(Mark One)
For the quarterly period endedJune 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 July 28, 2005, there were 476,291,614 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. Certain reclassifications have been made to conform prior year data to the current year presentation.
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 historic 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 expects to adopt it effective January 1, 2006.
The following schedule presents inventories by major class as of June 30, 2005 and December 31, 2004:
FIFO cost of total inventories on the LIFO method was $833.4 million and $768.5 million at June 30, 2005 and December 31, 2004, respectively.
Shown below is the interim period disclosure required by SFAS 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits.
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Note 4. (Continued)
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. During the first and second quarters of 2004, the Corporation made cash contributions of approximately $62 million and $13 million, respectively, to its pension trusts. The Corporation currently anticipates contributing about $68 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 $47.9 million and $38.7 million in the second quarter of 2005 and 2004, respectively, and are reported as nonoperating expense on the Corporation’s income statement. Pretax losses for the first six months of 2005 and 2004 totaled $94.2 million and $90.2 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.
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 June 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
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Note 6. (Continued)
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 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.
Options outstanding during the three- and six-month periods ended June 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 June 30, 2005 and 2004 was 476.6 million and 496.6 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:
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Note 8. (Continued)
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 six months ended June 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 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 are headed by executive officers who report to the Corporation’s Chief Executive Officer. These officers are responsible for the development and execution of 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.
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 9. (Continued)
The following schedule presents information concerning consolidated operations by business segment.
Note: Unallocated items – net, consists of expenses not associated with the business segments.
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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:
The Corporation achieved strong growth in net sales and higher operating profit, despite continued significant inflationary pressures and difficult price competition in several key businesses.
This section presents a discussion and analysis of the Corporation’s second quarter and first six months of 2005 net sales, operating profit and other information relevant to an understanding of the results of operations.
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Second Quarter of 2005 Compared With Second 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 second quarter of 2005 increased 8.1 percent compared with 2004. Overall sales volumes increased more than 5 percent highlighted by continued strength in developing and emerging markets, gains for key personal care and consumer tissue brands in North America and continued solid growth in K-C Professional and Health Care. In addition to currency benefits of nearly 3 percent, favorable product mix added about 1 percent to sales. Net selling prices were flat, as price increases for consumer tissue and K-C Professional products in North America and for personal care products in developing and emerging markets were offset by lower pricing in other areas, particularly diapers and training pants in North America and Europe and consumer tissue products in Europe. 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: Unallocated items - - net, consists of expenses not associated with the business segments.
(a) Primarily higher raw material, energy and distribution costs, net of cost savings achieved.
(b) Operating profit from divested pulp operations was included in 2004.
Consolidated operating profit increased 1.8 percent from the prior year. The benefits of the higher net sales and gross cost savings of more than $55 million combined to more than offset the impact of inflation in key cost components totaling approximately $95 million. More than $50 million of that inflation was in raw materials other than fiber, driven by increases in oil-based costs. Higher resin costs, which peaked during the second quarter, were responsible for a majority of this increase. The adverse impact of inflation on the second quarter also included an additional $10 million in fiber costs, $15 million in energy costs and $20 million in distribution costs. The Corporation also incurred nearly $35 million of increased marketing and research spending to support new and improved products. Operating profit also benefited by approximately $12 million from settlement of an insurance claim, reported in other income and expense, net, for partial recovery of damages related to a fire last year at one of the Corporation’s facilities in Europe. The year-over-year change in operating profit was also affected by $16 million of costs in the second quarter of 2004 to improve the efficiency of the Corporation’s diaper operations in North America and Europe.
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Note: Unallocated items - - net, consists of expenses not associated with the geographic areas.
Additional Income Statement Commentary
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First Six Months of 2005 Compared With First Six Months of 2004
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Consolidated net sales for the first six months of 2005 increased 6.7 percent.
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Note: Unallocated items - net, consists of expenses not associated with the business segments.
Consolidated operating profit increased 2.1 percent compared with the prior year. The combination of higher sales volumes, slightly higher net selling prices, approximately $100 million of gross cost savings, favorable currency, the previously mentioned insurance settlement and a favorable legal settlement of about $10 million in the first quarter of 2005 more than offset about $200 million in overall inflation and higher marketing, research and general expenses. The comparison to last year also benefited from the $16 million of costs incurred in second quarter 2004 related to North American and European diaper operations.
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Note: Unallocated items - net, consists of expenses not associated with the geographic areas.
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In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of SFAS154 is not expected to have an effect on the Corporation’s financial statements.
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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Competitive Improvement Initiatives
On July 20, 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, streamlining its worldwide manufacturing operations and enhancing the efficiency and cost effectiveness of its administrative operations.
Background
With the introduction of its Global Business Plan in 2003, the Corporation detailed a long-term strategy for top- and bottom-line growth through a financially disciplined approach to brand reinvestment and innovation. The Competitive Improvement Initiatives announced by the Corporation are consistent with that plan and are designed to deliver cost savings while focusing investment on building and growing those businesses that will yield improved margins and higher returns on invested capital.
These targeted growth investments are driven by a proactive and determined focus on delivering the best solutions to customers, shoppers and users in the areas in which the Corporation is uniquely positioned to achieve the greatest success. Specifically, the Corporation will invest to:
In support of these initiatives and to help improve brand equity and market share, the Corporation plans to reinvest significant funds in strategic marketing, raising spending levels as a percent of sales by more than 100 basis points from 2004 to 2009.
Strategic Cost Reduction Projects
These investments go hand in hand with strategic cost reductions aimed at streamlining manufacturing and administrative operations primarily in North America and Europe, creating an even more competitive platform for growth and margin improvement.
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The new cost reduction initiatives will commence in the third quarter of 2005 and are expected to be substantially completed by December 31, 2008. The initiatives will 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 accelerated depreciation 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. Approximately 20 manufacturing facilities, or 17 percent of the Corporation’s worldwide total, will be sold or closed, and an additional 4 facilities will be streamlined.
In addition, 7 other facilities will be expanded as some production capacity from affected facilities is transferred to them to further improve the scale, productivity and cost position of those operations. 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.
The initial phase of the cost reduction initiatives will occur between July, 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 ($500-$550 million before tax). 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); accelerated depreciation (approximately $190 million); asset impairments (approximately $100 million); and other associated costs (approximately $90 million).
The Corporation will report on the progress of these strategic cost reduction activities on a quarterly basis and provide information about future phases as specific projects are approved and implemented.
For the balance of the year, the Corporation expects continued growth in sales volumes as well as benefits from price increases, including the increases that are taking place in the third quarter of 2005 for infant care, child care and incontinence care products in the U.S. These actions, along with continued success in delivering gross cost reductions in the second half of the year, should help counteract ongoing inflationary cost pressures. However, the Corporation expects to incur significant charges in the third and fourth quarters related to the Competitive Improvement Initiatives, discussed above.
For the third quarter, the Corporation is planning to continue a stepped-up level of marketing spending in the quarter compared with the prior year to support its new product innovations. Compared with the third quarter of 2004, the Corporation expects inflation in most of its key cost inputs. However, recent reductions in the cost of fiber and polymers should provide a modest sequential benefit to operating results.
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
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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 June 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 June 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. All share repurchases by the Corporation were made through brokers on the New York Stock Exchange. During 2005, the Corporation anticipates purchasing up to $1.5 billion of its common stock, following approval from its board of directors for a new share repurchase program during the third quarter of 2005. The following table contains information for shares repurchased during the second quarter of 2005. None of the shares in this table were repurchased directly from any officer or director of the Corporation.
In addition, during April, May and June 2005, 4,233 shares at a cost of $276,528; 23,946 shares at a cost of $1,560,798; and 48,970 shares at a cost of $3,177,097, respectively, 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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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.
August 4, 2005
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EXHIBIT INDEX