 

$

1,714.7

 

$

1,606.7

 

Consumer Tissue

 

 

1,475.2

 

 

1,431.0

 

K-C Professional & Other

 

 

694.7

 

 

654.7

 

Health Care

 

 

331.0

 

 

306.7

 

Corporate & Other

 

 

6.8

 

 

6.7

 

Intersegment sales

 

 

(12.0

)

 

(5.0

)

 

 

 

 

 

 

 

 

Consolidated

 

$

4,210.4

 

$

4,000.8

 

 

Commentary:

 

 

 

Percent Change in Net Sales Versus Prior Year

 

 

 

 

 

Changes Due To

 

 

 

Total

 

Volume

 

Net

 

 

 

Mix/

 

 

 

Change

 

Growth

 

Price

 

Currency

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

5

 

 

1

 

 

1

 

 

2

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

7

 

 

5

 

 

(1

)

 

2

 

 

1

 

 

Consumer Tissue

 

3

 

 

(3

)

 

4

 

 

2

 

 

-

 

 

K-C Professional & Other

 

6

 

 

1

 

 

3

 

 

2

 

 

-

 

 

Health Care

 

8

 

 

7

 

 

-

 

 

-

 

 

1

 

 

 

Consolidated net sales were 5.2 percent higher than in 2005. Net sales benefited from a combination of improved sales volumes, higher net selling prices and favorable product mix, each approximately 1 percent better than the prior year. Changes in foreign currency exchange rates also added nearly 2 percent to net sales. In addition to the continued strong performance in developing and emerging markets, highlights for the quarter included volume growth for the Corporation’s child care, incontinence care and wipes brands in North America and for health care globally. Overall volume growth was tempered by declines in consumer tissue sales volumes in North America and Europe.

 

Personal care net sales advanced 6.7 percent in the third quarter, driven primarily by sales volume growth of approximately 5 percent, along with currency benefits of 2 percent. Favorable product mix of 1 percent versus the prior year was offset by a decline in net selling prices.

 

Personal care net sales in North America increased about 2 percent compared with the third quarter of 2005. Higher sales volumes accounted for the entire increase, led by upper single-digit volume gains for the Corporation’s market-leading Huggies baby wipes, Pull-Ups training pants, and Depend and Poise incontinence care products. Infant care volumes were even with

 

21

 


a strong year-ago base period, when volumes were up 7 percent. In feminine care, although Kotex brand sales volumes were down from last year, third quarter shipments were similar to first and second quarter levels. Favorable currency effects added 1 percent to net sales, while net selling prices decreased about 1 percent to match competitive activity and support product initiatives. In Europe, personal care net sales increased more than 4 percent, with stronger currencies in the region boosting sales comparisons. Overall sales volumes and net selling prices were essentially the same as the prior year. Diaper volumes rose 2 percent, with sales volumes of Huggies diapers about 6 percent ahead of last year in the Corporation’s four core European markets – the U.K., France, Italy and Spain. In developing and emerging markets, personal care net sales improved 15 percent, paced by double-digit increases in North Asia, Latin America, and Middle East/Africa/Eastern Europe. Higher sales volumes, better product mix and currency benefits all contributed to the increase.

 

Consumer tissue net sales increased 3.1 percent versus the third quarter of 2005. Net selling prices increased approximately 4 percent, as price increases have been implemented in every region of the world, and currency effects contributed an additional 2 percent. These improvements, however, were partially offset by a 3 percent decrease in sales volumes overall, driven primarily by declines in North America and Europe.

 

In North America, third quarter net sales of consumer tissue products rose approximately 1 percent, as net selling prices were about 4 percent higher and product mix improved 1 percent, while sales volumes declined by 4 percent. Pricing benefited from increases implemented earlier in the year for Kleenex facial tissue, Cottonelle and Scott bathroom tissue and Viva and Scott paper towels. The reduction in sales volumes was primarily attributable to lower sales of rolled products compared with double-digit growth overall in last year’s quarter. Meanwhile, third quarter sales volumes of Kleenex facial tissue began to rebound from second quarter levels and were slightly higher than in 2005. In Europe, consumer tissue sales increased 4 percent. Net selling prices increased about 4 percent, as the Corporation has implemented price increases in a number of European markets so far this year. Product mix also improved by 2 percent and currency effects added 5 percent to sales. Sales volumes, however, went down approximately 7 percent, which the Corporation believes is a short-term consequence of its disciplined approach to implementing the price increases. Plans are in place to improve sales over the balance of the year in both North America and Europe. Consumer tissue net sales in developing and emerging markets rose 9 percent, with growth in all regions, driven primarily by higher net selling prices, increased sales volumes and favorable currency exchange rates.

 

Net sales of K-C Professional & Other products were 6.1 percent above the year-ago quarter. Net selling prices increased about 3 percent and sales volumes rose approximately 1 percent, while currency benefits added 2 percent to sales. K-C Professional’s key strategies to improve revenue realization and shift volume to more profitable market segments with distinctive, differentiated products such as Kleenex and Scottfold hand towels, WypAll X80 towels, Kimtech wipers and offerings for the Do-It-Yourself channel continue to deliver overall top-line growth.

 

Net sales of health care products climbed 7.9 percent in the quarter, highlighted by continued strong volume growth of 7 percent. The business is experiencing broad-based growth in face masks, sterilization wrap and exam gloves, including the Corporation’s new Sterling Nitrile brand. Favorable product mix also benefited third quarter sales by 1 percent.

 

22

 


By Geography

(Millions of dollars)

 

Net Sales

 

2006

 

2005

 

 

 

 

 

 

 

 

 

North America

 

$

2,429.2

 

$

2,372.6

 

Outside North America

 

 

1,938.8

 

 

1,761.5

 

Intergeographic sales

 

 

(157.6

)

 

(133.3

)

 

 

 

 

 

 

 

 

Consolidated

 

$

4,210.4

 

$

4,000.8

 

 

Commentary:

 

Net sales in North America increased 2.4 percent primarily due to the higher sales volumes for personal care products and the higher net selling prices for consumer tissue and K-C Professional products, partially offset by the lower consumer tissue sales volumes.

 

Net sales outside North America increased 10.1 percent primarily because of the previously mentioned strength in the developing and emerging markets, and favorable currency effects principally in Europe.

 

Analysis of Operating Profit

 

By Business Segment

(Millions of dollars)

 

Operating Profit

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Personal Care

 

$

331.6

 

$

316.7

 

Consumer Tissue

 

 

180.2

 

 

189.8

 

K-C Professional & Other

 

 

119.1

 

 

114.2