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 June 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 July 31, 2006, there were 458,203,544 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

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(Millions of dollars, except per share amounts)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

4,161.4

 

$

3,987.1

 

$

8,229.3

 

$

7,892.9

 

Cost of products sold

 

 

2,873.8

 

 

2,664.5

 

 

5,788.6

 

 

5,263.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

1,287.6

 

 

1,322.6

 

 

2,440.7

 

 

2,629.2

 

Marketing, research and general expenses

 

 

741.9

 

 

688.1

 

 

1,454.4

 

 

1,342.0

 

Other (income) and expense, net

 

 

1.6

 

 

(1.7

)

 

21.8

 

 

13.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

544.1

 

 

636.2

 

 

964.5

 

 

1,273.8

 

Nonoperating expense

 

 

(7.6

)

 

(47.9

)

 

(23.4

)

 

(94.2

)

Interest income

 

 

6.6

 

 

8.3

 

 

13.0

 

 

14.3

 

Interest expense

 

 

(55.1

)

 

(46.3

)

 

(109.4

)

 

(90.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes and

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Interests

 

 

488.0

 

 

550.3

 

 

844.7

 

 

1,103.7

 

Provision for income taxes

 

 

(131.0

)

 

(140.8

)

 

(230.3

)

 

(258.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Equity Interests

 

 

357.0

 

 

409.5

 

 

614.4

 

 

845.7

 

Share of net income of equity companies

 

 

42.9

 

 

32.3

 

 

81.9

 

 

66.4

 

Minority owners’ share of subsidiaries’ net

 

 

 

 

 

 

 

 

 

 

 

 

 

income

 

 

(22.3

)

 

(20.0

)

 

(43.6

)

 

(40.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

377.6

 

$

421.8

 

$

652.7

 

$

871.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.82

 

$

.88

 

$

1.42

 

$

1.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

.82

 

$

.88

 

$

1.41

 

$

1.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared

 

$

.49

 

$

.45

 

$

.98

 

$

.90

 

 

See Notes to Consolidated Financial Statements.

 

2

 



                                                                                                                                                                                                                               

 

 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

 

 

June 30,

 

December 31,

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

337.4

 

$

364.0

 

Accounts receivable

 

 

2,219.9

 

 

2,101.9

 

Inventories

 

 

1,868.8

 

 

1,752.1

 

Other current assets

 

 

558.4

 

 

565.1

 

Total Current Assets

 

 

4,984.5

 

 

4,783.1

 

 

 

 

 

 

 

 

 

Property

 

 

14,960.3

 

 

14,616.2

 

Less accumulated depreciation

 

 

7,504.8

 

 

7,121.5

 

Net Property

 

 

7,455.5

 

 

7,494.7

 

 

 

 

 

 

 

 

 

Investments in Equity Companies

 

 

479.6

 

 

457.8

 

 

 

 

 

 

 

 

 

Goodwill

 

 

2,734.8

 

 

2,685.6

 

 

 

 

 

 

 

 

 

Other Assets

 

 

880.5

 

 

882.0

 

 

 

$

16,534.9

 

$

16,303.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Debt payable within one year

 

$

1,130.4

 

$

1,222.5

 

Accounts payable

 

 

1,334.5

 

 

1,354.3

 

Accrued expenses

 

 

1,450.6

 

 

1,399.6

 

Other current liabilities

 

 

636.4

 

 

666.5

 

Total Current Liabilities

 

 

4,551.9

 

 

4,642.9

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

2,539.3

 

 

2,594.7

 

Noncurrent Employee Benefit and Other Obligations

 

 

1,873.5

 

 

1,782.6

 

Deferred Income Taxes

 

 

505.2

 

 

572.9

 

Minority Owners’ Interests in Subsidiaries

 

 

404.8

 

 

394.5

 

Preferred Securities of Subsidiary

 

 

775.0

 

 

757.4

 

Stockholders’ Equity

 

 

5,885.2

 

 

5,558.2

 

 

 

$

16,534.9

 

$

16,303.2

 

 

See Notes to Consolidated Financial Statements.

 

3

 



                                                                                                                                                                                                                               

 

 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(Unaudited)

 

 

 

Six Months

 

 

 

Ended June 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

652.7

 

$

871.9

 

Depreciation and amortization

 

 

499.6

 

 

385.0

 

Changes in operating working capital

 

 

(71.9

)

 

(185.0

)

Deferred income tax provision

 

 

(99.8

)

 

(31.3

)

Net losses on asset dispositions

 

 

74.0

 

 

7.9

 

Equity companies’ earnings in excess of dividends paid

 

 

(48.1

)

 

(39.3

)

Minority owners’ share of subsidiaries’ net income

 

 

43.6

 

 

40.2

 

Postretirement benefits

 

 

30.7

 

 

21.4

 

Other

 

 

37.9

 

 

11.9

 

 

 

 

 

 

 

 

 

Cash Provided by Operations

 

 

1,118.7

 

 

1,082.7

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Capital spending

 

 

(398.6

)

 

(262.0

)

Proceeds from sales of investments

 

 

17.4

 

 

14.9

 

Proceeds from dispositions of property

 

 

24.7

 

 

12.5

 

Net decrease (increase) in time deposits

 

 

17.0

 

 

(8.2

)

Investments in marketable securities

 

 

(18.7

)

 

-

 

Other

 

 

(7.1

)

 

(14.7

)

 

 

 

 

 

 

 

 

Cash Used for Investing

 

 

(365.3

)

 

(257.5

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Cash dividends paid

 

 

(434.5

)

 

(410.7

)

Net decrease in short-term debt

 

 

(111.5

)

 

(4.9

)

Proceeds from issuance of long-term debt

 

 

31.4

 

 

19.8

 

Repayments of long-term debt

 

 

(62.8

)

 

(99.1

)

Proceeds from exercise of stock options

 

 

106.1

 

 

103.1

 

Acquisitions of common stock for the treasury

 

 

(301.1

)

 

(534.8

)

Other

 

 

(11.2

)

 

(11.2

)

 

 

 

 

 

 

 

 

Cash Used for Financing

 

 

(783.6

)

 

(937.8

)

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

3.6

 

 

(15.3

)

 

 

 

 

 

 

 

 

Increase in Cash and Cash Equivalents

 

 

(26.6

)

 

(127.9

)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, beginning of year

 

 

364.0

 

 

594.0

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, end of period

 

$

337.4

 

$

466.1

 

 

See Notes to Consolidated Financial Statements.

 

4

 



                                                                                                                                                                                                                               

 

 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  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.

 

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 awards of stock options and restricted shares to employees and awards of restricted share units to employees and outside directors. As of June 30, 2006, the number of shares of common stock available for stock option and restricted share awards under the Plans aggregated 24.8 million shares. Stock options are granted to employees at an exercise price equal to the market value of the underlying common stock on the date of grant. The Corporation’s employee 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. Nearly all awards are in the form of stock options or restricted share units. Restricted shares, time-based restricted share units and performance-based restricted share units generally vest over three to five years. The number of performance-based share units actually awarded ranges from zero to 150 percent based on improvement in return on invested capital during the three years in relation to a previously established target. 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 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.

 

Prior to January 1, 2006, the Corporation accounted for these Plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. 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, 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

 

5

 



                                                                                                                                                                                                                               

 

 

Note 2. (Continued)

 

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 $21.6 million and $36.1 million was recognized for the three and six months ended June 30, 2006, respectively. Related income tax benefits of $7.2 million and $12.5 million were recognized for the three and six months ended June 30, 2006, respectively. The compensation cost for the six months ended June 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 six months ended June 30, 2006 was $10.9 million and $15.6 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 six months ended June 30, 2006 was $7.3 million and $10.5 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 six month periods ended June 30, 2006 are lower than if the Corporation had continued to account for the stock-based compensation under APB 25 as shown below:

 

 

 

Three Months Ended

 

Six Months Ended

 

Reduction in Earnings Per Share:

 

June 30, 2006

 

June 30, 2006

 

Basic

 

 

$0.02

 

 

$0.02

 

Diluted

 

 

$0.02

 

 

$0.03

 

 

The Corporation recognized stock-based compensation costs of $11.9 million and $16.1 million for the three and six months ended June 30, 2005, respectively. This compensation cost was for restricted shares and restricted share units only.

 

The fair value of employee 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.

 

The weighted-average fair value of the options granted for the three and six months ended June 30, 2006 was $10.10 per option for both periods, based on the following assumptions:

 

 

Three Months Ended

Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2006

 

 

 

 

 

 

 

 

 

 

Dividend yield

 

 

3.50%

 

3.50%

 

 

Volatility

 

 

17.45%

 

17.46%

 

 

Risk-free interest rate

 

 

5.04%

 

5.04%

 

 

Expected life – years

 

 

6.0

 

6.0

 

 

 

 

6

 



                                                                                                                                                                                                                               

 

 

Note 2. (Continued)

 

As of June 30, 2006, the total remaining unrecognized compensation cost related to non-vested stock options, and restricted shares and restricted share units aggregated $54.3 million and $67.7 million, respectively, which will be amortized over the weighted-average service period of 1.2 years and 2.5 years, respectively.

 

On November 10, 2005, the Financial Accounting Standards Board (“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 short-cut method includes simplified procedures to establish the beginning balance of the pool of excess tax benefits (the “APIC Pool”) and to determine the subsequent effect on the APIC Pool and Cash Flow Statements of the tax effects of employee stock-based compensation awards that were outstanding upon adoption of SFAS 123R.

 

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 $8.3 million were classified as a financing cash inflow for the six months ended June 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 employee compensation cost on a straight-line basis over the requisite service period for the entire award as permitted by SFAS 123R.

 

The following table illustrates the effect on net income and earnings per share as if the Corporation had applied the fair value recognition provisions of SFAS 123 to stock options granted prior to January 1, 2006. For purposes of this pro forma disclosure, the value of the options was determined using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ vesting periods.

 

7

 



                                                                                                                                                                                                                               

 

 

Note 2. (Continued)

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(Millions of dollars, except per share amounts)

 

 

June 30, 2005

 

June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

 

 

$

421.8

 

 

 

 

$

871.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:   Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in reported net income, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income taxes

 

 

 

 

7.5

 

 

 

 

 

10.2

 

 

 

Less:  Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

determined under the fair value requirements 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of SFAS 123, net of income taxes

 

 

 

 

(21.1

)

 

 

 

 

(31.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

 

 

$

408.2

 

 

 

 

$

850.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic – As reported

 

 

 

$

.88

 

 

 

 

$

1.82

 

 

 

Basic – Pro forma

 

 

 

$

.85

 

 

 

 

$

1.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted – As reported

 

 

 

$

.88

 

 

 

 

$

1.81

 

 

 

Diluted – Pro forma

 

 

 

$

.85

 

 

 

 

$

1.76

 

 

 

 

Note 3. Strategic Cost Reductions

 

In July 2005, the Corporation authorized a multi-year program 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 1,600 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 June 30, 2006, charges have been recorded related to cost reduction initiatives for 21 facilities.

 

 

8

 



                                                                                                                                                                                                                               

 

 

Note 3. (Continued)

 

In connection with the strategic cost reductions, charges totaling $89.4 million were incurred in the second quarter of 2006; $60.1 million after tax. Year-to-date charges total $298.0 million; $215.3 million after tax. The following table outlines the noncash charges totaling $59.3 million for the second quarter and $183.4 million year-to-date.

 

 

Three Months Ended

 

 

Six Months Ended

(Millions of dollars)

 

June 30, 2006

 

 

June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Incremental depreciation and amortization

 

 

$

56.2

 

 

 

$

134.4

 

Asset write-offs

 

 

 

2.5

 

 

 

 

37.7

 

Loss on asset dispositions

 

 

 

.6

 

 

 

 

11.3

 

Noncash charges

 

 

$

59.3

 

 

 

$

183.4

 

 

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

 

 

Six Months Ended

(Millions of dollars)

June 30, 2006

Accrued expenses at December 31, 2005

 

$

28.2

 

Charges for workforce reductions

 

 

95.0

 

Other cash charges

 

 

18.1

 

Cash payments

 

 

(81.7

)

Currency

 

 

.1

 

 

 

 

 

 

Accrued expenses at June 30, 2006

 

$

59.7

 

 

During the three month and six month periods ended June 30, 2006, the Corporation also recorded charges for special pension benefits aggregating $1.2 million and $1.5 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. The second quarter 2006 charges have been recorded in cost of products sold ($66.4 million) and marketing, research and general expenses ($23.0 million)

 

9

 



                                                                                                                                                                                                                               

 

 

Note 3. (Continued)

 

partially offset by the effects included in the provision for income taxes ($29.3 million) and minority owners’ share of subsidiaries’ net income ($0.2 million). The year-to-date 2006 charges have been recorded in cost of products sold ($222.1 million), marketing, research and general expenses ($65.0 million) and other (income) expense, net ($10.9 million), partially offset by the effects included in the provision for income taxes ($82.7 million) and minority owners’ share of subsidiaries’ net income ($1.4 million). See Note 10 for additional information on the strategic cost reductions by business segment.

 

Actual pretax charges recorded for the three months ended June 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

 

$

39.1

 

 

 

$

10.8

 

 

 

$

6.3

 

$

56.2

 

Asset write-offs

 

 

.9

 

 

 

 

1.6

 

 

 

 

-

 

 

2.5

 

Charges for workforce reductions

 

 

17.5

 

 

 

 

1.3

 

 

 

 

.4

 

 

19.2

 

Loss on asset disposals and other charges

 

 

10.1

 

 

 

 

1.1

 

 

 

 

.3

 

 

11.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charges

 

$

67.6

 

 

 

$

14.8

 

 

 

$

7.0

 

$

89.4

 

 

Actual pretax charges recorded for the six months ended June 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

 

$

77.6

 

 

 

$

38.4

 

 

 

$

18.4

 

$

134.4

 

Asset write-offs

 

 

23.5

 

 

 

 

14.0

 

 

 

 

.2

 

 

37.7

 

Charges for workforce reductions

 

 

25.4

 

 

 

 

65.4

 

 

 

 

5.7

 

 

96.5

 

Loss on asset disposals and other charges

 

 

18.0

 

 

 

 

11.2

 

 

 

 

.2

 

 

29.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charges

 

$

144.5

 

 

 

$

129.0

 

 

 

$

24.5

 

$

298.0

 

 

 

10

 



                                                                                                                                                                                                                               

 

 

Note 4.  Inventories

 

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

 

 

 

June 30,

 

December 31,

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Raw materials

 

$

369.0

 

 

 

$

338.9

 

Work in process

 

 

276.0

 

 

 

 

236.7

 

Finished goods

 

 

1,188.3

 

 

 

 

1,128.9

 

Supplies and other

 

 

238.2

 

 

 

 

232.3

 

 

 

 

2,071.5

 

 

 

 

1,936.8

 

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

 

 

(202.7

)

 

 

 

(184.7

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,868.8

 

 

 

$

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 $857.6 million at both June 30, 2006 and December 31, 2005.

 

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 table:

 

 

 

Three Months Ended June 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expense

 

 

 

 

$

(7.6

)

 

 

 

$

(47.9

)

Tax credits

 

$

6.6

 

 

 

 

$

45.4

 

 

 

 

Tax benefit of nonoperating expense

 

 

2.6

 

 

9.2

 

 

16.8

 

 

62.2

 

Net synthetic fuel benefit

 

 

 

 

$

1.6

 

 

 

 

$

14.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share basis – diluted

 

 

 

 

$

-

 

 

 

 

$

.03

 

 

 

11

 



                                                                                                                                                                                                                               

 

 

 

 

 

Six Months Ended June 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expense

 

 

 

 

$

(23.4

)

 

 

 

$

(94.2

)

Tax credits

 

$

20.4

 

 

 

 

$

88.7

 

 

 

 

Tax benefit of nonoperating expense

 

 

8.3

 

 

28.7

 

 

33.0

 

 

121.7

 

Net synthetic fuel benefit

 

 

 

 

$

5.3

 

 

 

 

$

27.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share basis – diluted

 

 

 

 

$

.01

 

 

 

 

$

.06

 

 

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 June 30

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

21.8

 

$

18.3

 

$

3.3

 

$

3.8

 

Interest cost

 

 

73.8

 

 

74.2

 

 

11.4

 

 

11.4

 

Expected return on plan assets

 

 

(84.5

)

 

(80.7

)

 

-

 

 

-

 

Recognized net actuarial loss

 

 

25.0

 

 

22.8

 

 

.7

 

 

.6

 

Other

 

 

3.1

 

 

2.9

 

 

.9

 

 

.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

39.2

 

$

37.5

 

$

16.3

 

$

16.2

 

 

 

 

Defined

 

Other Postretirement

 

 

Benefit Plans

 

Benefit Plans

 

 

Six Months Ended June 30

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

43.7

 

$

41.3

 

$

7.5

 

$

8.0

 

Interest cost

 

 

148.2

 

 

147.3

 

 

23.5

 

 

23.5

 

Expected return on plan assets

 

 

(167.8

)

 

(161.6

)

 

-

 

 

-

 

Recognized net actuarial loss

 

 

50.2

 

 

45.5

 

 

2.0

 

 

1.9

 

Other

 

 

5.3

 

 

4.4

 

 

1.7

 

 

.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

79.6

 

$

76.9

 

$

34.7

 

$

34.0

 

 

During the first and second quarters of 2006, the Corporation made cash contributions of approximately $39 million and $10 million, respectively, to its pension trusts outside the U.S. During the first and second quarters of 2005, the Corporation made cash contributions of approximately $11 million and $40 million, respectively, 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.

 

12

 



                                                                                                                                                                                                                               

 

 

Note 7. Earnings Per Share

 

There are no adjustments required to be made to net income for purposes of computing basic and diluted earnings per share (“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

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

(Millions of shares)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Basic

 

459.0

 

477.5

 

459.7

 

479.0

 

Dilutive effect of stock options

 

.5

 

3.0

 

.7

 

3.2

 

Dilutive effect of restricted stock awards

 

1.3

 

.7

 

1.0

 

.7

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

460.8

 

481.2

 

461.4

 

482.9

 

 

Options outstanding during the three- and six-month periods ended June 30, 2006 to purchase 18.1 million and 18.2 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 six-month periods ended June 30, 2005 to purchase 5.4 million and 5.3 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.

 

The number of common shares outstanding as of June 30, 2006 and 2005 was 458.3 million and 476.6 million, respectively.

 

Note 8. Stockholders’ Equity

 

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

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

Average

 

Remaining

 

 

 

Shares

 

Exercise

 

Contractual

 

Stock Options

 

(000’s)

 

Price

 

Term

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2006

 

32,622

 

 

$

56.99

 

 

 

 

 

Granted

 

4,753

 

 

 

58.73

 

 

 

 

 

Exercised

 

(2,258

)

 

 

46.97

 

 

 

 

 

Forfeited or expired

 

(379

)

 

 

62.72

 

 

 

 

 

Outstanding at June 30, 2006

 

34,738

 

 

 

57.82

 

 

5.7

 

 

Exercisable at June 30, 2006

 

25,556

 

 

 

56.92

 

 

4.5

 

 

 

The total intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was $10.2 million and $28.4 million, respectively.

 

13

 



                                                                                                                                                                                                                               

 

 

 

 

 

 

 

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

 

 

-

 

 

 

-

 

 

 

285

 

 

 

58.79

 

 

 

252

 

 

 

58.73

 

Vested

 

 

-

 

 

 

-

 

 

 

(13

)

 

 

61.59

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(24

)

 

 

48.44

 

 

 

(23

)

 

 

61.00

 

 

 

(16

)

 

 

62.70

 

Nonvested at June 30, 2006

 

 

600

 

 

 

51.98

 

 

 

1,122

 

 

 

58.86

 

 

 

703

 

 

 

61.36

 

 

 

Note 9.  Comprehensive Income

 

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

 

The following schedule presents the components of comprehensive income:

 

 

 

Six Months Ended

 

 

 

June 30

 

(Millions of dollars)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Net income

 

$

652.7

 

$

871.9

 

Unrealized currency translation adjustments, net of tax

 

 

232.9

 

 

(310.2

)

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

 

 

(8.1

)

 

17.0

 

Unrealized holding losses on marketable securities

 

 

(.1

)

 

-

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

877.4

 

$

578.7

 

 

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.

 

The net unrealized currency translation adjustment for the six months ended June 30, 2006 is primarily due to a weakening of the U.S. dollar versus the euro.

 

 

14

 



                                                                                                                                                                                                                               

 

 

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.

 

15

 



                                                                                                                                                                                                                               

 

 

The following schedule presents information concerning consolidated operations by business segment.

 

 

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

1,715.1

 

$

1,601.6

 

$

3,340.1

 

$

3,134.5

 

Consumer Tissue

 

 

1,434.4

 

 

1,422.9

 

 

2,931.6

 

 

2,864.6

 

K-C Professional & Other

 

 

681.7

 

 

651.5

 

 

1,313.2

 

 

1,273.0

 

Health Care

 

 

340.1

 

 

308.6

 

 

661.9

 

 

615.1

 

Corporate & Other

 

 

7.7

 

 

7.8

 

 

16.7

 

 

15.6

 

Intersegment sales

 

 

(17.6

)

 

(5.3

)

 

(34.2

)

 

(9.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

4,161.4

 

$

3,987.1

 

$

8,229.3

 

$

7,892.9

 

 

 

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

(Millions of dollars)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING PROFIT (reconciled to income before

 

 

 

 

 

 

 

 

 

 

 

 

 

income taxes):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

328.4

 

$

315.0

 

$

628.6

 

$

626.8

 

Consumer Tissue

 

 

177.6

 

 

203.4

 

 

386.6

 

 

406.6

 

K-C Professional & Other

 

 

106.1

 

 

104.0

 

 

202.0

 

 

205.1

 

Health Care

 

 

66.1

 

 

55.3

 

 

126.0

 

 

120.0

 

Other income and (expense), net

 

 

(1.6

)

 

1.7

 

 

(21.8

)

 

(13.4

)

Corporate & Other

 

 

(132.5

)

 

(43.2

)

 

(356.9

)

 

(71.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Profit

 

 

544.1

 

 

636.2

 

 

964.5

 

 

1,273.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expense

 

 

(7.6

)

 

(47.9

)

 

(23.4

)

 

(94.2

)

Interest income

 

 

6.6

 

 

8.3

 

 

13.0

 

 

14.3

 

Interest expense

 

 

(55.1

)

 

(46.3

)

 

(109.4

)

 

(90.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

$

488.0

 

$

550.3

 

$

844.7

 

$

1,103.7

 

 

 

16

 



                                                                                                                                                                                                                               

 

 

Note:

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

 

 

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

(Millions of dollars)

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

 

Corporate & Other

 

$

(89.4

)

 

$

-

 

 

$

(287.1

)

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and (expense),

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net

 

 

-

 

 

 

-

 

 

 

(10.9

)

 

 

-

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Six Months

 

 

 

 

Ended June 30

 

Ended June 30

 

 

(Millions of dollars)

 

2006

 

2006

 

 

 

 

 

 

 

 

 

 

Personal Care

 

$

56.3

 

$

171.9

 

Consumer Tissue

 

 

16.8

 

 

79.8

 

K-C Professional & Other

 

 

4.0

 

 

10.7

 

Health Care

 

 

12.3

 

 

24.7

 

 

 

 

 

 

 

 

 

Total

 

$

89.4

 

$

287.1

 

 

Total pretax charges that are expected to be incurred for the strategic cost reductions by business segment are: Personal Care - $540 million; Consumer Tissue - $240 million; K-C Professional & Other - $140 million; and Health Care - $150 million.

 

 

17

 



                                                                                                                                                                                                                               

 

 

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 Second Quarter 2006 Results

 

Business Segments

 

Results of Operations and Related Information

 

Liquidity and Capital Resources

 

New Accounting Pronouncement

 

Environmental Matters

 

Business Outlook

 

Overview of Second Quarter 2006 Results

 

Despite continued significant inflationary pressures, the Corporation delivered net sales and earnings per share in line with its objectives.

 

Net sales increased 4.4 percent.

 

 

Improvement was due to 2 percent higher net selling prices and improvement in sales volumes and product mix of 1 percent each.

 

Operating profit decreased 14.5 percent and earnings per share declined 6.8 percent.

 

 

Net sales growth and cost savings did not overcome significant cost inflation and charges for strategic cost reductions.

 

Cash provided by operations was $599.8 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.

 

18

 



                                                                                                                                                                                                                               

 

 

Results of Operations and Related Information

 

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

 

Second Quarter of 2006 Compared With Second Quarter of 2005

 

Analysis of Net Sales

 

By Business Segment

(Millions of dollars)

 

Net Sales

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Personal Care

 

$

1,715.1

 

$

1,601.6

 

Consumer Tissue

 

 

1,434.4

 

 

1,422.9

 

K-C Professional & Other

 

 

681.7

 

 

651.5

 

Health Care

 

 

340.1

 

 

308.6

 

Corporate & Other

 

 

7.7

 

 

7.8

 

Intersegment sales

 

 

(17.6

)

 

(5.3

)

 

 

 

 

 

 

 

 

Consolidated

 

$

4,161.4

 

$

3,987.1

 

 

Commentary:

 

 

 

Percent Change in Net Sales Versus Prior Year

 

 

 

 

 

Changes Due To

 

 

 

Total

 

Volume

 

Net

 

 

 

Mix/

 

 

 

Change

 

Growth

 

Price

 

Currency

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

4

 

 

1

 

 

2

 

 

-

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

7

 

 

6

 

 

-

 

 

1

 

 

-

 

 

Consumer Tissue

 

1

 

 

(4

)

 

4

 

 

-

 

 

1

 

 

K-C Professional & Other

 

5

 

 

-

 

 

3

 

 

-

 

 

2

 

 

Health Care

 

10

 

 

7

 

 

1

 

 

-

 

 

2

 

 

 

Consolidated net sales were 4.4 percent higher than in 2005. The increase in second quarter net sales reflects broadly higher net selling prices, up 2 percent overall, and favorable product mix of 1 percent. Sales in developing and emerging markets continued to expand at a double-digit rate. The Corporation also achieved volume growth for its infant, child and incontinence care brands in North America and for health care globally; however, sales volumes of consumer tissue products in North America and Europe declined. In total, sales volumes were up 1 percent while currency effects were neutral compared with the prior year.

 

Personal care net sales advanced 7.1 percent from last year, primarily driven by sales volume growth of approximately 6 percent, along with currency benefits of 1 percent. Net selling prices were essentially even with the prior year.

 

 

19

 



                                                                                                                                                                                                                               

 

 

Personal care net sales in North America increased about 6 percent compared with the second quarter of 2005. Sales volumes were up more than 6 percent, with growth in most categories. Huggies baby wipes and toiletries and Pull-Ups training pants posted double-digit volume gains, while incontinence care and infant care sales volumes rose at high single-digit rates. Although sales volumes of Kotex feminine care products were below last year’s levels, shipments increased somewhat compared with the first quarter. 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 decreased approximately 6 percent. Sales volumes were down about 4 percent, primarily related to the timing of promotional activities for the Corporation’s infant and child care brands. Overall diaper volumes were down 2 percent, with sales volumes of Huggies diapers about the same as the prior year in the Corporation’s four core European markets – the U.K., France, Italy and Spain. Net selling prices in the region were unchanged and currency effects reduced net sales by 2 percent. In developing and emerging markets, personal care net sales advanced 12 percent, with particular strength in North Asia, Latin America, and the Middle East, Africa and Eastern Europe. Higher sales volumes and prices, better product mix and currency benefits all contributed to the increase.

 

Consumer tissue net sales increased .8 percent. Net selling prices were up approximately 4 percent, mainly as a result of price increases in North America and Europe, while favorable product mix contributed an additional 1 percent. These improvements, however, were mostly offset by volume declines in the two regions following the price increases.

 

In North America, second quarter net sales of consumer tissue products rose approximately 1 percent, as net selling prices were about 5 percent higher, while sales volumes declined by 4 percent. Pricing benefited from increases implemented early in the second quarter for Kleenex facial tissue and during the first quarter for Cottonelle and Scott bathroom tissue and Viva and Scott paper towels. The reduction in sales volumes was primarily attributable to lower sales of Kleenex facial tissue. As expected, category volumes softened for a period of time in reaction to the price increase. In Europe, consumer tissue net sales decreased 5 percent, including negative currency effects of 2 percent. Net selling prices increased about 4 percent, as the Corporation successfully implemented price increases in a number of European markets so far this year. Product mix also improved by 1 percent. Sales volumes, however, decreased approximately 8 percent, which the Corporation believes is a temporary consequence of its disciplined approach to implementing the price increases. Consumer tissue net sales in developing and emerging markets improved 8 percent. Net sales grew in all regions, with higher sales volumes, net selling prices and product mix accounting for virtually all of the improvement.

 

Net sales of K-C Professional & Other products increased 4.6 percent above the year-ago quarter, primarily driven by more than 3 percent higher net selling prices, along with favorable product mix of approximately 1 percent. 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 continued to deliver overall net sales growth.

 

Net sales of health care products increased 10.2 percent. Sales volumes rose more than 7 percent, on the strength of broad-based growth in face masks, sterilization wrap, medical devices and new Sterling Nitrile exam gloves. Favorable product mix benefited second quarter sales by 2 percent and higher net selling prices contributed an additional 1 percent.

 

20

 



                                                                                                                                                                                                                               

 

 

By Geography

(Millions of dollars)

 

Net Sales

 

2006

 

2005

 

 

 

 

 

 

 

 

 

North America

 

$

2,427.9

 

$

2,342.3

 

Outside North America

 

 

1,872.8

 

 

1,788.9

 

Intergeographic sales

 

 

(139.3

)

 

(144.1

)

 

 

 

 

 

 

 

 

Consolidated

 

$

4,161.4

 

$

3,987.1

 

 

Commentary:

 

Net sales in North America increased 3.7 percent primarily because of the increased sales volumes for personal care products and the higher net selling prices for consumer tissue, partially offset by the lower consumer tissue sales volumes.

 

Net sales outside of North America increased 4.7 percent primarily due to the previously mentioned strength in the developing and emerging markets, tempered by the lower net sales for European personal care and consumer tissue products.

 

Analysis of Operating Profit

 

By Business Segment

(Millions of dollars)

 

Operating Profit

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Personal Care

 

$

328.4

 

$

315.0

 

Consumer Tissue

 

 

177.6

 

 

203.4

 

K-C Professional & Other

 

 

106.1

 

 

104.0

 

Health Care

 

 

66.1

 

 

55.3

 

Other income and (expense), net

 

 

(1.6

)

 

1.7

 

Corporate & Other

 

 

(132.5

)

 

(43.2

)

 

 

 

 

 

 

 

 

Consolidated

 

$

544.1

 

$

636.2

 

 

Note:

For 2006, Corporate & Other includes $89.4 million of charges for strategic cost reductions, and

 

other expenses not associated with the business segments.

 

 

 

21

 



                                                                                                                                                                                                                               

 

 

Commentary:

 

 

 

Percentage Change in Operating Profit Versus Prior Year

 

 

 

 

Change Due To

 

 

 

 

 

 

 

 

Raw

 

Energy and

 

 

 

 

 

 

Total

 

 

 

Net

 

Materials

 

Distribution

 

 

 

 

 

 

Change

 

Volume

 

Price

 

Cost

 

Expense

 

Currency

 

Other(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

(14

)

 

5

 

 

12

 

 

(6

)

 

(10

)

 

2

 

 

(17

)(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Care

 

4

 

 

11

 

 

(2

)

 

(7

)

 

(5

)

 

2

 

 

5

 

Consumer Tissue

 

(13

)

 

(7

)

 

27

 

 

(4

)

 

(17

)

 

-

 

 

(12

)

K-C Professional

& Other

 

2

 

 

4

 

 

20

 

 

(3

)

 

(10

)

 

2

 

 

(11

)

Health Care

 

20

 

 

19

 

 

7

 

 

(10

)

 

(3

)

 

(2

)

 

9

 

 

(a)

Includes higher marketing and general expenses, net of cost savings achieved.

 

(b)

Includes costs aggregating $89.4 million for strategic cost reductions.

 

Consolidated operating profit for the second quarter of 2006 decreased $92.1 million or 14.5 percent from the prior year. This decline was primarily due to the $89.4 million of charges for strategic cost reductions discussed later in this MD&A and in Note 3 to the Consolidated Financial Statements. These charges are not included in the business segments. Another factor that negatively impacted operating profit was cost inflation of about $100 million. Total cost inflation included about $30 million for raw materials other than fiber, driven by increases in the cost of polymer resins, superabsorbents and other oil-based materials, $10 million in higher fiber costs, $25 million in energy costs, and more than $35 million in distribution costs. As discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”). Adoption of SFAS 123R resulted in a charge of $10.9 million for stock option expense. The continued growth in net sales and cost savings totaling about $50 million positively impacted second quarter operating results.

 

Personal care segment operating profit increased 4.3 percent as the benefits of higher sales volumes and cost savings more than offset lower net selling prices and significant raw material cost inflation. In North America, higher sales volumes and cost savings were offset by lower net selling prices and cost inflation. Operating profit in Europe increased primarily due to cost savings. In the developing and emerging markets, higher net sales were offset by increased distribution, marketing and general expenses.

 

Consumer tissue segment operating profit decreased 12.7 percent because cost inflation and lower sales volumes more than offset the benefits of the higher net selling prices. In North America and Europe, higher energy, distribution and manufacturing operating costs more than offset the effect of higher net selling prices. In the developing and emerging markets, higher distribution, marketing and general expenses more than offset higher net selling prices.

 

Operating profit for K-C Professional & Other products increased 2.0 percent as the higher net sales more than offset increased energy, distribution, marketing and general costs.

 

Health care segment operating profit increased 19.5 percent on the strength of the higher net selling prices and sales volumes, tempered by increased raw materials costs and higher general expenses.

 

22

 



                                                                                                                                                                                                                               

 

 

Other income and (expense), net includes lower currency losses in 2006 compared with 2005, however, 2005 included a gain on the settlement of an insurance claim related to one of the Corporation’s facilities in Europe.

 

By Geography

(Millions of dollars)

 

Operating Profit

 

2006

 

2005

 

 

 

 

 

 

 

 

 

North America

 

$

495.0

 

$

513.6

 

Outside North America

 

 

183.2

 

 

164.1

 

Other income and (expense), net

 

 

(1.6

)

 

1.7

 

Corporate & Other

 

 

(132.5

)

 

(43.2

)

 

 

 

 

 

 

 

 

Consolidated

 

$

544.1

 

$

636.2

 

 

Note:

For 2006, Corporate & Other includes $89.4 million of charges for strategic cost reductions, and

other expenses not associated with the geographic regions.

 

Commentary:

 

Operating profit in North America decreased 3.6 percent primarily due to lower earnings in the consumer tissue business.

 

Operating profit outside North America increased 11.6 percent primarily because of higher earnings for personal care in Europe and Latin America.

 

Strategic Cost Reductions

 

During the second quarter of 2006, the Corporation made further progress implementing the strategic cost reductions that will support the targeted growth investments announced in July 2005. As previously disclosed, the Corporation plans to reduce costs by streamlining manufacturing and administrative operations primarily in North America and Europe, creating an even more competitive platform for growth and margin improvement.

 

Pretax charges totaling $89 million (approximately $60 million after tax) related to these cost reduction initiatives were recorded in the second quarter. A majority of the pretax charges were noncash, primarily for incremental depreciation. Major components of the charges were for consolidation of North Atlantic feminine and adult care and North American infant and child care operations, as well as cost structure improvements in Europe and Latin America.

 

To date, employees have been notified about workforce reductions and other actions at 19 of the approximately 24 facilities slated for sale, closure or streamlining as part of the cost reduction initiatives, and pretax charges of $527 million (about $382 million after tax) have been recorded. The Corporation currently expects to incur cumulative pretax charges of $1.0 to $1.1 billion ($700 to $775 million after tax) through the end of 2008 that will yield annual pretax savings of at least $350 million in 2009. See Note 3 to the Consolidated Financial Statements for additional detail on the costs recorded in the second quarter.

 

23

 



                                                                                                                                                                                                                               

 

 

Savings of approximately $25 million were realized in the second quarter of 2006. Based upon results to date and plans for the balance of the year, the Corporation expects to achieve at least $100 million of savings in 2006. Pretax charges for the full year are expected to total approximately $500 million.

 

The strategic cost reductions are corporate decisions and are not included in the business segments’ operating profit performance. See Note 10 to the Consolidated Financial Statements for the 2006 costs of the strategic cost reductions related to the activities in the Corporation’s business segments. The second quarter 2006 charges have been recorded in Cost of Products Sold ($66.4 million) and Marketing, Research and General Expenses ($23.0 million).

 

Additional Income Statement Commentary

 

Nonoperating expense of $7.6 million for the second quarter of 2006 is the Corporation’s pretax loss associated with its ownership interest in the synthetic fuel partnerships described in Note 5 to the Consolidated Financial Statements.

 

Interest expense increased 19.0 percent primarily due to higher average interest rates.

 

The Corporation’s effective income tax rate was 26.8 percent in 2006 compared with 25.6 percent in 2005. A lower level of synthetic fuel tax benefits and related nonoperating expense than in the prior year were the main reasons the second quarter 2006 effective tax rate increased from 2005.