(Mark One)
For the quarterly period endedSeptember 30, 2005
OR
For the transition period from.............to.....................
Commission file number1-225
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of October 27, 2005, there were 467,188,792 shares of the Corporation’s common stock outstanding.
See Notes to Consolidated Financial Statements.
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The unaudited consolidated financial statements have been prepared on a basis consistent with that used in the Annual Report on Form 10-K for the year ended December 31, 2004, and include all normal recurring adjustments necessary to present fairly the condensed consolidated balance sheet, consolidated income statement and condensed consolidated cash flow statement for the periods indicated.
On November 30, 2004, the Corporation completed the spin-off of Neenah Paper, Inc. As a result, the Corporation’s prior period consolidated income statements and condensed consolidated cash flow statement and related disclosures present the fine paper and technical paper businesses as discontinued operations. The December 31, 2004 condensed consolidated balance sheet and related disclosures are presented on their historical basis. Unless otherwise noted, the information contained in the notes to the consolidated financial statements relates to the Corporation’s continuing operations.
The Corporation continues to account for stock-based compensation using the intrinsic-value method permitted by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. No employee compensation for stock options has been charged to earnings because the exercise prices of all stock options granted have been equal to the market value of the Corporation’s common stock at the date of grant. Information about net income and earnings per share as if the Corporation had applied the fair value expense recognition requirements of Statement of Financial Accounting Standards (“SFAS”) 123, Accounting for Stock-Based Compensation, to all employee stock options granted is presented below:
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience.
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Note 2. (Continued)
On April 14, 2005, the Securities and Exchange Commission amended the compliance date for SFAS 123R, Share-Based Payment, by requiring adoption of the fair value method of accounting for share-based payments to employees no later than the first fiscal year beginning after December 15, 2005. The Corporation is evaluating SFAS 123R and will adopt it effective January 1, 2006.
In July 2005, the Corporation authorized the initial phase of 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 Competitive Improvement Initiatives commenced in the third quarter of 2005 and are expected to be substantially completed by December 31, 2008. Based on current estimates, the initiatives are expected to result in cumulative charges of approximately $900 million to $1.1 billion before tax ($625-$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. As of September 30, 2005, a workforce reduction of 235 had 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, 2005, the initiatives have begun to be implemented at 10 facilities.
In connection with the Competitive Improvement Initiatives approved by the Corporation, charges totaling $168.0 million were incurred in the third quarter of 2005; $126.4 million after tax.
Of the $168.0 million of charges, $140.4 million were noncash charges comprised of the following:
The following summarizes the charges recorded for workforce reductions and reconciles such charges to accrued expenses at September 30, 2005.
Termination benefits related to workforce reductions were accrued in accordance with the requirements of SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, FAS 112,Employers’ Accounting for Postemployment Benefits, and SFAS 88,Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination Benefits, as appropriate. Retention
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Note 3. (Continued)
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 arrrangement 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. Asset impairment charges have been recorded in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to reduce the carrying amount of long-lived assets that will be sold or disposed of to their estimated fair values. The fair values of impaired assets were estimated by independent appraisers. Charges for asset write-offs reduce the carrying amount of long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.
Costs of the initiatives have not been recorded at the business segment level, as the Competitive Improvement Initiatives are corporate decisions. The 2005 charges have been recorded in cost of products sold ($160.5 million) and marketing, research and general expense ($7.5 million). See Note 11 for additional information on the Competitive Improvement Initiatives by business segment.
The following schedule presents inventories by major class as of September 30, 2005 and December 31, 2004:
FIFO cost of total inventories on the LIFO method was $827.4 million and $768.5 million at September 30, 2005 and December 31, 2004, respectively.
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Shown below is the interim period disclosure required by SFAS 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits.
During the first, second and third quarters of 2005, the Corporation made cash contributions of approximately $11 million, $40 million and $7 million, respectively, to its pension trusts. During the first, second and third quarters of 2004, the Corporation made cash contributions of approximately $62 million, $13 million and $12 million, respectively, to its pension trusts. The Corporation currently anticipates contributing about $67 million for the full year 2005 to its pension trusts.
The Corporation has minority interests in two synthetic fuel partnerships. The production of synthetic fuel results in pretax losses, which totaled $43.2 million and $26.4 million in the third quarter of 2005 and 2004, respectively, and are reported as nonoperating expense on the Corporation’s income statement. Pretax losses for the first nine months of 2005 and 2004 totaled $137.4 million and $116.6 million, respectively. 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 tax credits and tax benefits combined to reduce the Corporation’s income tax expense, as shown in the following table.
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Note 6. (Continued)
On October 22, 2004, the American Jobs Creation Act (the “Act”) was signed into law. The Act provides, among other things, a special one-time deduction for certain foreign earnings that are repatriated to and reinvested in the United States. During the second quarter of 2005, the Corporation completed its evaluation of whether to repatriate unremitted earnings of certain of its non-U.S. subsidiaries under the provisions of the Act and decided to repatriate approximately $660 million of such earnings in 2005. As a result of this decision, the Corporation recorded income tax expense and a related income tax liability of approximately $34.8 million in the second quarter of 2005.
At September 30, 2005, U.S. income taxes have not been provided on approximately $3.3 billion of unremitted earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to the Corporation or a U.S. affiliate, or if the Corporation were to sell its stock in the subsidiaries. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation.
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:
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.
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Note 8. (Continued)
Options outstanding during the three- and nine-month periods ended September 30, 2004 to purchase 5.4 million and 5.5 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, 2005 and 2004 was 469.8 million and 489.0 million, respectively.
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:
Net unrealized currency gains or losses resulting from the translation of assets and liabilities of foreign 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 net 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 nine months ended September 30, 2005 is primarily due to the strengthening of the U.S. dollar versus the euro, British pound, Swiss franc and Australian dollar.
The Corporation, through a wholly-owned subsidiary, KCC Comercial Ltda. (“KCC”), owns a 70 percent interest in a Brazil corporation, Kimberly-Clark Kenko Indústria e Comércio Ltda. (“K-C Kenko”). The owner of the remaining 30 percent of K-C Kenko filed an action, for the benefit of K-C Kenko, in the Arbitration Center of the Brazil-Canada Chamber of Commerce in Brazil alleging, among other things, that KCC negligently managed K-C Kenko. KCC has denied the claims, raised numerous defenses and has asserted counterclaims. In management’s opinion, this matter is not expected to have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.
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The Corporation is organized into operating segments based on product groupings. These operating segments have been aggregated into three reportable global business segments: Personal Care; Consumer Tissue; and Business-to-Business. The reportable segments were determined in accordance with how the Corporation’s executive managers under the direction of the Chief Executive Officer develop and execute the Corporation’s global strategies to drive growth and profitability of the Corporation’s worldwide Personal Care, Consumer Tissue and Business-to-Business 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 Competitive Improvement Initiatives described in Note 3.
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 Business-to-Business segment manufactures and markets disposable, single-use, health and hygiene products to the away-from-home marketplace. These products include facial and bathroom tissue, paper towels, napkins, wipers, surgical gowns, drapes, infection control products, sterilization wrap, disposable face masks and exam gloves, respiratory products, other disposable medical products and other products. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, Kimwipes, WypAll, Surpass, Safeskin, Tecnol, Ballard and other brand names.
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Note 11. (Continued)
The following schedule presents information concerning consolidated operations by business segment.
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(a) Excludes the effects of the November 30, 2004 spin-off of Neenah Paper, Inc.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 2005 Results
• Results of Operations and Related Information
• Liquidity and Capital Resources
• Environmental Matters
• Business Outlook
The Corporation achieved solid growth in sales volumes but continued to encounter significant inflationary pressures.
• Net sales increased 5.8 percent.
• The positive effects of growth in net sales and gross cost savings overcame significant cost inflation.
• Earnings per share were negatively impacted by the charges for the Competitive Improvement Initiatives‚ but benefited from the Corporation’s share repurchase program.
This section presents a discussion and analysis of the Corporation’s third quarter and first nine months of 2005 net sales, operating profit and other information relevant to an understanding of the results of operations.
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Third Quarter of 2005 Compared With Third Quarter of 2004
Analysis of Net Sales
By Business Segment(Millions of dollars)
Note: The decrease in intersegment sales is primarily due to the divestiture of the pulp operations.
Commentary:
Consolidated net sales for the third quarter of 2005 increased 5.8 percent compared with 2004. Overall sales volumes increased 4 percent highlighted by continued strength in developing and emerging markets along with double-digit growth for key personal care and consumer tissue brands in North America and for diapers in Europe. In addition to currency effects of nearly 2 percent, higher net selling prices boosted sales by approximately 1 percent. The divestiture of the pulp operations as part of the spin-off of Neenah Paper on November 30, 2004 reduced net sales by about 1 percent.
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By Geography(Millions of dollars)
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Analysis of Operating Profit
Note: Corporate & Other includes costs aggregating $168.0 million for the Competitive Improvement Initiatives and expenses not associated with the business segments.
(a) Primarily higher raw material, energy and distribution costs, net of cost savings achieved.
(b) Includes costs aggregating $168.0 million for the Competitive Improvement Initiatives.
(c) Operating profit from divested pulp operations was included in 2004.
Consolidated operating profit decreased $152.3 million or 24.7 percent. This decline was primarily due to the $168.0 million of charges for the programs related to the Corporation’s Competitive Improvement Initiatives as described in Note 3 to the Consolidated Financial Statements. In addition, operating profit was impacted by inflation in key cost components totaling approximately $90 million. Partially offsetting these negative factors were the favorable effects of the higher sales volumes, increased net selling prices, currency effects and cost savings. More than $45 million of cost savings were achieved in the quarter. Cost inflation in the third quarter included $50 million for raw materials other than fiber, driven by increases in the cost of polymer resins, superabsorbents and other oil-based materials, $20 million in energy costs and $25 million in distribution costs, tempered by slightly lower fiber costs. Marketing and research and development expense of more than $25 million was incurred during the quarter in support of new and improved products. The year-over-year change in operating profit was also affected by $20 million of costs in the third quarter of 2004 to improve the efficiency of the Corporation’s diaper operations.
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Competitive Improvement Initatives
The Competitive Improvement Initiatives commenced in the third quarter of 2005 and are expected to be substantially completed by December 31, 2008. Based on current estimates, the initiatives are expected to result in cumulative charges of approximately $900 million to $1.1 billion before tax ($625-$775 million after tax) over that three and one-half year period. The initiatives are expected to yield annual pretax savings that increase to $300-$350 million by 2009. Continuous productivity gains over the last several years along with investments in state-of-the-art manufacturing capacity are enabling the Corporation to consolidate production at fewer facilities. Cash costs related to the sale, closure or streamlining of operations, relocation of equipment, severance and other expenses are expected to account for approximately 45 percent of the charges. Noncash charges will consist primarily of incremental depreciation and amortization and asset write downs.
By the end of 2008, it is anticipated there will be a net workforce reduction of about 10 percent, or approximately 6,000 employees. As of September 30, 2005, a workforce reduction of 235 had 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. There is a particular focus on Europe aimed at improving business results in the region. The Corporation intends to consolidate and streamline manufacturing facilities, further improve operating efficiencies, and reduce selling, general and administrative expenses while reinvesting in key growth opportunities there. As of September 30, 2005, the initiatives have begun to be implemented at 10 facilities.
The initial phase of the Competitive Improvement Initiatives will occur between 2005 and mid-2007 and will include the sale, closure or streamlining of 15 of the facilities and the expansion of 3 others. After-tax charges in connection with these projects are expected to total approximately $355-$390 million. The Corporation anticipates that the pretax charges for the initial phase will be incurred for the following categories at the indicated estimated amounts: workforce reduction costs (approximately $150 million); incremental depreciation and amortization (approximately $225 million); asset impairments (approximately $100 million); and other associated costs (approximately $55 million). The Corporation incurred charges totaling $168.0 million in the third quarter of 2005 in connection with the Competitive Improvement Initiatives; $126.4 million after tax.
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Charges for workforce reductions of $27.6 million were also recorded.
The 2005 charges have been recorded in cost of products sold ($160.5 million) and marketing, research and general expense ($7.5 million).
Costs of the initiatives have not been recorded at the business segment level, as the Competitive Improvement Initiatives are corporate-driven and are not included in the business segments’ operating profit performance. Certain actions yet to be announced for the Competitive Improvement Initiatives are still being studied. Accordingly, it is difficult at this time to estimate the total costs to be incurred by business segment over the life of the initiatives. See Note 11 for additional information on the actual costs of Competitive Improvement Initiatives by business segment.
Note: Corporate & Other includes costs aggregating $168.0 million for the Competitive Improvement Initiatives and expenses not associated with the geographic areas.
Additional Income Statement Commentary
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First Nine Months of 2005 Compared With First Nine Months of 2004
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Consolidated net sales for the first nine months of 2005 increased 6.4 percent.
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Consolidated operating profit decreased 6.8 percent. Significant factors that negatively affected operating profit were the charges for the Competitive Improvement Initiatives, cost inflation of about $290 million, and higher marketing, research and general expenses. Those factors were partially offset by gross cost savings of nearly $150 million, increased sales volumes, favorable currency effects and higher net selling prices.
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The Corporation has been named a potentially responsible party under the provisions of the federal Comprehensive Environmental Response, Compensation and Liability Act, or analogous state statutes, at a number of waste disposal sites, none of which, individually or in the aggregate, in management’s opinion, is likely to have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity.
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The Corporation is confident that it will continue to execute its Global Business Plan and generate solid top-line growth and additional cost savings over the balance of the year. Net sales in the fourth quarter of 2005 should benefit from a full quarter of the price increases implemented during the third quarter for diaper, pant and incontinence products in the U.S. as well as recent price increases for K-C Professional products in North America. At the same time, business conditions are expected to remain very challenging, as costs for resin and other oil-based materials, energy and distribution have risen following Hurricanes Katrina and Rita. In total, the Corporation expects these cost components to increase more than $30 million versus the third quarter, equivalent to approximately 5 cents per share.
Certain matters discussed in this report are forward-looking statements that are based upon management’s expectations and beliefs concerning future events impacting the Corporation. These matters include the business outlook, new product introductions, cost savings and acquisitions, anticipated costs and savings related to the Competitive Improvement Initiatives, anticipated financial and operating results, strategies, contingencies, and anticipated transactions of the Corporation. There can be no assurance that these future events will occur as anticipated or that the Corporation’s results will be as estimated. For a description of certain factors that could cause the Corporation’s future results to differ materially from those expressed in any such forward-looking statements, see the section of Part I, Item 1 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004 entitled “Factors That May Affect Future Results.”
As of September 30, 2005, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2005. There have been no significant changes during the quarter covered by this report in the Corporation’s internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting.
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The Corporation regularly repurchases shares of Kimberly-Clark common stock pursuant to publicly announced share repurchase programs. During 2005, the Corporation anticipates purchasing up to $1.5 billion of its common stock. The following table contains information for shares repurchased during the third quarter of 2005. None of the shares in this table were repurchased directly from any officer or director of the Corporation.
All share repurchases during the three months ended September 30, 2005 were made pursuant to a share repurchase program authorized by the Corporation’s board of directors on June 8, 2004 and announced the same day, which allowed for the repurchase of 25 million shares in an amount not to exceed $2.25 billion.
On September 15, 2005, the Corporation’s board of directors authorized the repurchase of an additional 50 million shares in an amount not to exceed $5 billion, which was publicly announced the same day.
In addition, during July 2005, 967 shares at a cost of $60,372 were purchased from current or former employees in connection with the exercise of employee stock options and other awards.
(a) Exhibits
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Item 6. (Continued)
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 4, 2005
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EXHIBIT INDEX