Kimberly-Clark - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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)

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.

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):

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

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

(Unaudited)

See Notes to Consolidated Financial Statements.

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

See Notes to Consolidated Financial Statements.

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(Unaudited)

See Notes to Consolidated Financial Statements.

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  Accounting Policies

Basis of Presentation

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

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

New Accounting Standards

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

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

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

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Note 1. (Continued)

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

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

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

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

Note 2.  Stock-Based Compensation

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

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

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

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

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Note 2. (Continued)

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

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

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

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

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

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

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Note 2. (Continued)

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

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

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

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

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

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Note 2. (Continued)

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

Note 3. Strategic Cost Reduction Plan

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

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

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

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Note 3. (Continued)

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

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

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

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

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Note 3. (Continued)

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

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

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

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

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Note 3. (Continued)

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

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

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

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Note 4.  Inventories

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

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

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

Note 5. Synthetic Fuel Partnerships

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

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Note 5. (Continued)

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.

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

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Note 7. Earnings Per Share

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

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

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

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

Note 8. Stockholders’ Equity

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

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

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Note 8. (Continued)

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