Exhibit No. (13)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Kimberly-Clark Corporation and Subsidiaries
Business Segments
The Corporation is organized into 12 operating segments based on product
groupings. These operating segments have been aggregated into three reportable
business segments: Personal Care; Consumer Tissue; and Business-to-Business.
Each reportable segment is headed by an executive officer who reports to our
Chief Executive Officer and is 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 and research and development programs, cost reductions including
supply chain management, and capacity and capital investments for each of these
businesses. The principal sources of revenue in each of our global business
segments are described below.
The Personal Care segment manufactures and markets disposable diapers,
training and youth pants and swimpants; 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 and napkins for household use; wet wipes; and related
products. Products in this segment are sold under the Kleenex, Scott,
Cottonelle, Viva, Andrex, Scottex, Page, Huggies and other brand names.
The Business-to-Business segment manufactures and markets facial and
bathroom tissue, paper towels, wipers and napkins for away-from-home use; health
care products such as surgical gowns, drapes, infection control products,
sterilization wraps, disposable face masks and exam gloves, respiratory
products, and other disposable medical products; printing, premium business and
correspondence papers; specialty and technical papers; 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.
PROFILE BY SEGMENT
2002 consolidated net sales
[BAR GRAPH]
CONSUMER TISSUE................... 37%
PERSONAL CARE..................... 37%
B2B............................... 26%
PROFILE BY GEOGRAPHY
2002 consolidated net sales
[BAR GRAPH]
NORTH AMERICA..................... 63%
EUROPE............................ 18%
ASIA, LATIN AMERICA,
AND OTHER......................... 19%
Analysis of Consolidated Net Sales - Three Years Ended December 31, 2002
By Business Segment
(Millions of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Personal Care........................................................... $ 5,101.7 $ 5,156.6 $ 4,959.9
Consumer Tissue......................................................... 5,018.6 4,747.9 4,552.0
Business-to-Business.................................................... 3,593.0 3,544.6 3,593.4
Intersegment sales...................................................... (147.0) (161.5) (195.8)
--------- --------- ---------
Consolidated....................................................... $13,566.3 $13,287.6 $12,909.5
========= ========= =========
By Geographic Area
(Millions of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
United States........................................................... $ 8,649.4 $ 8,638.3 $ 8,460.5
Canada.................................................................. 831.4 900.7 954.2
Intergeographic sales................................................... (601.2) (694.7) (673.5)
--------- --------- ---------
Total North America................................................ 8,879.6 8,844.3 8,741.2
Europe.................................................................. 2,482.8 2,341.3 2,201.7
Asia, Latin America and other........................................... 2,751.5 2,661.7 2,515.8
Intergeographic sales................................................... (547.6) (559.7) (549.2)
--------- --------- ---------
Consolidated....................................................... $13,566.3 $13,287.6 $12,909.5
========= ========= =========
Net sales for all years presented are stated net of the cost of trade promotions
and both the face value of consumer coupons and other applicable promotional
activities as required under an accounting pronouncement issued by the Financial
Accounting Standards Board ("FASB") in Emerging Issues Task Force ("EITF")
Issue 01-9. (See additional information under Accounting Standards Changes and
New Pronouncements.)
Commentary:
2002 versus 2001
Consolidated net sales increased 2.1 percent over 2001. Excluding changes in
foreign currency exchange rates, net sales increased nearly 3 percent.
Unfavorable currency effects, primarily in Argentina and Venezuela, were
partially offset by favorable currency effects in Europe. Sales volumes
increased approximately 5 percent, including the acquisition of majority
ownership of Kimberly-Clark Australia Pty. Ltd. ("KCA") effective July 1, 2001,
which contributed about one-third of the gain. Net selling prices decreased
about 2 percent, primarily due to higher promotional spending in North America
in the personal care and consumer tissue segments.
o Worldwide sales of personal care products declined 1.1 percent. Sales
volume growth of over 3 percent, about one-half of which was due to the
consolidation of KCA, was more than offset by lower net selling prices and
negative effects of changes in currency exchange rates. In North America,
net sales decreased about 2 percent as lower net selling prices, driven by
competitive activities, more than offset sales volume gains of nearly
4 percent. Net sales in Europe increased about 4 percent, however,
excluding favorable currency effects, net sales declined about 1 percent.
Decreased net selling prices overcame 1 percent higher sales volumes.
In Latin America, net sales declined primarily because of the effects
of the recession in Argentina. KCA was a significant contributor to higher
sales volumes in Asia, along with growth in sales of infant and feminine
care products in Korea, partially offset by lower sales volumes in the
Philippines.
o Worldwide sales of consumer tissue products increased 5.7 percent.
Excluding favorable currency effects, net sales grew about 5 percent on the
strength of 8 percent higher sales volumes tempered by 3 percent lower net
selling prices. In North America, a 5 percent increase in net sales was
driven by more than 9 percent growth in sales volumes, with strong
increases in sales of Scott towels and Cottonelle and Scott bathroom
tissue, partially offset by lower net selling prices, including the effect
of higher promotion spending. Excluding a near 5 percent boost from
currency effects, net sales in Europe increased more than 2 percent. Higher
sales volumes of over 3 percent, including the launch of baby wipes, were
partially offset by lower net selling prices. In Latin America, the
unfavorable currency effects not recovered through selling price increases
partially reduced the overall increase in sales volumes. In addition to the
contribution of KCA, Asia benefited from higher sales volumes in Korea,
tempered by market weakness in Taiwan.
o Worldwide sales of products in the business-to-business segment increased
1.4 percent. Sales volumes for the segment increased nearly 3 percent, on
the strength of higher volumes in the health care and professional
businesses of 7 percent and 4 percent, respectively. However, net sales in
the North American printing and technical paper businesses declined due to
the effects of the weak U.S. economy.
ANALYSIS OF CHANGE IN SALES
[BAR GRAPH]
2001 2002
Net selling price................. +1% -2%
Volume............................ +5% +5%
Currency.......................... -3% -1%
2001 versus 2000
Consolidated net sales increased 2.9 percent above 2000. Excluding changes in
foreign currency exchange rates, primarily in Europe, Korea and Brazil, net
sales increased more than 5 percent. Sales volumes advanced nearly 5 percent
with each business segment contributing to the gain. Acquisitions, including
Linostar, S.p.A. ("Linostar") in Italy, S-K Corporation ("S-K") in Taiwan and
KCA, contributed about 3 percentage points of the increased net sales. Net
selling prices increased less than 1 percent.
o Worldwide net sales of personal care products increased 4.0 percent. Sales
volume growth of more than 7 percent was partially offset by a negative
effect of over 3 percent due to changes in currency exchange rates.
Excluding currency effects, net sales increased in every geographic region.
Net selling prices increased less than 1 percent. In North America, net
sales advanced because of 2 percent higher net selling prices. In Europe,
sales volumes rose 22 percent driven by strong sales of Huggies diapers,
including a 13 percentage point contribution from the acquisition of
Linostar. Strong volume gains in the Caribbean region of Latin America were
partially offset by lower volumes in Brazil resulting from market
contraction in that country. Asia's sales volume benefited from the
acquisitions of KCA and S-K and from growth in Korea for diapers and
feminine care products, partially offset by a sales volume decline in
China.
o Worldwide net sales of consumer tissue products increased 4.3 percent.
Excluding currency effects, primarily in Europe and Korea, net sales were
about 7 percent higher with increased sales volumes contributing almost
5 percent of the gain. Net selling prices rose about 2 percent. More than
half of the increase in sales volumes was due to higher sales of bathroom
tissue, particularly Scott tissue, and Huggies baby wipes in North America.
Sales volumes in Latin America grew over 8 percent. Asia produced nearly
half the increase in sales volumes, primarily due to KCA and higher sales
in Korea. The gain in net selling prices was principally attributable to
Europe.
o Net sales for the business-to-business segment declined 1.4 percent.
Excluding currency effects, net sales were about equal to the prior year.
Net sales for health care products expanded over 9 percent, principally due
to increased sales volumes. However, net sales in North America for K-C
Professional, Neenah Paper and Technical Paper declined due to lower sales
volumes that reflected the slowdown in market demand associated with the
economic downturn.
Analysis of Consolidated Operating Profit - Three Years Ended December 31, 2002
By Business Segment
(Millions of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Personal Care .......................................................... $1,042.7 $1,042.7 $1,136.7
Consumer Tissue ........................................................ 921.7 863.7 825.1
Business-to-Business ................................................... 670.0 599.4 666.0
Other income (expense), net ............................................ (73.3) (83.7) 104.2
Unallocated - net ...................................................... (97.3) (83.9) (98.2)
-------- -------- --------
Consolidated ...................................................... $2,463.8 $2,338.2 $2,633.8
======== ======== ========
By Geographic Area
(Millions of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
United States .......................................................... $2,018.9 $1,927.5 $1,937.1
Canada ................................................................. 100.5 156.9 211.3
Europe ................................................................. 191.0 176.2 149.7
Asia, Latin America and other .......................................... 324.0 245.2 329.7
Other income (expense), net ............................................ (73.3) (83.7) 104.2
Unallocated - net ...................................................... (97.3) (83.9) (98.2)
-------- -------- --------
Consolidated ...................................................... $2,463.8 $2,338.2 $2,633.8
======== ======== ========
<FN>
Note: Unallocated - net consists of expenses not associated with the business segments or geographic areas.
</FN>
Commentary:
2002 versus 2001
Consolidated operating profit increased 5.4 percent. Operating profit as a
percentage of net sales increased from 17.6 percent in 2001 to 18.2 percent in
2002. The Corporation recorded charges of approximately $67 million in 2002
related to business improvement and other programs and a litigation settlement.
Charges related to the previously announced plans to streamline manufacturing
and administrative operations in Latin America and Europe totaled $14.3 million
and $19.1 million, respectively, and consisted principally of employee severance
of $16.8 million and asset write-off and disposal costs of $8.4 million. The
Corporation also recorded charges of approximately $4 million for employee
severance to complete actions that had been initiated in 2001, approximately
$2 million for an arbitration settlement and approximately $4 million for a
one-time national security tax levied on all corporations in Colombia. In
addition, the Corporation recorded $21 million of charges related to the
settlement in December 2002 of securities and shareholder derivative litigation
involving Safeskin Corporation ("Safeskin"). As previously disclosed, the
litigation predated the Corporation's February 2000 acquisition of Safeskin.
The above charges were recorded in the business segments as follows:
personal care $14.8 million; consumer tissue $21.8 million; business-to-business
$7.6 million and the portion not allocated to the segments was $23.1 million,
consisting principally of the Safeskin litigation charges. On a geographic basis
these charges are included as follows: North America $6.8 million; Europe
$19.1 million; Asia, Latin America and other $18.3 million and the portion not
allocated to the regions was $23.1 million. These charges are included in the
consolidated income statement as follows: cost of products sold - $19.9 million,
consisting principally of employee severance and asset write-off costs;
marketing, research and general expenses - $24.3 million, consisting principally
of severance, training and other integration costs in Europe, and other (income)
expense, net - $23.1 million, consisting principally of the Safeskin litigation
charges.
Operating profit in 2001 included charges totaling nearly $213 million,
principally for asset write-off and disposal costs of $107 million, employee
severance costs of $26 million, contract termination costs of $15 million, costs
to assimilate acquired businesses of $13 million and arbitration rulings of
$43 million. In November 2001, the Corporation announced plans for the
streamlining of manufacturing operations in Latin America, including the
shutdown of four small, older plants, as well as the closure of a technical
paper mill in North America. Total cash charges for these plans were
$18.4 million, including a one-time $11 million payment to settle a vendor
contract agreement in North America. Noncash costs for these plans recorded in
the fourth quarter totaled $66.7 million, including the write-off of the assets
associated with the technical paper mill that was closed in December 2001. Also
included in those
plans were the write-off of excess manufacturing equipment in North America of
approximately $14 million. These plans were substantially completed prior to the
end of 2002. Also included in the $213 million of charges were workforce
severance costs of about $6 million and asset write-off and disposal costs of
approximately $34 million to streamline personal care operations in North
America and China. These programs were completed during 2001. As part of the
integration of acquired businesses, including Linostar, S-K, and Safeskin, costs
totaling approximately $13 million related to assimilating these operations,
such as changing packaging and labeling and duplicative labor costs, were
expensed as incurred. In addition, in 2001 a charge of $43.2 million was
recorded pursuant to arbitration rulings released on January 21 and 31, 2002.
The rulings resolved two disputes related to the closure of the Corporation's
Mobile, Ala., pulp mill in 1999 and the supply of energy to the Corporation's
Mobile tissue mill.
The above charges were recorded in the business segments as follows:
personal care $76.8 million; consumer tissue $39.2 million; business-to-business
$51.4 million and the portion not allocated to the segments was $45.5 million,
consisting principally of the charges related to the arbitration rulings. On a
geographic basis these charges are included as follows: North America
$109.5 million; Europe $12.6 million; Asia, Latin America and other
$45.3 million and the portion not allocated to regions was $45.5 million. These
charges are included in the consolidated income statement as follows: cost of
products sold - $141.7 million, consisting principally of asset write-off and
disposal costs and severance costs; marketing, research and general expenses -
$25.7 million, consisting principally of severance costs for administrative
employees in Europe and certain costs related to the business integrations; and
other (income) expense, net - $45.5 million, consisting principally of the
charges related to the arbitration rulings.
In accordance with Statement of Financial Accounting Standards ("SFAS")
142, Goodwill and Other Intangible Assets, the Corporation ceased amortizing
goodwill in 2002. Goodwill amortization by segment in 2001 was: personal care
$16.0 million; consumer tissue $14.6 million and business-to-business
$58.8 million. By geographic region, goodwill amortization in 2001 was: North
America $57.8 million; Europe $9.2 million and Asia, Latin America and other
$22.4 million.
In 2002, the Corporation incurred higher net pension costs for its defined
benefit plans of approximately $52 million compared with 2001.
o Operating profit for personal care products was even with last year. The
costs of promotional spending that were driven by competitive activity,
especially in the second half of the year, offset the increased sales
volumes, lower costs for business improvement plans and the discontinuation
of goodwill amortization in 2002. In North America, operating profit
declined despite increased sales volumes, particularly for Depend and Poise
adult incontinence care products, and increased productivity and cost
savings programs. This decline primarily reflected the high levels of
promotional activity to defend the infant and child care brands' market
positions. While operating profit in Europe improved, in part due to lower
raw material costs, that business experienced competitive pressure similar
to North America. Operating profit in Asia benefited from the acquisition
of KCA and growth in Korea, tempered by lower earnings in the Philippines.
o Operating profit for consumer tissue products increased 6.7 percent.
Increased sales volumes, particularly in North America for Scott and
Cottonelle bathroom tissue and Scott towels, and lower pulp costs were the
primary drivers behind this growth. These gains were partially offset by
increased levels of promotional and marketing spending.
o Operating profit for the business-to-business segment increased
11.8 percent. On a pro forma basis, excluding the amortization of goodwill
in 2001, operating profit increased 1.8 percent. In addition, the segment
recorded approximately $51 million of costs in 2001 primarily related to a
North American mill closing and costs to integrate acquired businesses
compared to about $8 million of
similar costs in 2002. While earnings for the health care business
benefited from the higher sales volumes, this gain was offset by lower
results in the other businesses due to the economic slowdown in North
America.
o From 1999 through early 2001, two of our affiliates in Brazil purchased
unused tax credits, as permitted by law, to reduce taxes otherwise payable.
During the fourth quarter 2001, we determined that it was probable that a
portion of the purchased tax credits would not be allowed by tax
authorities nor would collection of the collateral or amounts pledged under
sellers' guarantees occur. Accordingly, in the fourth quarter 2001, we
recorded a charge of $33 million to other expense for these tax credits.
In 2002, we established a team to investigate and to pursue actions to
recover these losses. In the second quarter 2002, evidence was discovered
to suggest fraud by at least one employee of our affiliates and possibly
several others in connection with the tax credit purchases. We determined
that the remaining purchased tax credits were invalid and that the
collateral backing them was worthless. We had previously concluded, during
the December 2001 review, based on the advice of our outside advisors that
these credits represented legitimate tax credits. Accordingly, in the
second quarter 2002, we recorded a charge of $26.5 million to other expense
for losses associated with these tax credits. We have no remaining
financial exposure for purchased tax credits.
We have implemented various corrective actions to prevent this matter from
recurring in the future, including terminating all the employees
responsible for the decisions to purchase these tax credits. We have also
filed civil and criminal actions against a former employee; third parties
(i.e., intermediaries who sold or arranged for our affiliates' purchase of
tax credits); tax credit sellers; and legal counsel associated with the
purchase of the tax credits.
In addition, we have restricted the affiliates' purchasing authority and
control procedures have been re-emphasized. Personnel changes have been
made to strengthen the affiliates' organizations and their internal control
compliance.
o Other income (expense), net included the Safeskin litigation settlement in
2002, the arbitration rulings in 2001, and $17.1 million of operating
losses in 2002 related to the Corporation's participation in affordable
housing and historic renovation real estate projects, an increase of
$11.8 million compared with 2001. Included in 2002 and 2001 were charges of
$26.5 million and $33 million, respectively, for the tax credits discussed
above. Also included were currency transaction gains in 2002 compared with
losses in 2001.
2001 versus 2000
Consolidated operating profit declined 11.2 percent primarily due to other
income (expense), net. Operating profit as a percentage of net sales decreased
from 20.4 percent in 2000 to 17.6 percent in 2001. As previously discussed,
charges of nearly $213 million were recorded in 2001 while 2000 included charges
for business improvement ($24 million, principally to complete previously
announced plans, which involved employee severance of $5 million and asset
write-off and disposal costs of $19 million) and business integration and other
costs of $35 million, including $20 million to assimilate acquisitions and to
reorganize our North American health care sales force as part of integrating
those acquisitions, and about $6 million for asset write-off and disposal
costs. Also included in 2000 were charges of $15 million for litigation
settlements, a favorable patent settlement of about $56 million and the reversal
of $20 million of estimated liabilities that ceased to be required, which
related to a prior asset disposition. The 2000 charges described above were
recorded in the business segments as follows: personal care $5.2 million;
consumer tissue $22.0 million; business-to-business $32.3 million and the
portion not allocated to the segments was a net gain of $60.6 million,
consisting of the litigation and patent settlements and the liability reversal.
On a geographic basis these charges are
included as follows: North America $36.3 million; Europe $23.2 million and the
portion not allocated to regions was the net gain of $60.6 million. These net
charges (credits) are included in the consolidated income statement as follows:
cost of products sold - $30.3 million for employee severance and asset write-off
and disposal costs; marketing, research and general expenses - $29.2 million,
consisting of expenses to assimilate the health care acquisitions and sales
force integration; and other (income) expense, net - $(60.6) million, consisting
of the litigation and patent settlements and the liability reversal.
The results of the business segments were affected in North America by
higher energy costs early in 2001, significant start-up costs to support the
rollout of new and improved products, increased fringe benefit costs primarily
due to lower returns on pension assets and lower earnings for most of the
business-to-business operations resulting from the downturn in the economy.
These results were also affected by a decline in earnings from Latin American
operations due to difficult business conditions and overall higher marketing
expenses. These factors offset the higher sales volumes, the increased net
selling prices and lower pulp costs.
In 2001, the Corporation incurred higher net pension costs for its defined
benefit plans of approximately $65 million compared with 2000.
o Operating profit for personal care products decreased 8.3 percent.
Operating profit benefited from sales volume gains including the
consolidation of KCA. Strong contributors to the volume gains were diapers
in Europe, training pants in North America and diapers and feminine care
products in Korea. However, higher marketing expenses, particularly in
Europe, and the increased fringe benefit costs in North America more than
offset the effect of the higher sales volumes.
o Operating profit for consumer tissue products increased 4.7 percent. Net
selling price increases in North America for facial tissue and towel
products and in Europe, primarily for bathroom tissue, combined with lower
pulp costs and the increase in sales volumes were the drivers behind the
increase. Partially offsetting these gains were higher energy, start-up and
fringe benefit costs in North America and higher marketing costs in North
America and Europe.
o Operating profit for the business-to-business segment decreased
10.0 percent. Health care operating profit increased more than 30 percent
on the strength of the higher sales volumes. As previously stated, the
other North American operations in this segment were adversely affected by
the downturn in the economy. The benefit of lower pulp costs did not
offset the impacts of lower sales volumes and higher energy and fringe
benefit costs. In 2001, the segment recorded business integration costs
of $13.5 million compared with similar costs of $19.5 million in 2000.
o Other income (expense), net for 2001 includes the previously mentioned
charge of approximately $33 million in Brazil for tax credits and currency
transaction losses versus gains in 2000. Also included in 2000 were gains
on minor asset sales.
Additional Income Statement Commentary
2002 versus 2001
o Interest expense decreased primarily due to lower interest rates, partially
offset by higher average levels of debt.
o The Corporation's effective income tax rate was 29.0 percent in 2002
compared with 29.8 percent in 2001. The lower effective tax rate was
primarily due to the discontinuance, for financial reporting purposes, of
goodwill amortization that had not been deductible for income tax purposes.
o The Corporation's share of net income of equity companies was
$113.3 million in 2002 compared with $154.4 million in 2001. The decrease
was primarily due to lower earnings at Kimberly-Clark de Mexico, S.A. de
C.V. ("KCM") due to negative currency effects and a higher effective tax
rate due to changes in Mexican tax law. Although KCM's sales volumes
increased more than 4 percent, operating profit declined about 3 percent
due to lower net selling prices reflecting the competitive environment. The
consolidation of KCA also impacted the Corporation's share of net income of
equity companies.
o Minority owners' share of subsidiaries' net income decreased 8.1 percent
primarily due to a lower return on the preferred securities held by the
minority interest in the Corporation's consolidated foreign financing
subsidiary (as described under Financing Commentary).
o On a diluted basis, net income was $3.22 per share in 2002 compared with
$3.02 per share in 2001, an increase of 6.6 percent.
2001 versus 2000
o Interest expense decreased primarily due to lower interest rates, partially
offset by a higher average debt level.
o The Corporation's effective income tax rate was 29.8 percent in 2001
compared with 31.1 percent in 2000. The lower effective tax rate was
primarily due to tax initiatives and the resolution of prior years' income
tax matters, and because the mix of the Corporation's income continued to
shift to jurisdictions with lower effective tax rates.
o The Corporation's share of net income of equity companies was
$154.4 million in 2001 compared with $186.4 million in 2000. The decrease
was primarily due to the previously mentioned consolidation of KCA and net
losses at the Corporation's affiliates in Brazil and Argentina due to the
unstable and contracting economies of those countries. Argentina's results
were also affected by the devaluation of its currency.
o Minority owners' share of subsidiaries' net income was even with 2000. The
effect of the consolidation of KCA and the recognition in 2001 of the
return on preferred securities held by the minority interest in the
Corporation's consolidated foreign financing subsidiary were offset by the
lower earnings in Latin America.
o On a diluted basis, net income was $3.02 per share in 2001 compared with
$3.31 per share in 2000, a decrease of 8.8 percent.
Sales of Principal Products
(Billions of dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Family care tissue products .......................................................... $ 4.4 $ 4.2 $ 4.0
Diapers .............................................................................. 3.0 3.0 2.9
Away-from-home products............................................................... 1.9 1.9 1.9
All other ............................................................................ 4.3 4.2 4.1
----- ----- -----
Consolidated .................................................................... $13.6 $13.3 $12.9
===== ===== =====
Approximately 12 percent, 11 percent and 10 percent of net sales were to
Wal-Mart Stores, Inc. in 2002, 2001 and 2000, respectively, primarily in the
Personal Care and Consumer Tissue businesses.
Liquidity and Capital Resources
Year Ended December 31
----------------------------
(Millions of dollars) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by operations.............................................................. $2,424.2 $2,253.8
Capital spending......................................................................... 870.7 1,099.5
Acquisitions of businesses, net of cash acquired......................................... 410.8 135.0
Proceeds from issuance of preferred securities of subsidiary............................. - 516.5
Ratio of net debt and preferred securities to capital.................................... 39.8% 38.9%
Pretax interest coverage - times......................................................... 13.3 11.7
Cash Flow Commentary:
o Cash provided by operations increased by $170.4 million. Net income plus
noncash charges included in net income of $2.6 billion in 2002 was
$.1 billion higher than in 2001. The Corporation invested $197.6 million in
working capital in 2002 versus $232.6 million in 2001.
o Capital spending decreased by $228.8 million as the Corporation focused on
carefully targeting expenditures to benefit operations and maximize free
cash flow.
CAPITAL SPENDING TRENDS
Percent of net sales
[BAR GRAPH]
2001.............................. 8.3%
2002.............................. 6.4%
Contractual Obligations
The following table presents the Corporation's total contractual obligations for
which cash flows are fixed or determinable.
(Millions of dollars) Total 2003 2004 2005 2006 2007 2008+
- ----------------------------------------------------------------------------------------------------------------
Contractual obligations
Long-term debt .......................... $2,868.3 $ 24.3 $125.1 $540.5 $14.9 $325.1 $1,838.4
Operating leases ........................ 246.5 60.7 48.1 36.0 27.2 18.4 56.1
Unconditional purchase
obligations ........................... 629.4 379.2 99.3 65.2 36.1 26.1 23.5
-------- ------ ------ ------ ----- ------ --------
Total contractual obligations .............. $3,744.2 $464.2 $272.5 $641.7 $78.2 $369.6 $1,918.0
======== ====== ====== ====== ===== ====== ========
The unconditional purchase obligations are for the purchase of raw
materials, primarily pulp, and utilities, principally natural gas. Although the
Corporation is primarily liable for payments on the above operating leases and
unconditional purchase obligations, management believes the Corporation's
exposure to losses, if any, under these arrangements is not material.
A consolidated financing subsidiary of the Corporation has issued preferred
securities that are in substance perpetual and are callable by the subsidiary in
November 2008 and each 20-year anniversary thereafter. Management anticipates
extending the call date of these securities in November 2008 and therefore they
are not included in the above table (see the Financing Commentary section of
this Management's Discussion and Analysis for additional detail regarding these
securities).
Financing Commentary:
o In 2002, the Corporation repurchased 11.85 million shares of its common
stock in connection with its share repurchase program at a total cost of
$675.5 million. At December 31, 2002, authority to repurchase 9.65 million
shares remained under November 2000 repurchase authority from the
Corporation's board of directors. The Corporation announced in
February 2003 that its board of directors authorized the repurchase of an
additional 20 million shares of its common stock. In 2001,
the Corporation repurchased 15.0 million shares of its common stock at a
total cost of $900.1 million. All share repurchases by the Corporation were
effected through brokers on the New York Stock Exchange. No shares were
repurchased directly from any officer or director of the Corporation.
o In February 2001, a newly formed Luxembourg-based consolidated financing
subsidiary of the Corporation issued 1 million shares of preferred
securities (the "Securities") with an aggregate par value of $520 million
to a nonaffiliated entity for cash proceeds of $516.5 million.
Approximately 97 percent of the subsidiary's funds are invested in
long-term, variable rate loans to the Corporation or its consolidated
subsidiaries on terms that would be substantially similar to other
borrowings by the Corporation or its consolidated subsidiaries. The
remaining funds are invested in other financial assets. The Securities pay
no dividend but accrue a variable rate of return based on three-month LIBOR
plus 0.764 percent, which at December 31, 2002 equated to an annual rate of
approximately 2.144 percent. The Securities are in substance perpetual and
are callable by the subsidiary at par value plus any accrued but unpaid
return on the Securities in November 2008 and each 20-year anniversary
thereafter. The common equity securities, all of which are owned by the
Corporation, are entitled to all of the residual equity after satisfaction
of the preferred interests. As of December 31, 2002 and 2001, the
authorized, issued and outstanding 1 million shares of preferred securities
had a balance (and a liquidating value) of $553.5 million and
$538.4 million, respectively, which is shown as preferred securities of
subsidiary on the consolidated balance sheet. The increase in the
balance of the Securities of $15.1 million and $21.9 million during
2002 and 2001, respectively, is the return on the Securities, which was
included in minority owners' share of subsidiaries' net income on the
Corporation's consolidated income statement.
o At December 31, 2002, total debt and preferred securities was $4.5 billion,
an increase of $.3 billion above the prior year-end total. Net debt (total
debt net of cash, cash equivalents and time deposits) and preferred
securities was $3.9 billion at December 31, 2002 compared with $3.8 billion
at December 31, 2001. The ratio of net debt and preferred securities to
capital at December 31, 2002 was 39.8 percent, which is within the
Corporation's targeted range of 35 to 45 percent.
o At December 31, 2002, the Corporation had $1.425 billion of syndicated
revolving credit facilities. These facilities, unused at December 31, 2002,
permit borrowing at competitive interest rates and are available for
general corporate purposes, including backup for commercial paper
borrowings. The Corporation pays commitment fees on the unused portion but
may cancel the facilities without penalty at any time prior to their
expiration. Of these facilities, $712.5 million expires in October 2003 and
the balance expires in November 2007.
o On February 8, 2002, the Corporation issued $400 million of 5 5/8% Notes
due February 15, 2012 and used the proceeds to retire commercial paper.
o On March 19, 2002, the Corporation issued $400 million of 4 1/2% Notes due
July 30, 2005 and used the proceeds to retire commercial paper. In
connection with the borrowing, the Corporation entered into an interest
rate swap agreement maturing on July 30, 2005 with a counterparty under
which the difference between the fixed- and floating-rate interest amounts
calculated on a $400 million notional amount is exchanged on a quarterly
basis. The floating rate is 3-month LIBOR minus 29.5 basis points. The swap
agreement permits the Corporation to maintain its desired ratio of fixed-
and floating-rate borrowings.
o The Corporation's long-term debt securities have a Double-A rating and its
commercial paper is rated in the top category.
Variable Interest Entities
The Corporation has a controlling financial interest in the following three
types of variable interest entities despite not having voting control of them.
Accordingly, because the Corporation is the primary beneficiary under these
arrangements, it is reasonably possible that the Corporation will be required to
consolidate such entities beginning in the third quarter of 2003 in accordance
with the requirements of FASB Interpretation 46. No current or former officer or
employee of the Corporation, its subsidiaries or affiliates or any person
related to such officer or employee is a participant in any of these
arrangements. Therefore, they could not personally benefit in any way,
financially or otherwise, from any of these arrangements. (See additional
information regarding Interpretation 46 under Accounting Standards Changes and
New Pronouncements.)
Financing Entities
The Corporation has sold certain nonstrategic timberlands and related assets in
1999 and 1989 to nonaffiliated buyers and received long-term notes from the
buyers of these assets. These transactions qualified for the installment method
of accounting for income tax purposes and met the criteria for immediate profit
recognition for financial reporting purposes contained in SFAS 66, Accounting
for Sales of Real Estate. The 1999 sale involved notes receivable having an
aggregate face value of $397 million and a fair value of approximately
$383 million at the date of sale. These notes do not require principal payments
before their December 31, 2009 maturity, are extendable at the option of the
note holder in five-year increments to December 31, 2029, and have floating
interest rates of LIBOR minus 15 basis points. The 1989 sale involved notes
receivable having an aggregate face value of $220 million and a fair value of
approximately $210 million at the date of sale. These notes do not require
principal payments before their July 7, 2011 maturity, are extendable at the
option of the note holder in three-year increments to July 7, 2019, and have
floating interest rates of LIBOR minus 12.5 basis points. The notes receivable
are backed by irrevocable standby letters of credit issued by money center
banks, which aggregated $617 million at December 31, 2002.
Because the Corporation desired to monetize the $617 million of notes
receivable and continue the deferral of current income taxes on the gains, in
1999 the Corporation transferred the notes received from the 1999 sale to a
noncontrolled financing entity, and in 2000 it transferred the notes received
from the 1989 sale to another noncontrolled financing entity. The Corporation
has minority voting interests in each of the financing entities (collectively,
the "Financing Entities"), and has accounted for these minority ownership
interests using the equity method of accounting. The transfers of the notes and
certain other assets to the Financing Entities were made at fair value, were
accounted for as asset sales and resulted in no gain or loss to the Corporation.
A nonaffiliated financial institution has made substantive capital investments
in each of the Financing Entities, has majority voting control over them and has
substantive risks and rewards of ownership of the assets in the Financing
Entities. The Financing Entities became obligated for $617 million in
third-party debt financing. The Corporation also contributed intercompany notes
receivable (guaranteed by the Corporation) aggregating $662 million and
intercompany preferred stock of $50 million to the Financing Entities, which
serve as secondary collateral for the third-party lending arrangements. The
Corporation retains equity interests in the Financing Entities for which the
legal right of offset exists against the intercompany notes. As a result, the
intercompany notes payable have been offset against the Corporation's equity
interests in the Financing Entities for financial reporting purposes. In the
unlikely event of default by the money center banks that provided the
irrevocable standby letters of credit, the Corporation could experience a
maximum loss of $617 million under these arrangements.
If payment of the outstanding notes were to be accelerated in the above
financing arrangements, previously provided deferred income taxes totaling
$188 million at December 31, 2002 may become payable.
In 1988, Scott Paper Company ("Scott"), prior to its merger with the
Corporation, together with Mead Corporation ("Mead"), sold their joint ownership
interests in a pulp and paper manufacturing facility and related timberlands to
Georgia-Pacific Corporation ("G-P") for $665 million, less related debt. The
purchase price consisted of cash and ten-year G-P notes in the principal amount
of $300 million. In 1998, G-P extended the maturity of the notes for an
additional five years.
In 1988, in order to monetize the G-P notes and continue the deferral of
current income taxes of $55 million on the gain, Scott and Mead formed a
jointly-owned partnership and each contributed their G-P notes to the
partnership. The partnership borrowed $300 million from a third party under a
ten-year bank loan agreement. The loan was prepaid in December 2002 by tendering
the G-P notes to the bank, at which time the deferred taxes became a current tax
obligation.
Real Estate Entities
In 1994, the Corporation began participating in the U.S. affordable and historic
renovation real estate markets. Investments in these markets are encouraged by
laws enacted by the United States Congress and related federal income tax rules
and regulations. Accordingly, these investments generate income tax credits and
depreciation deductions that are used to reduce the Corporation's income tax
liabilities. The Corporation has invested in these markets through (i) a
partnership arrangement in which it is a limited partner, (ii) limited liability
companies ("LLCs") in which it is a nonmanaging member and (iii) investments in
various funds in which the Corporation is one of many noncontrolling investors.
The partnership, LLCs and funds borrow money from third parties on a nonrecourse
basis and invest in and own various real estate projects. These entities are not
consolidated because they are not controlled by the Corporation. The Corporation
has accounted for its interests in these entities by the equity method of
accounting or by the effective yield method, as appropriate, and accounts for
related income tax credits as a reduction in the income tax provision.
As of December 31, 2002, the Corporation had net equity of $65 million in
these real estate entities. Income tax credits to be generated by these
investments are expected to exceed $163 million, of which approximately
$101 million will be claimed on the Corporation's income tax returns through
December 31, 2002. As of December 31, 2002, total permanent financing debt for
the projects was $325 million. This permanent financing debt is secured solely
by the properties, is nonrecourse to the Corporation and is not supported or
guaranteed by the Corporation. From time to time, temporary interim financing is
guaranteed by the Corporation. In general, the Corporation's interim financing
debt guarantees are eliminated at the time permanent financing is obtained. At
December 31, 2002, $76 million of temporary interim financing debt was
guaranteed by the Corporation. The Corporation considers its default risk from
these real estate investments and its temporary interim financing debt
guarantees to be minimal as a result of geographical dispersion of the projects
and because the permanent financing debt of the projects is nonrecourse to the
Corporation.
As of December 31, 2002, the total underlying market value of the
properties is estimated to be in excess of the total related permanent financing
debt. If the Corporation's investments in these real estate entities were to be
disposed of at their carrying amounts, a portion of the tax credits and
depreciation deductions claimed on the Corporation's income tax returns may be
recaptured and may result in a charge to income. As of December 31, 2002, this
recapture risk is estimated to be $41 million. The Corporation has no current
intention of disposing of these investments, nor does it anticipate the need to
do so in the foreseeable future in order to satisfy any anticipated liquidity
need. Accordingly, the Corporation considers its recapture risk to be remote.
At December 31, 2002, the Corporation's maximum loss exposure for its real
estate entities totaled $182 million and was composed of its net equity in these
entities of $65 million, its loan guarantees of $76 million and the income tax
credit recapture risk of $41 million.
Synthetic Leases
From time to time, the Corporation acquires the use of certain assets, such as
automobiles, fork lifts, trucks, warehouses and some manufacturing equipment
through synthetic leases. Synthetic leases are often desirable when they offer
administrative benefits, as would be the case in avoiding the burden of
acquiring and disposing of automobiles, fork lifts and trucks, or when long-term
interest-only financing is available, as is often the case in real estate
synthetic leases. Synthetic leases usually are cost-effective alternatives to
traditional operating leases because of their more favorable interest rates and
treatment under income tax laws. Under applicable accounting rules for such
leases, rent expense is recorded for financial reporting purposes and no asset
or debt obligation is recorded on the Corporation's balance sheet. At
December 31, 2002, the fair value of synthetically leased assets totaled about
$27 million.
These synthetic leases have termination penalties or residual value
guarantees. However, because the assets under these leases are used in the
conduct of the Corporation's business operations, it is unlikely that any
significant portion of these leases would be terminated prior to the normal
expiration of their lease terms. At December 31, 2002, the Corporation's maximum
loss exposure under residual value guarantees for synthetic leases was
approximately $24 million.
Other Commentary:
o Effective June 30, 2002, the Corporation purchased the remaining 45 percent
ownership interest in KCA at a cost of A$697.5 million (approximately
$390 million). This acquisition was part of the Corporation's strategy to
expand its three business segments within Australia. The acquisition of the
additional 45 percent ownership of KCA resulted in recognizing goodwill of
$317 million reflecting the Corporation's expectation of continued growth
and profitability of KCA.
o Management believes that the Corporation's ability to generate cash from
operations, which has exceeded $2 billion in each of the last three years,
and its capacity to issue short-term and long-term debt are adequate to
fund working capital, capital spending and other needs in the foreseeable
future.
Risk Sensitivity
As a multinational enterprise, the Corporation is exposed to changes in foreign
currency exchange rates, interest rates and commodity prices. A variety of
practices are employed to manage these market risks, including operating and
financing activities and, where deemed appropriate, the use of derivative
instruments. Derivative instruments are used only for risk management purposes
and not for speculation or trading. All derivative instruments are either
exchange traded or are entered into with major financial institutions. The
Corporation's credit exposure under these arrangements is limited to the fair
value of the agreements with a positive fair value at the reporting date.
Additionally, credit risk with respect to the counterparties is considered
minimal in view of the financial strength of the counterparties.
Effective January 1, 2001, the Corporation adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. This accounting
standard requires that all derivative instruments be recognized as assets or
liabilities on the balance sheet at fair value. Changes in the fair value of
derivatives are either recorded in income or other comprehensive income,
depending on whether the derivative has been designated and qualifies as part of
a hedging relationship. The gain or loss on derivatives designated as fair value
hedges and the offsetting loss or gain on the hedged item attributable to the
hedged risk are included in current income in the period that changes in fair
value occur. The gain or loss on derivatives designated as cash flow hedges is
included in other comprehensive income in the period that changes in fair value
occur and is reclassified to income in the same period that the hedged item
affects income. The gain or loss on derivatives that have not been
designated as hedging instruments is included in current income in the period
that changes in fair value occur. Upon adoption of SFAS 133, the Corporation
recognized a pretax loss of $.5 million in other (income) expense, net.
Foreign Currency Risk
Foreign currency risk is managed by the use of foreign currency forward and
swap contracts. The use of these contracts allows management of transactional
exposure to exchange rate fluctuations because the gains or losses incurred on
the derivative instruments will offset, in whole or in part, losses or gains on
the underlying foreign currency exposure. Management of foreign currency
transactional exposures was not changed during 2002, and management does not
foresee or expect any significant change in such exposures or in the strategies
it employs to manage them in the near future.
Foreign currency contracts and transactional exposures are sensitive to
changes in foreign currency exchange rates. As of December 31, 2002, our largest
exposures to losses on monetary assets due to changes in foreign currency
exchange rates were the pound sterling, the Mexican peso and the euro. If a
10 percent unfavorable change in each of these foreign currencies were to occur,
pretax losses of approximately $12 million, $12 million and $2 million,
respectively, would result. As of December 31, 2002, a 10 percent unfavorable
change in the exchange rate of the U.S. dollar against the prevailing market
rates of our significant foreign currencies involving balance sheet
transactional exposures would have resulted in a net pretax loss of
approximately $30 million. These hypothetical losses on transactional exposures
are based on the difference between the December 31, 2002 rates and the assumed
exchange rates. In the view of management, the above hypothetical losses
resulting from these assumed changes in foreign currency exchange rates are not
material to the Corporation's consolidated financial position, results of
operations or cash flows.
The translation of the balance sheets of our non-U.S. operations into U.S.
dollars also is sensitive to changes in foreign currency exchange rates. As of
December 31, 2002, our largest translation exposures due to changes in foreign
currency exchange rates were the Australian dollar, the euro, the Canadian
dollar and the Mexican peso. If a 10 percent unfavorable change in each of these
foreign currency exchange rates were to occur, our unrealized translation
adjustment ("UTA") would increase by about $55 million, $52 million, $48 million
and $34 million, respectively. These increases in UTA would reduce stockholders'
equity. As of December 31, 2002, a 10 percent unfavorable change in the exchange
rate of the U.S. dollar against the prevailing market rates of all of our
significant foreign currency translation exposures would have reduced
stockholders' equity approximately $290 million. These hypothetical increases in
UTA are based on the difference between the December 31, 2002 exchange rates and
the assumed exchange rates. In the view of management, the above hypothetical
UTA adjustments resulting from these assumed changes in foreign currency
exchange rates are not material to the Corporation's consolidated financial
position.
Interest Rate Risk
Interest rate risk is managed through the maintenance of a portfolio of
variable- and fixed-rate debt composed of short- and long-term instruments. The
objective is to maintain a cost-effective mix that management deems appropriate.
At December 31, 2002, the debt portfolio was composed of approximately
40 percent variable-rate debt, adjusted for the effect of variable-rate assets,
and 60 percent fixed-rate debt. The strategy employed to manage exposure to
interest rate fluctuations did not change significantly during 2002, and
management does not foresee or expect any significant changes in its exposure to
interest rate fluctuations or in how such exposure is managed in the near
future.
We perform two separate tests to determine whether changes in interest
rates would have a significant effect on our financial position or future
results of operations. Both tests are based on our consolidated debt levels at
the time of the test. The first test estimates the effect of interest rate
changes on our fixed-rate debt. Interest rate changes would result in gains or
losses in the market value of fixed-rate debt due to differences between the
current market interest rates and the rates governing these instruments. With
respect to fixed-rate debt outstanding at December 31, 2002, a 10 percent change
in interest rates would have increased the fair value of fixed-rate debt by
about $110 million. The second test estimates the potential effect on future
pretax income that would result from increased interest rates applied to our
current level of variable-rate debt. With respect to commercial paper and other
variable-rate debt, a 10 percent increase in interest rates would have had no
material effect on the future results of operations or cash flows.
Commodity Price Risk
The Corporation is subject to commodity price risk, the most significant of
which relates to the price of pulp. Selling prices of tissue products are
influenced, in part, by the market price for pulp, which is determined by
industry supply and demand. On a worldwide basis, the Corporation supplies
approximately 40 percent of its virgin fiber needs from internal pulp
manufacturing operations. Management still intends to reduce its level of pulp
integration, when market conditions permit, to approximately 20 percent, and
such a reduction in pulp integration, if accomplished, could increase the
Corporation's commodity price risk. Specifically, increases in pulp prices could
adversely affect earnings if selling prices are not adjusted or if such
adjustments significantly trail the increases in pulp prices. Derivative
instruments have not been used to manage these risks. Management does not
believe that commodity price risk is material to the Corporation's business or
its consolidated financial position, results of operations or cash flows.
In addition, the Corporation is subject to price risk for utilities,
primarily natural gas, which are used in its manufacturing operations.
Derivative instruments are used to hedge this risk when it is deemed prudent to
do so by management.
Inflation Risk
The Corporation's inflation risk is managed on an entity-by-entity basis through
selective price increases, productivity increases and cost-containment measures.
Management does not believe that inflation risk is material to the Corporation's
business or its consolidated financial position, results of operations or cash
flows.
Other Information
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of net sales and
expenses during the reporting period. Actual results could differ from these
estimates. Changes in these estimates are recorded when known. The most critical
accounting estimates used by management in the preparation of the Corporation's
consolidated financial statements are for consumer and trade promotion and
rebate accruals, postretirement and other employee benefits, workers
compensation claims and certain product liability risks, excess and obsolete
inventory, allowances for doubtful accounts, deferred tax assets and
contingencies.
Pension Plans
The Corporation and its subsidiaries in North America and the United Kingdom
have defined benefit pension plans (these plans, which comprise more than
90 percent of the total defined benefit pension fund assets and obligations, are
referred to as the "Principal Plans") and/or defined contribution retirement
plans covering substantially all regular employees. Certain other subsidiaries
have defined benefit pension plans or, in certain countries, termination pay
plans covering substantially all regular
employees. The funding policy for the Principal Plans is to contribute assets to
fully fund the accumulated benefit obligation ("ABO"). Subject to regulatory and
tax deductibility limits, any funding shortfall will be eliminated over a
reasonable number of years. Nonqualified U.S. plans providing benefits in excess
of limitations imposed by the U.S. income tax code are not funded. Funding for
the remaining defined benefit plans outside the U.S. is based on legal
requirements, tax considerations, investment opportunities, and customary
business practices in such countries.
Consolidated pension expense for defined benefit pension plans was
approximately $32 million in 2002 compared with income of about $20 million for
2001. Pension expense/income is calculated based upon a number of actuarial
assumptions applied to each of the defined benefit plans. The weighted-average
expected long-term rate of return on pension fund assets used to calculate
pension expense for 2002 was 9.19 percent and will be 8.42 percent for 2003. The
expected long-term rate of return on pension fund assets was determined based on
several factors, including input from our pension investment consultant, and our
projected long-term returns of broad equity and bond indices. We also considered
our historical U.S. plan 10-year and 15-year compounded annual returns of
9.7 percent and 10.1 percent, respectively, which have been in excess of these
broad equity and bond benchmark indices. We anticipate that on average the
investment managers for each of the plans comprising the Principal Plans will
generate annual long-term rates of return of at least 8.5 percent. Our expected
long-term rate of return on the assets in the Principal Plans is based on an
asset allocation assumption of about 70 percent with equity managers, with
expected long-term rates of return of approximately 10 percent, and 30 percent
with fixed income managers, with an expected long-term rate of return of about
6 percent. We regularly review our actual asset allocation and periodically
rebalance our investments to our targeted allocation when considered
appropriate. Also, when deemed appropriate, we execute hedging strategies using
index options and futures to limit the downside exposure of certain investments
by trading off upside potential above an acceptable level. We executed such a
hedging strategy in both 2002 and 2001, and we have a hedging strategy in place
for 2003. We will continue to evaluate our long-term rate of return assumptions
at least annually and will adjust them as necessary.
We determine pension expense on the fair value of assets rather than a
market-related value of assets. Investment gains or losses represent the
difference between the expected return calculated using the fair value of assets
and the actual return based on the fair value of assets. We recognize the
variance between actual and expected gains and losses on pension assets in
pension expense more rapidly than we would if we used a market-related value for
plan assets. As of December 31, 2002, the Principal Plans had cumulative
unrecognized investment losses and other actuarial losses of approximately
$1.3 billion. These unrecognized net losses may increase our future pension
expense if not offset by (i) actual investment returns that exceed the assumed
investment returns, or (ii) other factors, including reduced pension liabilities
arising from higher discount rates used to calculate our pension obligations, or
(iii) other actuarial gains, including whether such accumulated actuarial losses
at each measurement date exceed the "corridor" determined under SFAS 87,
Employers' Accounting for Pensions.
The discount (or settlement) rate that we utilize for determining the
present value of future pension obligations generally has been based in the U.S.
on the yield reported for the long-term AA-rated corporate bond indexes,
converted to an equivalent one-year compound basis. From time-to-time, and most
recently at December 31, 2002, we validated this practice by assembling a
hypothetical portfolio of high-quality debt securities where the portfolio cash
flows correspond to expected future benefit payments. We use similar techniques
for establishing the discount rates for our non-U.S. Principal Plans. The
weighted-average discount rate for the Principal Plans decreased to 6.68 percent
at December 31, 2002 from 7.07 percent at December 31, 2001.
We estimate that our consolidated pension expense will approximate
$170 million annually over the next several years. This estimate reflects the
effect of the actuarial losses and is based on an expected weighted-average
long-term rate of return on assets in the Principal Plans of 8.50 percent, a
weighted-
average discount rate of 6.68 percent and various other assumptions. Future
actual pension expense will depend on future investment performance, the
Corporation's contributions to the pension trusts, changes in discount rates and
various other factors related to the covered employees in the plans.
If the expected long-term rate of return on assets for our Principal Plans
was lowered by 0.25 percent, our annual pension expense would increase by
approximately $8 million. If the discount rate assumptions for these same plans
were reduced by 0.25 percent, our annual pension expense would increase by
approximately $10 million and our December 31, 2002 minimum pension liability
would increase by about $116 million.
The fair value of the assets in our defined benefit plans decreased from
$3.7 billion at December 31, 2001 to $3.4 billion at December 31, 2002,
primarily due to investment losses and cash pension benefit payments net of our
plan contributions. Recent investment performance and lower discount rates have
caused the projected benefit obligations (the "PBO") of the defined benefit
plans to exceed the fair value of plan assets by approximately $1 billion at
December 31, 2002, compared with a shortfall of approximately $.3 billion at
December 31, 2001. These same factors have caused the ABO of our defined benefit
plans to exceed plan assets by about $.7 billion at the end of 2002. At the end
of 2001, the ABO and the fair value of plan assets were essentially even. On a
consolidated basis, we contributed $126.0 million to the defined benefit plans
in 2002 compared with $12.8 million in 2001. We expect our annual contributions
to range from about $75 million to $150 million over the next several years.
The discount rate used for each country's pension obligation is identical
to the discount rate used for that country's other postretirement obligation.
The discount rates displayed for the two types of obligations for the
Corporation's consolidated operations may appear different due to the weighting
used in the calculation of the two weighted-average discount rates.
Other
Among those factors affecting the accruals for promotion and rebate costs are
estimates of the number of consumer coupons that will be redeemed, the level of
support that trade customers have provided to the Corporation and the quantity
of products distributors have sold to specific customers. Generally, the
Corporation bases its estimates on historical patterns of expense, influenced by
judgments about current market conditions. Promotion accruals as of December 31,
2002 and 2001 were $227.7 million and $191.7 million, respectively. The increase
was primarily due to higher promotional activity in 2002 driven by the
competitive environment.
The Corporation retains selected property and casualty risks, primarily
related to workers compensation and certain product liability. Accrued
liabilities for incurred but not reported events related to these retained risks
are calculated based upon loss development factors provided to the Corporation
by its external insurance brokers. The Corporation's total cost for property and
casualty risks has in recent years been relatively stable and this trend is
expected to continue.
As of December 31, 2002, the Corporation has recorded deferred tax assets
related to income tax loss carryforwards and income tax credits totaling
$483.2 million and has established valuation allowances against these deferred
tax assets of $240.6 million, thereby resulting in a net deferred tax asset of
$242.6 million. As of December 31, 2001, the net deferred tax asset was
$190.4 million. These income tax losses and credits are in non-U.S. taxing
jurisdictions and in certain states within the U.S. In determining the valuation
allowances to establish against these deferred tax assets, the Corporation
considers many factors, including the specific taxing jurisdiction, the
carryforward period, income tax strategies and forecasted earnings for the
entities in each jurisdiction. A valuation allowance is recognized if, based on
the weight of available evidence, the Corporation concludes that it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
Contingencies and Legal Matters
Litigation
The following is a brief description of certain legal and administrative
proceedings to which the Corporation or its subsidiaries is a party or to which
the Corporation's or its subsidiaries' properties are subject. In management's
opinion, none of the legal and administrative proceedings described below,
individually or in the aggregate, is expected to have a material adverse effect
on the Corporation's business, financial condition or results of operations.
As of December 31, 2002, approximately 165 product liability lawsuits
seeking monetary damages, in most cases of an unspecified amount, are pending in
federal and state courts against Safeskin. Safeskin is typically one of several
defendants who manufacture or sell natural rubber latex gloves. These lawsuits
allege injuries ranging from dermatitis to severe allergic reactions caused by
the residual chemicals or latex proteins in gloves worn by health care workers
and other individuals while performing their duties. Safeskin has referred the
defense of these lawsuits to its insurance carriers and management believes its
insurance coverage is adequate for these types of claims.
Safeskin and certain of its former officers and directors are defendants in
two cases filed in 1999, prior to the acquisition of Safeskin by the
Corporation. One case is a class action lawsuit alleging violations of the
federal securities laws and the other is a shareholder derivative action
alleging breach of fiduciary duty, waste of corporate assets and gross
negligence in connection with a stock repurchase program undertaken by Safeskin.
In December 2002, a settlement agreement was entered into pursuant to which all
claims against Safeskin and the other defendants in these two cases are to be
released and dismissed with prejudice and without admission of liability or
wrongdoing by any party in exchange for $55 million, most of which is covered by
insurance. The Corporation recorded a charge of $21 million in the fourth
quarter of 2002 related to this matter. The settlement is subject to notice to
the class and approval by the U.S. District Court for the Southern District of
California. Court approval is expected in March 2003.
As of December 31, 2002, the Corporation, along with many other
nonaffiliated companies, was a party to lawsuits with allegations of personal
injury resulting from asbestos exposure on the defendants' premises and
allegations that the defendants manufactured, sold, distributed or installed
products which cause asbestos-related lung disease. These general allegations
are often made against the Corporation without any apparent evidence or
identification of a specific product or premises of the Corporation. The
Corporation has denied the allegations and raised numerous defenses in all of
these asbestos cases. All asbestos claims have been tendered to the
Corporation's insurance carriers for defense and indemnity. The financial
statements reflect appropriate accruals for the Corporation's portion of the
costs estimated to be incurred in connection with settling these claims.
Contingency
One of the Corporation's North American tissue mills has an agreement to provide
its local utility company a specified amount of electric power per year for the
next 16 years. In the event that the mill was shut down, the Corporation would
be required to continue to operate the power generation facility on behalf of
its owner, the local utility company. The net present value of the cost to
fulfill this agreement as of December 31, 2002 is estimated to be approximately
$87 million. However, management considers the probability of closure of this
mill to be remote.
Environmental Matters
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 or results of operations.
Accounting Standards Changes and New Pronouncements
During 2001, the EITF issued EITF 01-9, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products. Under EITF 01-9,
the cost of promotion activities offered to customers is classified as a
reduction in sales revenue. In addition, the estimated redemption value of
consumer coupons is required to be recorded at the time the coupons are issued
and classified as a reduction in sales revenue. The Corporation adopted
EITF 01-9 effective January 1, 2002, and reclassified the face value of coupons
and other applicable promotional activities from expense to a reduction in
revenue, which reduced net sales by $1.2 billion and $1.1 billion for 2001 and
2000, respectively. The adoption of EITF 01-9 did not change reported earnings
for 2001 and 2000 but did require the recording of a cumulative effect of a
change in accounting principle in 2002, equal to an after tax charge of
approximately $.02 per share, which resulted from a change in the period for
recognizing the face value of coupons.
On January 1, 2002, the Corporation adopted SFAS 142. Under this standard,
goodwill and intangible assets having indefinite lives are no longer amortized
but are subject to annual impairment tests with any resulting impairment loss
recognized during the period of impairment. Accordingly, the Corporation
discontinued amortization of goodwill and also determined that it has no
identified intangible assets with indefinite useful lives. The Corporation has
completed the required annual testing of goodwill for impairment and has
determined that none of its goodwill is impaired.
On January 1, 2002, the Corporation adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 contains accounting and
reporting requirements for the impairment and disposal of long-lived assets and
discontinued operations. Adoption of SFAS 144 had no effect on the Corporation's
financial statements.
SFAS 143, Accounting for Asset Retirement Obligations, was issued in June
2001 and is effective beginning January 1, 2003. SFAS 143 addresses the
accounting and reporting for the retirement of long-lived assets and related
retirement costs. The Corporation does not expect the adoption of SFAS 143 to
have a material effect on its financial statements.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The Corporation will adopt SFAS 146 on January 1, 2003, and does
not expect its adoption to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation and Disclosure, which amends SFAS 123 and provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based compensation. The Corporation currently plans to
continue to account for stock-based compensation using the intrinsic-value
method permitted by Accounting Principles Board Opinion 25.
In November 2002, the FASB issued Interpretation ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires disclosure of guarantees.
It also requires liability recognition for the fair value of guarantees made
after December 31, 2002. The Corporation will adopt the liability recognition
requirements of FIN 45 effective January 1, 2003 and does not expect such
adoption to have a material effect on its financial statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, which interprets Accounting Research Bulletin 51, Consolidated
Financial Statements, and requires consolidation of certain entities in which
the primary beneficiary has a controlling financial interest despite not having
voting control of such entities. It is reasonably possible the Corporation will
be required to consolidate the entities described in the Variable Interest
Entities section of this Management's Discussion and Analysis beginning in the
third quarter of 2003. Consolidation of these entities is not expected to have a
material adverse effect on the Corporation's results of operations or financial
position, including its ability to obtain financing, because the debt of these
entities is nonrecourse and the notes receivable are guaranteed.
Outlook
The Corporation expects 2003 to be another challenging year as it faces a
continuing tough competitive environment and an anticipated increase in pension
costs of approximately $145 million. However, the Corporation expects net sales
to rise in the low-to-mid single digits with product innovation across its three
global segments as the key driver of sales growth. The Corporation also has
plans to reduce costs by $175 million to $200 million in 2003. The Corporation
expects cash flow to continue to be strong in 2003 which will allow it to
repurchase approximately 2 percent of its outstanding common stock in 2003,
depending on market conditions. The Corporation anticipates spending
approximately $900 million on capital projects in 2003, with most of the
expenditures earmarked for projects that will deliver growth, cost savings or
product improvements. The Corporation's strong cash flow has given it the
ability to raise its dividend by 13.3 percent for 2003, marking the 31st
consecutive annual increase in its dividend.
Information Concerning Forward-Looking Statements
Certain matters discussed in this report concerning, among other things, the
business outlook, including new product introductions, cost savings and
acquisitions, anticipated financial and operating results, strategies,
contingencies and contemplated transactions of the Corporation, constitute
forward-looking statements and are based upon management's expectations and
beliefs concerning future events impacting the Corporation. There can be no
assurance that these events will occur or that the Corporation's results will be
as estimated.
The assumptions used as a basis for the forward-looking statements include
many estimates that, among other things, depend on the achievement of future
cost savings and projected volume increases. Furthermore, the Corporation has
assumed that it will continue to identify suitable acquisition candidates in
those product markets where it intends to grow by acquisition. In addition, many
factors outside the control of the Corporation, including the prices of the
Corporation's raw materials, potential competitive pressures on selling prices
or advertising and promotion expenses for the Corporation's products, and
fluctuations in foreign currency exchange rates, as well as general economic
conditions in the markets in which the Corporation does business, also could
impact the realization of such estimates.
For a description of these and other 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 I of the
Corporation's Annual Report on Form 10-K entitled "Factors That May Affect
Future Results."
CONSOLIDATED INCOME STATEMENT
Kimberly-Clark Corporation and Subsidiaries
Year Ended December 31
---------------------------------------
(Millions of dollars, except per share amounts) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Net Sales ................................................................... $13,566.3 $13,287.6 $12,909.5
Cost of products sold .................................................... 8,750.7 8,618.0 8,232.8
--------- --------- ---------
Gross Profit ............................................................... 4,815.6 4,669.6 4,676.7
Marketing, research and general expenses ................................. 2,278.5 2,158.3 2,065.4
Goodwill amortization .................................................... - 89.4 81.7
Other (income) expense, net .............................................. 73.3 83.7 (104.2)
--------- --------- ---------
Operating Profit ........................................................... 2,463.8 2,338.2 2,633.8
Interest income .......................................................... 15.7 17.8 24.0
Interest expense ......................................................... (182.1) (191.6) (221.8)
--------- --------- ---------
Income Before Income Taxes .................................................. 2,297.4 2,164.4 2,436.0
Provision for income taxes ............................................... 666.6 645.7 758.5
--------- --------- ---------
Income Before Equity Interests .............................................. 1,630.8 1,518.7 1,677.5
Share of net income of equity companies .................................. 113.3 154.4 186.4
Minority owners' share of subsidiaries' net income ....................... (58.1) (63.2) (63.3)
--------- --------- ---------
Income Before Cumulative Effect of Accounting Change ........................ 1,686.0 1,609.9 1,800.6
Cumulative effect of accounting change,
net of income taxes .................................................... (11.4) - -
--------- --------- ---------
Net Income................................................................... $ 1,674.6 $ 1,609.9 $ 1,800.6
========= ========= =========
Per Share Basis
Basic
Income before cumulative effect of accounting change ................... $ 3.26 $ 3.04 $ 3.34
========= ========= =========
Net income ............................................................ $ 3.24 $ 3.04 $ 3.34
========= ========= =========
Diluted
Income before cumulative effect of accounting change ................... $ 3.24 $ 3.02 $ 3.31
========= ========= =========
Net income ............................................................. $ 3.22 $ 3.02 $ 3.31
========= ========= =========
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
Kimberly-Clark Corporation and Subsidiaries
December 31
-------------------------
(Millions of dollars) ASSETS 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents ........................................................... $ 494.5 $ 364.5
Accounts receivable, net ............................................................ 1,952.1 1,672.4
Inventories ......................................................................... 1,430.1 1,494.1
Deferred income taxes ............................................................... 191.3 239.8
Prepaid expenses and other .......................................................... 205.9 142.2
--------- ---------
Total Current Assets ............................................................ 4,273.9 3,913.0
Property
Land................................................................................. 266.0 242.5
Buildings ........................................................................... 2,042.9 1,921.8
Machinery and equipment ............................................................. 10,812.5 10,073.0
Construction in progress ............................................................ 442.6 477.4
--------- ---------
13,564.0 12,714.7
Less accumulated depreciation ....................................................... 5,944.6 5,388.2
--------- ---------
Net Property .................................................................... 7,619.4 7,326.5
Investments in Equity Companies .......................................................... 571.2 705.3
Goodwill ................................................................................. 2,254.9 1,949.2
Other Assets ............................................................................. 866.4 1,113.6
--------- ---------
$15,585.8 $15,007.6
========= =========
See Notes to Consolidated Financial Statements.
December 31
------------------------
(Millions of dollars) LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Debt payable within one year .......................................................... $ 1,086.6 $ 1,236.1
Trade accounts payable ................................................................ 844.5 768.9
Other payables ........................................................................ 277.5 335.3
Accrued expenses ...................................................................... 1,271.4 1,225.3
Accrued income taxes .................................................................. 404.3 456.2
Dividends payable ..................................................................... 154.0 146.5
--------- ---------
Total Current Liabilities ........................................................... 4,038.3 4,168.3
Long-Term Debt ........................................................................... 2,844.0 2,424.0
Noncurrent Employee Benefit and Other Obligations ........................................ 1,390.0 916.0
Deferred Income Taxes .................................................................... 854.2 1,004.6
Minority Owners' Interests in Subsidiaries ............................................... 255.5 309.4
Preferred Securities of Subsidiary........................................................ 553.5 538.4
Stockholders' Equity
Preferred stock - no par value - authorized 20.0 million shares,
none issued ......................................................................... - -
Common stock - $1.25 par value - authorized 1.2 billion shares;
issued 568.6 million shares at December 31, 2002 and 2001............................ 710.8 710.8
Additional paid-in capital ............................................................ 419.0 415.6
Common stock held in treasury, at cost - 57.8 million and 47.6 million
shares at December 31, 2002 and 2001 ................................................ (3,350.6) (2,748.2)
Accumulated other comprehensive income (loss) ......................................... (2,157.7) (1,696.2)
Retained earnings ..................................................................... 10,054.0 8,999.5
Unearned compensation on restricted stock.............................................. (25.2) (34.6)
--------- ---------
Total Stockholders' Equity .......................................................... 5,650.3 5,646.9
--------- ---------
$15,585.8 $15,007.6
========= =========
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Kimberly-Clark Corporation and Subsidiaries
Common Stock Unearned Accumulated
Issued Additional Treasury Stock Compensation Other
(Dollars in millions, -------------- Paid-in ----------------- on Restricted Retained Comprehensive Comprehensive
shares in thousands) Shares Amount Capital Shares Amount Stock Earnings Income (Loss) Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ..... 568,597 $710.8 $166.4 27,969 $(1,420.4) $(13.5) $ 6,764.6 $(1,114.8)
Net income ....................... - - - - - - 1,800.6 - $1,800.6
Other comprehensive income:
Unrealized translation ........ - - - - - - - (218.8) (218.8)
Minimum pension liability...... - - - - - - - (4.0) (4.0)
--------
Total comprehensive income........ $1,577.8
========
Options exercised and other
awards ......................... - - (63.7) (2,901) 154.0 - - -
Stock option income tax benefits.. - - 25.2 - - - - -
Shares repurchased ............... - - - 21,217 (1,190.7) - - -
Acquisition of Safeskin .......... - - 282.4 (10,695) 464.0 - - -
Net issuance of restricted stock,
less amortization .............. - - 2.0 (357) 19.0 (12.6) - -
Dividends declared ............... - - - - - - (583.2) -
------- ------ ------ ------- --------- ------ --------- ---------
Balance at December 31, 2000 ..... 568,597 710.8 412.3 35,233 (1,974.1) (26.1) 7,982.0 (1,337.6)
Net income ....................... - - - - - - 1,609.9 - $1,609.9
Other comprehensive income:
Unrealized translation ........ - - - - - - - (256.7) (256.7)
Minimum pension liability...... - - - - - - - (102.1) (102.1)
Other ......................... - - - - - - - .2 .2
--------
Total comprehensive income........ $1,251.3
========
Options exercised and other
awards ......................... - - (17.5) (2,433) 119.0 - - -
Stock option income tax benefits.. - - 17.7 - - - - -
Shares repurchased ............... - - - 15,141 (909.7) - - -
Net issuance of restricted stock,
less amortization .............. - - 3.1 (354) 16.6 (8.5) - -
Dividends declared ............... - - - - - - (592.4) -
------- ------ ------ ------- --------- ------ --------- ---------
Balance at December 31, 2001...... 568,597 710.8 415.6 47,587 (2,748.2) (34.6) 8,999.5 (1,696.2)
Net income ....................... - - - - - - 1,674.6 - $1,674.6
Other comprehensive income:
Unrealized translation ........ - - - - - - - 96.4 96.4
Minimum pension liability...... - - - - - - - (555.7) (555.7)
Other ......................... - - - - - - - (2.2) (2.2)
--------
Total comprehensive income........ $1,213.1
========
Options exercised and other
awards ......................... - - (7.7) (1,627) 76.6 - - -
Stock option income tax benefits.. - - 9.9 - - - - -
Shares repurchased ............... - - - 11,980 (683.6) - - -
Net issuance of restricted stock,
less amortization .............. - - 1.2 (98) 4.6 9.4 - -
Dividends declared ............... - - - - - - (620.1) -
------- ------ ------ ------- --------- ------ --------- ---------
Balance at December 31, 2002 ..... 568,597 $710.8 $419.0 57,842 $(3,350.6) $(25.2) $10,054.0 $(2,157.7)
======= ====== ====== ======= ========= ====== ========= =========
See Notes to Consolidated Financial Statements.
CONSOLIDATED CASH FLOW STATEMENT
Kimberly-Clark Corporation and Subsidiaries
Year Ended December 31
-------------------------------------
(Millions of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operations
Net income ............................................................... $1,674.6 $1,609.9 $1,800.6
Cumulative effect of accounting change, net of income taxes .............. 11.4 - -
Depreciation ............................................................. 706.6 650.2 591.7
Goodwill amortization .................................................... - 89.4 81.7
Deferred income tax provision ............................................ 197.6 39.7 84.1
Net losses on asset dispositions ......................................... 38.4 102.0 19.3
Equity companies' earnings in excess of dividends paid ................... (8.2) (39.1) (67.0)
Minority owners' share of subsidiaries' net income ....................... 58.1 63.2 63.3
Increase in operating working capital .................................... (197.6) (232.6) (338.3)
Postretirement benefits .................................................. (118.2) (54.7) (121.9)
Other .................................................................... 61.5 25.8 19.7
-------- -------- --------
Cash Provided by Operations ............................................ 2,424.2 2,253.8 2,133.2
-------- -------- --------
Investing
Capital spending ......................................................... (870.7) (1,099.5) (1,170.3)
Acquisitions of businesses, net of cash acquired ......................... (410.8) (135.0) (294.5)
Proceeds from dispositions of property and businesses .................... 6.3 34.4 44.5
Investments in marketable securities ..................................... (9.0) (19.7) -
Proceeds from sales of investments ....................................... 44.9 33.1 53.1
Net increase in time deposits ............................................ (36.8) (21.3) (19.9)
Proceeds from notes receivable ........................................... - - 220.0
Other .................................................................... (18.0) (39.5) (26.3)
-------- -------- --------
Cash Used for Investing ................................................ (1,294.1) (1,247.5) (1,193.4)
-------- -------- --------
Financing
Cash dividends paid ...................................................... (612.7) (590.1) (580.1)
Net (decrease) increase in short-term debt................................ (423.9) 288.4 710.7
Proceeds from issuance of long-term debt ................................. 823.1 76.5 353.7
Repayments of long-term debt ............................................. (154.6) (271.8) (422.9)
Issuance of preferred securities of subsidiary............................ - 516.5 -
Proceeds from exercise of stock options .................................. 68.9 101.5 90.3
Acquisitions of common stock for the treasury ............................ (680.7) (891.5) (1,190.7)
Other .................................................................... (34.9) (33.5) (25.6)
-------- -------- --------
Cash Used for Financing ................................................ (1,014.8) (804.0) (1,064.6)
-------- -------- ---------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents.......................................................... 14.7 (24.5) (11.3)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents ............................ 130.0 177.8 (136.1)
Cash and Cash Equivalents, beginning of year ................................ 364.5 186.7 322.8
-------- -------- --------
Cash and Cash Equivalents, end of year ...................................... $ 494.5 $ 364.5 $ 186.7
======== ======== ========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kimberly-Clark Corporation and Subsidiaries
Note 1. Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Kimberly-Clark
Corporation and all subsidiaries that are more than 50 percent owned and
controlled (the "Corporation"). All significant intercompany transactions and
accounts are eliminated in consolidation. Certain reclassifications have been
made to conform prior year data to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of net sales and
expenses during the reporting period. Actual results could differ from these
estimates. Changes in these estimates are recorded when known. Estimates are
used in accounting for, among other things, consumer and trade promotion and
rebate accruals, postretirement and other employee benefits, workers
compensation claims and certain product liability risks, excess and obsolete
inventory, allowances for doubtful accounts, deferred tax assets and
contingencies.
Cash Equivalents
Cash equivalents are short-term investments with an original maturity date of
three months or less.
Inventories and Distribution Costs
Most U.S. inventories are valued at the lower of cost, using the Last-In,
First-Out (LIFO) method for financial reporting purposes, or market. The balance
of the U.S. inventories and inventories of consolidated operations outside the
U.S. are valued at the lower of cost, using either the First-In, First-Out
(FIFO) or weighted-average cost methods, or market. Distribution costs are
classified as cost of products sold.
Available-for-Sale Securities
Available-for-sale securities, consisting of debt securities issued by non-U.S.
governments and unaffiliated corporations with maturity dates of two years or
less, are carried at market value. Securities with original maturity dates of
less than one year are included in prepaid and other assets and were
$10.5 million and $7.5 million at December 31, 2002 and 2001, respectively.
Securities with original maturity dates greater than one year are included in
other assets and were $8.9 million and $12.5 million at December 31, 2002
and 2001, respectively. The securities are held by the Corporation's
consolidated foreign financing subsidiary formed in February 2001 as described
in Note 9. Unrealized holding gains or losses on these securities are recorded
in other comprehensive income until realized. No significant gains or losses
were recognized in income during 2002 or 2001.
Property and Depreciation
For financial reporting purposes, property, plant and equipment are stated at
cost and are depreciated on the straight-line or units-of-production method.
Buildings are depreciated over their estimated useful lives ranging from
7 to 50 years. Machinery and equipment are depreciated over their estimated
Note 1. (Continued)
useful lives ranging from 2 to 40 years. For income tax purposes, accelerated
methods of depreciation are used. The cost of computer software that is
purchased or developed for internal use is capitalized in accordance with the
capitalization criteria of Statement of Position 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. These costs are
amortized on the straight-line method over the estimated useful life of the
software but not in excess of five years.
Estimated useful lives are periodically reviewed and, when warranted, changes
are made that generally result in an acceleration of depreciation. Long-lived
assets, including computer software, are reviewed for impairment whenever events
or changes in circumstances indicate that their cost may not be recoverable. An
impairment loss would be recognized when estimated undiscounted future cash
flows from the use of the asset and its eventual disposition are less than its
carrying amount. Measurement of an impairment loss would be based on discounted
future cash flows compared to the carrying amount of the assets. When property
is sold or retired, the cost of the property and the related accumulated
depreciation are removed from the balance sheet and any gain or loss on the
transaction is included in income.
The cost of major maintenance performed on manufacturing facilities, composed of
labor, materials and other incremental costs, is charged to operations as
incurred. Start-up costs for new or expanded facilities are expensed as
incurred.
Investments in Equity Companies
Investments in equity companies over which we exercise significant influence and
that, in general, are at least 20 percent owned are stated at cost plus equity
in undistributed net income. These investments are evaluated for impairment in
accordance with the requirements of Accounting Principles Board ("APB") Opinion
18, The Equity Method of Accounting for Investments in Common Stock. Although no
impairment losses on equity company investments have yet been recognized, an
impairment loss would be recorded whenever a decline in value of an equity
investment below its carrying amount is determined to be other than temporary.
In judging "other than temporary", management would consider the length of time
and extent to which the value of the investment has been less than the carrying
amount of the equity company, the near-term and longer-term operating and
financial prospects of the equity company, and management's longer-term intent
of retaining its investment in the equity company.
Revenue Recognition
Sales revenue is recognized at the time of product shipment to unaffiliated
customers. Sales are reported net of allowances for estimated returns, consumer
and trade promotions and freight allowed.
Sales Incentives and Trade Promotion Allowances
During 2001, the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") issued EITF 01-9, Accounting for Consideration Given by
a Vendor to a Customer or a Reseller of the Vendor's Products. Under EITF 01-9,
the cost of promotion activities offered to customers is classified as a
reduction in sales revenue. In addition, the estimated redemption value of
consumer coupons is required to be recorded at the time the coupons are issued
and classified as a reduction in sales revenue. The Corporation adopted
EITF 01-9 effective January 1, 2002, and reclassified the face value of coupons
and other applicable promotional activities from expense to a reduction in
revenue, which reduced net sales by $1.2 billion and $1.1 billion for
2001 and 2000, respectively. The adoption of EITF 01-9 did not change reported
earnings for 2001 and 2000 but did
Note 1. (Continued)
require the recording of a cumulative effect of a change in accounting principle
in 2002, equal to an after-tax charge of approximately $.02 per share, which
resulted from a change in the period for recognizing the face value of coupons.
Advertising Expense
Advertising costs are expensed in the year the related advertisement is first
presented by the media. For interim reporting purposes, advertising expenses are
charged to operations as a percentage of sales based on estimated sales and
related advertising expense for the full year.
Research Expense
Research and development costs are charged to expense as incurred.
Environmental Expenditures
Environmental expenditures related to current operations that qualify as
property, plant and equipment or which substantially increase the economic value
or extend the useful life of an asset are capitalized, and all other
expenditures are expensed as incurred. Environmental expenditures that relate to
an existing condition caused by past operations are expensed as incurred.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the costs can be reasonably estimated. Generally, the timing of
these accruals coincides with completion of a feasibility study or a commitment
to a formal plan of action.
Stock-Based Employee Compensation
The Corporation's stock-based employee compensation plan is described in Note 7.
The expense recognition and measurement principles of APB 25, Accounting for
Stock Issued to Employees, and related interpretations are followed in
accounting for this plan. No employee compensation for stock options has been
charged to earnings because the exercise prices of all stock options granted
under this plan have been equal to the market value of the Corporation's common
stock at the date of grant. The following presents 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 under the plan.
Year Ended December 31
--------------------------------------
(Millions of dollars, except per share amounts) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Net income, as reported ...................................................... $1,674.6 $1,609.9 $1,800.6
Less: Stock-based employee compensation determined under
the fair value requirements of SFAS 123, net of income
tax benefits ......................................................... 70.2 76.1 53.3
-------- -------- --------
Pro forma net income.......................................................... $1,604.4 $1,533.8 $1,747.3
======== ======== ========
Earnings per share
Basic - as reported ..................................................... $ 3.24 $ 3.04 $ 3.34
======== ======== ========
Basic - pro forma ....................................................... $ 3.10 $ 2.90 $ 3.24
======== ======== ========
Diluted - as reported ................................................... $ 3.22 $ 3.02 $ 3.31
======== ======== ========
Diluted - pro forma ..................................................... $ 3.09 $ 2.88 $ 3.21
======== ======== ========
Note 1. (Continued)
Pursuant to the requirements of SFAS 123, the weighted-average fair value of the
individual employee stock options granted during 2002, 2001 and 2000 have been
estimated as $16.57, $19.87 and $16.24, respectively, on the date of grant. The
fair values were determined using a Black-Scholes option-pricing model using the
following assumptions:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Dividend yield ............................................................. 1.97% 1.61% 2.04%
Volatility ................................................................. 26.91% 25.86% 26.20%
Risk-free interest rate .................................................... 4.30% 4.70% 6.50%
Expected life .............................................................. 5.8 years 5.8 years 5.8 years
Accounting Standards Changes and New Pronouncements
On January 1, 2002, the Corporation adopted SFAS 142, Goodwill and Other
Intangible Assets. Under this standard, goodwill and intangible assets having
indefinite lives are no longer amortized but are subject to annual impairment
tests with any resulting impairment loss recognized during the period of
impairment. Accordingly, the Corporation discontinued amortization of goodwill
and also determined that it has no identified intangible assets with indefinite
useful lives. The Corporation has completed the required annual testing of
goodwill for impairment and has determined that none of its goodwill is
impaired.
On January 1, 2002, the Corporation adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 contains accounting and
reporting requirements for the impairment and disposal of long-lived assets and
discontinued operations. Adoption of SFAS 144 had no effect on the Corporation's
financial statements.
SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001
and is effective beginning January 1, 2003. SFAS 143 addresses the accounting
and reporting for the retirement of long-lived assets and related retirement
costs. The Corporation does not expect the adoption of SFAS 143 to have a
material effect on its financial statements.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The Corporation will adopt SFAS 146 on January 1, 2003 and does
not expect its adoption to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation and Disclosure, which amends SFAS 123 and provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based compensation. The Corporation currently plans to
continue to account for stock-based compensation using the intrinsic-value
method permitted by APB 25.
In November 2002, the FASB issued Interpretation ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires disclosure of guarantees.
It also requires liability recognition for the fair value of guarantees made
after December 31, 2002. The Corporation will adopt the liability recognition
requirements of FIN 45 effective January 1, 2003 and does not expect such
adoption to have a material effect on its financial statements.
Note 1. (Continued)
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, which interprets Accounting Research Bulletin 51, Consolidated
Financial Statements, and requires consolidation of certain entities in which
the primary beneficiary has a controlling financial interest despite not having
voting control of such entities. It is reasonably possible the Corporation will
be required to consolidate the entities described in Note 13 beginning in the
third quarter of 2003. Consolidation of these entities is not expected to have a
material adverse effect on the Corporation's results of operations or financial
position, including its ability to obtain financing, because the debt of these
entities is nonrecourse and the notes receivable are guaranteed.
Note 2. Income Taxes
An analysis of the provision for income taxes follows:
Year Ended December 31
----------------------------------
(Millions of dollars) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Current income taxes:
United States ................................................................. $255.4 $363.9 $407.3
State ......................................................................... 19.9 52.5 36.5
Other countries ............................................................... 193.7 189.6 230.6
------ ------ ------
Total ....................................................................... 469.0 606.0 674.4
------ ------ ------
Deferred income taxes:
United States ................................................................. 183.3 115.4 91.3
State ......................................................................... 5.7 (17.9) 14.0
Other countries ............................................................... 8.6 (57.8) (21.2)
------ ------ -----
Total ....................................................................... 197.6 39.7 84.1
------ ------ -----
Total provision for income taxes(a) .............................................. $666.6 $645.7 $758.5
====== ====== ======
<FN>
(a) The 2002 amount excludes income tax benefits of $6.9 million related to the
cumulative effect of an accounting change.
</FN>
Income before income taxes is earned in the following tax jurisdictions:
Year Ended December 31
------------------------------------
(Millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
United States ................................................................ $1,758.2 $1,741.8 $1,787.5
Other countries .............................................................. 539.2 422.6 648.5
-------- -------- --------
Total income before income taxes(b) .......................................... $2,297.4 $2,164.4 $2,436.0
======== ======== ========
<FN>
(b) The 2002 amount excludes a charge of $18.3 million related to the cumulative
effect of an accounting change.
</FN>
Note 2. (Continued)
Deferred income tax assets (liabilities) are composed of the following:
December 31
---------------------------
(Millions of dollars) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Net current deferred income tax asset attributable to:
Pension, postretirement and other employee benefits .................................. $ 101.5 $ 112.7
Other accrued expenses................................................................ 90.1 101.2
Inventory............................................................................. (1.8) 18.0
Other ................................................................................ 5.2 8.0
Valuation allowances ................................................................. (3.7) (.1)
--------- ---------
Net current deferred income tax asset ................................................... $ 191.3 $ 239.8
========= =========
Net noncurrent deferred income tax asset attributable to:
Accumulated depreciation ............................................................. $ (59.1) $ (42.7)
Income tax loss carryforwards ........................................................ 388.4 299.9
Other ................................................................................ 40.7 29.6
Valuation allowances ................................................................. (197.6) (125.7)
--------- ---------
Net noncurrent deferred income tax asset included in other assets ..................... $ 172.4 $ 161.1
========= =========
Net noncurrent deferred income tax liability attributable to:
Accumulated depreciation.............................................................. $(1,215.5) $ (995.2)
Pension and other postretirement benefits ............................................ 471.3 207.1
Installment sales .................................................................... (188.1) (254.1)
Foreign tax credits .................................................................. 103.3 51.4
Other ................................................................................ 14.1 37.6
Valuation allowances ................................................................. (39.3) (51.4)
--------- ---------
Net noncurrent deferred income tax liability ............................................ $ (854.2) $(1,004.6)
========= =========
Valuation allowances increased $63.4 million and $18.4 million in 2002 and
2001, respectively. Valuation allowances at the end of 2002 primarily relate to
the potentially unusable portion of income tax loss carryforwards of
$1,071.2 million in jurisdictions outside the United States. If not
utilized against taxable income, $472.6 million of the loss carryforwards will
expire from 2003 through 2023. The remaining $598.6 million has no expiration
date.
Realization of deferred tax assets is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax assets, net of applicable valuation allowances, will be realized.
The amount of the deferred tax assets considered realizable could be reduced or
increased if estimates of future taxable income change during the carryforward
period.
Note 2. (Continued)
Presented below is a reconciliation of the income tax provision computed at the
U.S. federal statutory tax rate to the provision for income taxes.
Year Ended December 31
--------------------------------------------------------------------
2002 2001 2000
--------------------- ------------------------ ---------------------
(Millions of dollars) Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes ..................... $2,297.4 $2,164.4 $2,436.0
======== ======== ========
Tax at U.S. statutory rate ..................... $ 804.1 35.0% $ 757.5 35.0% $ 852.6 35.0%
State income taxes, net of federal
tax benefit ................................. 16.6 .7 22.5 1.0 32.8 1.3
Net operating losses realized .................. (14.8) (.6) (29.7) (1.4) (70.1) (2.9)
Other - net .................................... (139.3) (6.1) (104.6) (4.8) (56.8) (2.3)
-------- ---- -------- ---- -------- ---
Provision for income taxes ..................... $ 666.6 29.0% $ 645.7 29.8% $ 758.5 31.1%
======== ==== ======== ==== ======== ====
At December 31, 2002, income taxes have not been provided on approximately
$3.4 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.
Note 3. Postretirement and Other Benefits
Pension Plans
The Corporation and its subsidiaries in North America and the United Kingdom
have defined benefit and/or defined contribution retirement plans covering
substantially all regular employees. Certain other subsidiaries have defined
benefit pension plans or, in certain countries, termination pay plans covering
substantially all regular employees. The funding policy for the qualified
defined benefit plans in North America and the defined benefit plans in the
United Kingdom is to contribute assets to fully fund the accumulated benefit
obligation ("ABO"). Subject to regulatory and tax deductibility limits, any
funding shortfall will be eliminated over a reasonable number of years.
Nonqualified U.S. plans providing pension benefits in excess of limitations
imposed by the U.S. income tax code are not funded. Funding for the remaining
defined benefit plans outside the U.S. is based on legal requirements, tax
considerations, investment opportunities, and customary business practices in
such countries.
In accordance with SFAS 87, Employers' Accounting for Pensions, the Corporation
was required to record a minimum pension liability for underfunded plans
representing the excess of the unfunded ABO over previously recorded pension
cost liabilities. The minimum pension liability is included in noncurrent
employee benefit and other obligations on the balance sheet. An offsetting
charge is included as an intangible asset to the extent of unrecognized prior
service cost, and the balance is included in accumulated other comprehensive
income. The principal cause of the accrual for additional minimum pension
liability in 2002 was a decline in the value of equity securities held by the
North American and United Kingdom pension trusts and decreases in the discount
rates used to estimate the ABO. The accrual for additional minimum pension
liability in 2001 primarily resulted from the decline in the value of equity
securities held by the United Kingdom pension trusts.
Information about the minimum pension liability follows:
December 31
-----------------------
(Millions of dollars) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Minimum pension liability ..................................................................... $1,089.4 $181.2
Less intangible asset ......................................................................... 51.9 12.9
-------- ------
Accumulated other comprehensive income ........................................................ $1,037.5 $168.3
======== ======
Other Postretirement Benefit Plans
Substantially all retired employees of the Corporation and its North American
subsidiaries and certain international employees are covered by health care and
life insurance benefit plans. Certain benefits are based on years of service and
age at retirement. The plans are principally noncontributory for employees who
retired before 1993 and are contributory for most employees who retire after
1992. Certain U.S. plans limit the Corporation's cost of future annual per
capita retiree medical benefits to no more than 200 percent of the 1992 annual
per capita cost. These plans are expected to reach this limitation during 2003.
Certain other U.S. plans limit the Corporation's future cost for retiree
benefits to a defined fixed annual per capita medical cost. The health care cost
trend rate for all other plans, which comprise about 22 percent of the health
care obligation as of December 31, 2002, is assumed to be 9.03 percent in 2003,
8.14 percent in 2004 and to decrease to 5.36 percent in 2010 and thereafter. The
consolidated weighted-average health care trend rate for 2003 is expected to be
9.22 percent.
Note 3. (Continued)
Summarized financial information about postretirement plans, excluding defined
contribution retirement plans, is presented below.
Pension Benefits Other Benefits
---------------------- ----------------------
Year Ended December 31
----------------------------------------------------
(Millions of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year ........................ $4,014.6 $3,847.1 $ 696.5 $ 661.9
Service cost ................................................... 69.7 65.4 13.0 12.0
Interest cost .................................................. 275.1 266.8 50.5 48.2
Participants' contributions .................................... 7.1 7.4 5.9 5.3
Actuarial loss ................................................. 203.3 86.6 57.8 41.8
Acquisitions ................................................... - 37.3 - -
Curtailments ................................................... (1.2) (1.4) - -
Special termination benefits ................................... 3.7 9.0 - -
Currency exchange rate effects ................................. 95.1 (37.4) .3 (1.8)
Benefit payments from plans .................................... (262.7) (256.6) - -
Direct benefit payments ........................................ (12.2) (9.6) (72.6) (70.9)
-------- -------- ------- -------
Benefit obligation at end of year .............................. 4,392.5 4,014.6 751.4 696.5
-------- -------- ------- -------
Change in Plan Assets
Fair value of plan assets at beginning of year ................. 3,721.5 4,086.5 - -
Actual loss on plan assets ..................................... (250.5) (130.0) - -
Acquisitions ................................................... - 36.0 - -
Employer contributions ......................................... 126.0 12.8 66.7 65.6
Participants' contributions .................................... 7.1 7.4 5.9 5.3
Currency exchange rate effects ................................. 65.2 (34.6) - -
Benefit payments ............................................... (262.7) (256.6) (72.6) (70.9)
-------- -------- ------- -------
Fair value of plan assets at end of year ....................... 3,406.6 3,721.5 - -
-------- -------- ------- -------
Funded Status
Benefit obligation in excess of plan assets .................... (985.9) (293.1) (751.4) (696.5)
Unrecognized net actuarial loss (gain) ......................... 1,347.3 544.5 59.8 (.6)
Unrecognized transition amount ................................. 1.0 (1.0) - -
Unrecognized prior service cost ................................ 46.9 53.8 (9.1) (11.3)
-------- -------- ------- -------
Net amount recognized .......................................... $ 409.3 $ 304.2 $(700.7) $(708.4)
======== ======== ======= =======
Amounts Recognized in the Balance Sheet
Prepaid benefit cost ........................................... $ 4.3 $ 309.4 $ - $ -
Accrued benefit cost ........................................... (684.4) (186.4) (700.7) (708.4)
Intangible asset ............................................... 51.9 12.9 - -
Accumulated other comprehensive income ......................... 1,037.5 168.3 - -
-------- ------- ------ -------
Net amount recognized .......................................... $ 409.3 $ 304.2 $(700.7) $(708.4)
======== ======== ======= =======
The above pension benefits information has been presented on an aggregated basis
whereby benefit obligation and plan asset information for plans in which plan
assets exceed ABO have been combined with plans where the ABO exceeds plan
assets.
Note 3. (Continued)
Summary disaggregated information about these pension plans follows:
Assets Exceed ABO Exceeds
ABO Assets
-------------------- ----------------------
December 31
------------------------------------------------
(Millions of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation ......................................... $38.9 $3,173.0 $4,353.6 $841.6
ABO .................................................................. 29.7 2,906.3 4,054.3 790.6
Fair value of plan assets ............................................ 32.9 3,114.2 3,373.7 607.3
Pension Benefits Other Benefits
----------------- --------------------
December 31
---------------------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Weighted Average Assumptions
Discount rate .................................................... 6.62% 6.98% 6.76% 7.24%
Long-term expected return on plan assets ......................... 8.42% 9.19% - -
Rate of compensation increase .................................... 3.56% 3.90% - -
Health care cost trend rate ...................................... - - 9.22% 10.03%
Pension Benefits Other Benefits
-------------------------------- --------------------------------
Year Ended December 31
------------------------------------------------------------------------
(Millions of dollars) 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Components of Net Periodic
Benefit Cost
Service cost ............................. $ 69.7 $ 65.4 $ 63.4 $13.0 $12.0 $10.9
Interest cost ............................ 275.1 266.8 263.6 50.5 48.2 48.3
Expected return on plan assets(a) ........ (335.6) (368.1) (397.6) - - -
Amortization of prior service cost ....... 7.8 8.6 9.1 (2.1) (2.1) (2.1)
Amortization of transition amount ........ (2.0) (4.4) (4.4) - - -
Recognized net actuarial loss
(gain) ................................. 14.5 4.5 (20.2) (2.7) (3.8) (4.3)
Curtailments ............................. (1.2) (1.4) - - - -
Other .................................... 3.7 9.0 1.0 - (.1) -
-------- ------- ------- ----- ----- -----
Net periodic benefit cost (credit) ....... $ 32.0 $ (19.6) $ (85.1) $58.7 $54.2 $52.8
======== ======= ======= ===== ===== =====
<FN>
(a) The expected return on plan assets is determined by multiplying the
fair value of the plan assets at the prior year-end (adjusted for
estimated current year cash benefit payments and contributions) by the
long-term expected rate of return.
</FN>
Assumed health care cost trend rates affect the amounts reported for
postretirement health care benefit plans. A one-percentage-point change in
assumed health care trend rates would have the following effects:
One-Percentage-Point
-----------------------
(Millions of dollars) Increase Decrease
- -------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components ..................................... $ 3.5 $ 2.7
Effect on postretirement benefit obligation ................................................. 36.6 29.1
Note 3. (Continued)
Defined Contribution Retirement Plans
The Corporation's contributions to the defined contribution retirement plans are
primarily based on the age and compensation of covered employees. The
Corporation's contributions, all of which were charged to expense, were
$42.2 million, $37.3 million and $29.8 million in 2002, 2001 and 2000,
respectively.
Investment Plans
Voluntary contribution investment plans are provided to substantially all North
American employees. Under the plans, the Corporation matches a portion of
employee contributions. Costs charged to expense under the plans were
$29.3 million, $27.5 million and $22.6 million in 2002, 2001 and 2000,
respectively.
Note 4. Earnings Per Share
A reconciliation of the average number of common shares outstanding used in the
basic and diluted EPS computations follows:
Average Common Shares Outstanding
----------------------------------------
(Millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Basic ....................................................................... 517.2 529.6 539.5
Dilutive effect of stock options ......................................... 2.5 3.4 3.9
Dilutive effect of deferred compensation plan shares ..................... .3 .2 .1
Dilutive effect of shares issued for participation share awards .......... - - .3
----- ----- -----
Diluted ..................................................................... 520.0 533.2 543.8
===== ===== =====
Options outstanding that were not included in the computation of diluted EPS
because their exercise price was greater than the average market price of the
common shares are summarized below:
Description 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Average number of share equivalents (millions) ............................. 10.7 5.1 .5
Weighted-average exercise price(a) ......................................... $65.89 $71.36 $157.27
Expiration date of options ................................................. 2006 2006 2001
to 2012 to 2011 to 2010
Options outstanding at year-end ............................................ 11.4 5.8 .5
<FN>
(a) The weighted-average exercise price in 2000 represents converted options
from the Safeskin Corporation acquisition.
</FN>
The number of common shares outstanding as of December 31, 2002, 2001 and 2000
was 510.8 million, 521.0 million and 533.4 million, respectively.
Note 5. Debt
Long-term debt is composed of the following:
Weighted-
Average December 31
Interest -----------------------
(Millions of dollars) Rate Maturities 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Commercial paper to be refinanced ................................ $ - $ 400.0
Notes and debentures ............................................. 6.30% 2003 - 2030 2,088.4 1,469.8
Industrial development revenue bonds ............................. 5.27% 2004 - 2037 577.1 413.4
Bank loans and other financings in various
currencies .................................................. 6.69% 2003 - 2025 202.8 278.5
-------- --------
Total long-term debt ............................................. 2,868.3 2,561.7
Less current portion ............................................. 24.3 137.7
-------- --------
Long-term portion ................................................ $2,844.0 $2,424.0
======== ========
In February 2002, the Corporation issued $400 million of 5 5/8% Notes due
February 15, 2012 and used the proceeds to retire commercial paper. At December
31, 2001, the Corporation classified the $400 million of commercial paper to be
refinanced as long-term debt.
In March 2002, the Corporation issued $400 million of 4 1/2% Notes due
July 30, 2005 and used the proceeds to retire commercial paper. In connection
with the borrowing, the Corporation entered into an interest rate swap agreement
maturing on July 30, 2005 with a counterparty under which the difference between
the fixed- and floating-rate interest amounts calculated on a $400 million
notional amount is exchanged on a quarterly basis. The floating rate is 3-month
LIBOR minus 29.5 basis points. The swap agreement permits the Corporation to
maintain its desired ratio of fixed- and floating-rate borrowings.
Fair value of total long-term debt was $3,080.9 million and $2,639.5 million at
December 31, 2002 and 2001, respectively. Scheduled maturities of long-term debt
for the next five years are $24.3 million in 2003, $125.1 million in 2004,
$540.5 million in 2005, $14.9 million in 2006 and $325.1 million in 2007.
At December 31, 2002, the Corporation had $1.425 billion of syndicated revolving
credit facilities. These facilities, unused at December 31, 2002, permit
borrowing at competitive interest rates and are available for general corporate
purposes, including backup for commercial paper borrowings. The Corporation pays
commitment fees on the unused portion but may cancel the facilities without
penalty at any time prior to their expiration. Of these facilities,
$712.5 million expire in October 2003 and the balance expires in November 2007.
Debt payable within one year is as follows:
December 31
----------------------
(Millions of dollars) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Commercial paper .............................................................................. $ 975.0 $ 961.3
Current portion of long-term debt ............................................................. 24.3 137.7
Other short-term debt ......................................................................... 87.3 137.1
-------- --------
Total .................................................................................... $1,086.6 $1,236.1
======== ========
At December 31, 2002 and 2001, the weighted-average interest rate for commercial
paper was 1.3 percent and 1.9 percent, respectively.
Note 6. Risk Management
As a multinational enterprise, the Corporation is exposed to changes in foreign
currency exchange rates, interest rates and commodity prices. A variety of
practices are employed to manage these market risks, including operating and
financing activities and, where deemed appropriate, the use of derivative
instruments. Derivative instruments are used only for risk management purposes
and not for speculation or trading. All derivative instruments are either
exchange traded or are entered into with major financial institutions. The
Corporation's credit exposure under these arrangements is limited to the fair
value of the agreements with a positive fair value at the reporting date.
Additionally, credit risk with respect to the counterparties is considered
minimal in view of the financial strength of the counterparties.
Effective January 1, 2001, the Corporation adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. This accounting
standard requires that all derivative instruments be recognized as assets or
liabilities on the balance sheet at fair value. Changes in the fair value of
derivatives are either recorded in income or other comprehensive income,
depending on whether the derivative has been designated and qualifies as part of
a hedging relationship. The gain or loss on derivatives designated as fair value
hedges and the offsetting loss or gain on the hedged item attributable to the
hedged risk are included in current income in the period that changes in fair
value occur. The gain or loss on derivatives designated as cash flow hedges is
included in other comprehensive income in the period that changes in fair value
occur and is reclassified to income in the same period that the hedged item
affects income. The gain or loss on derivatives that have not been designated as
hedging instruments is included in current income in the period that changes in
fair value occur. Upon adoption of SFAS 133, the Corporation recognized a pretax
loss of $.5 million in other (income) expense, net.
Prior to adoption of SFAS 133, and in accordance with generally accepted
accounting principles in effect at that time, gains and losses on instruments
that hedged firm commitments were deferred and included in the basis of the
underlying hedged items. Premiums paid for options were amortized ratably over
the life of the option. Contracts used to hedge recorded foreign currency
transactions generally matured within one year and were marked to market with
the resulting gains or losses included in current income. These gains and losses
offset foreign exchange gains and losses on the underlying transactions.
Foreign Currency Risk
Foreign currency risk is managed by the use of foreign currency forward and
swap contracts. The use of these contracts allows management of transactional
exposure to exchange rate fluctuations because the gains or losses incurred on
the derivative instruments will offset, in whole or in part, losses or gains on
the underlying foreign currency exposure. Management of foreign currency
transactional exposures was not changed during 2002, and management does not
foresee or expect any significant change in such exposures or in the strategies
it employs to manage them in the near future.
Translation Risk
The income statements of foreign operations, other than those in
hyperinflationary economies, are translated into U.S. dollars at rates of
exchange in effect each month. The balance sheets of these operations are
translated at period-end exchange rates, and the differences from historical
exchange rates are reflected in stockholders' equity as unrealized translation
adjustments.
The income statements and balance sheets of operations in hyperinflationary
economies are translated into U.S. dollars using both current and historical
rates of exchange. For balance sheet accounts translated at current exchange
rates, such as cash and accounts receivable, the differences from historical
exchange rates are reflected in income. Operations that are deemed to be
hyperinflationary are as follows: Russia, Turkey and Venezuela (prior to 2002).
Note 6. (Continued)
Translation exposure generally is not hedged. The risk to any particular
entity's net assets is minimized to the extent that the entity is financed with
local currency borrowing. In addition, many of the Corporation's non-U.S.
operations buy the majority of their inputs and sell the majority of their
outputs in their local currency, thereby minimizing the effect of currency rate
changes on their local operating profit margins.
Interest Rate Risk
Interest rate risk is managed through the maintenance of a portfolio of
variable- and fixed-rate debt composed of short- and long-term instruments. The
objective is to maintain a cost-effective mix that management deems appropriate.
The strategy employed to manage exposure to interest rate fluctuations did not
change significantly during 2002 and management does not foresee or expect any
significant changes in its exposure to interest rate fluctuations or in how such
exposure is managed in the near future.
The Corporation has entered into an interest rate swap agreement maturing on
July 30, 2005, that effectively converted $400 million of its fixed-rate debt to
a floating-rate basis, thereby permitting the Corporation to benefit from a low
short-term interest rate environment.
Commodity Price Risk
The Corporation is subject to commodity price risk, the most significant of
which relates to the price of pulp. Selling prices of tissue products are
influenced, in part, by the market price for pulp, which is determined by
industry supply and demand. On a worldwide basis, the Corporation supplies
approximately 40 percent of its virgin fiber needs from internal pulp
manufacturing operations. Management still intends to reduce its level of pulp
integration, when market conditions permit, to approximately 20 percent, and
such a reduction in pulp integration, if accomplished, could increase the
Corporation's commodity price risk. Specifically, increases in pulp prices could
adversely affect earnings if selling prices are not adjusted or if such
adjustments significantly trail the increases in pulp prices.
In addition, the Corporation is subject to price risk for utilities, primarily
natural gas, which are used in its manufacturing operations. Derivative
instruments are used to hedge this risk when it is deemed prudent to do so by
management.
Effect of Derivative Instruments on Results of Operations and Other
Comprehensive Income
Fair Value Hedges
The Corporation's fair value hedges were effective in 2002 and 2001 and
consequently resulted in no net income effect. In addition, during these years,
all of the Corporation's firm commitments continued to qualify for fair value
hedge accounting.
Cash Flow Hedges
The Corporation's cash flow hedges were effective in 2002 and 2001 and
consequently resulted in no net income effect. During the same period in which
the hedged forecasted transactions affected earnings, the Corporation
reclassified $5.4 million of after-tax losses from accumulated other
Note 6. (Continued)
comprehensive income to earnings. At December 31, 2002, the Corporation expects
to reclassify $1.4 million of after-tax losses from accumulated other
comprehensive income to earnings during the next twelve months. The maximum
maturity of cash flow derivatives in place at December 31, 2002 is April 2004.
Other
In 2001, the Corporation entered into forward contracts to purchase Australian
dollars related to the acquisition of the remaining 45 percent ownership
interest in Kimberly-Clark Australia Pty. Ltd. ("KCA") for A$697.5 million
(approximately $390 million). These contracts were settled in conjunction with
the completion of this acquisition in June 2002. These forward contracts did not
qualify for hedge accounting under SFAS 133 and were marked to market each
period with the resulting gains or losses included in other (income) expense,
net. During 2002, net gains on these contracts were approximately $17 million
and, for the year ended December 31, 2001, net losses were approximately
$7 million.
The net gain on all other derivative instruments not designated as hedges was
approximately $10 million and $21 million in 2002 and 2001, respectively, and
has been included in operating profit on the consolidated income statement.
Note 7. Stock Compensation Plans
The Corporation's Equity Participation Plans (the "Plans") provide for awards of
stock options, restricted stock and (prior to 1999) participation shares to
employees of the Corporation and its subsidiaries. As of December 31, 2002, the
number of shares of common stock available for stock option and restricted share
awards under the Plans aggregated 23.7 million shares.
Stock Options
The Corporation has granted stock options to executives and other key employees.
All stock options are granted at not less than the market value at the date of
grant, expire 10 years after the date of grant and generally become exercisable
over three years.
Data concerning stock option activity follows:
2002 2001 2000
--------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding - Beginning of
year ............................. 26,665 $52.73 23,941 $ 49.67 20,167 $44.08
Granted ............................... 5,742 60.99 5,867 69.71 5,799 52.95
Exercised ............................ (1,627) 42.34 (2,428) 41.75 (2,876) 30.88
Canceled or expired ................... (472) 58.24 (715) 126.87 (554) 67.96
Converted Safeskin options ............ - - - - 1,405 85.22
------ ------ ------
Outstanding - End of year(a) .......... 30,308 54.77 26,665 52.73 23,941 49.67
====== ====== ======
Exercisable - End of year ............. 18,671 49.98 15,237 46.80 11,330 46.95
====== ====== ======
<FN>
(a) Data concerning stock options at December 31, 2002 follows (options in thousands):
</FN>
Options Outstanding
-----------------------------------------
Weighted- Options Exercisable
Weighted- Average -------------------------
Number Average Remaining Number Weighted-
of Exercise Contractual of Average
Exercise Price Range Options Price Life (Years) Options Price
---------------------------------------------------------------------------------------------------------
$12.36 - 37.74 ............. 1,622 $24.85 1.6 1,622 $ 24.85
39.94 - 50.41 ............. 8,098 46.95 4.8 8,059 46.94
50.50 - 60.08 ............. 9,247 53.64 5.5 7,158 53.83
60.99 - 71.74 ............. 11,292 65.31 8.6 1,795 69.54
86.28 - 188.53 ............. 49 121.01 5.4 37 121.20
------ ------
30,308 54.77 6.2 18,671 49.98
====== ======
Note 7. (Continued)
Restricted Stock Awards
The Plans provide for restricted share awards not to exceed 3.0 million shares.
All restricted stock awards vest and become unrestricted shares in three to
10 years from the date of grant. Although participants are entitled to cash
dividends and may vote such awarded shares, the sale or transfer of such shares
is limited during the restricted period.
Data concerning restricted stock awards follows:
(Shares in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Number of shares awarded ........................................................ 80 487 508
Weighted-average price per share ................................................ $59.79 $55.59 $58.18
The market value of the Corporation's common stock determines the value of the
restricted stock, and such value is recorded at the date of the award as
unearned compensation on restricted stock in a separate component of
stockholders' equity. This unearned compensation is amortized to compensation
expense over the periods of restriction. During 2002, 2001 and 2000,
$16.8 million, $13.0 million and $10.8 million, respectively, was charged to
compensation expense under the plan. The tax effect of differences between
compensation expense for financial statement and income tax purposes is recorded
as additional paid-in capital.
Participation Shares
Prior to 1999, the Corporation awarded key employees participation shares that
are payable in cash at the end of the vesting period. The amount of cash paid to
participants is based on the increase in the book value of the Corporation's
common stock during the award period. Participants do not receive dividends on
the participation shares, but their accounts are credited with dividend shares
payable in cash at the maturity of the award. Neither participation nor dividend
shares are shares of common stock. Amounts expensed related to participation
shares were $13.1 million, $15.0 million and $44.5 million in 2002, 2001 and
2000, respectively. The Corporation will continue recognizing expense related to
existing participation shares through 2003, and will make the final payment to
participants in February 2004. The Corporation ceased issuing participation
shares after 1998.
Data concerning participation and dividend shares follows:
(Thousands of shares) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Outstanding - Beginning of year ................................................. 4,475 6,608 10,229
Dividend shares credited - net .................................................. 245 377 602
Matured ........................................................................ (2,238) (2,356) (4,015)
Forfeited ....................................................................... (103) (154) (208)
----- ----- ------
Outstanding - End of year ....................................................... 2,379 4,475 6,608
===== ===== ======
Note 8. Commitments
Leases
The future minimum obligations under operating leases having a noncancelable
term in excess of one year as of December 31, 2002, are as follows:
(Millions of dollars) Amount
- --------------------------------------------------------------------------------------------------------------------------
Year Ending December 31:
2003 ...................................................................................................... $ 60.7
2004 ...................................................................................................... 48.1
2005 ...................................................................................................... 36.0
2006 ...................................................................................................... 27.2
2007 ...................................................................................................... 18.4
Thereafter ............................................................................................... 56.1
----
Future minimum obligations ..................................................................................... $246.5
======
Operating lease obligations have been reduced by approximately $4 million for
rental income from noncancelable sublease agreements.
Consolidated rental expense under operating leases was $166.8 million,
$159.4 million and $145.9 million in 2002, 2001 and 2000, respectively.
Purchase Commitments
The Corporation has entered into long-term contracts for the purchase of raw
materials, primarily pulp, and utilities, principally natural gas. The minimum
purchase commitments extend beyond 2008. Commitments under these contracts are
approximately $379.2 million in 2003, $99.3 million in 2004, $65.2 million in
2005, $36.1 million in 2006 and $26.1 million in 2007. Total commitments beyond
the year 2007 are $23.5 million.
Although the Corporation is primarily liable for rental payments on the
above-mentioned leases and purchase commitments described above, management
believes the Corporation's exposure to losses, if any, under these arrangements
is not material.
Note 9. Preferred Securities of Subsidiary
In February 2001, a newly formed Luxembourg-based consolidated financing
subsidiary of the Corporation issued 1 million shares of preferred securities
(the "Securities") with an aggregate par value of $520 million to a
nonaffiliated entity for cash proceeds of $516.5 million. Approximately
97 percent of the subsidiary's funds are invested in long-term, variable rate
loans to the Corporation or its consolidated subsidiaries on terms that would be
substantially similar to other borrowings by the Corporation or its consolidated
subsidiaries. The remaining funds are invested in other financial assets. The
Securities pay no dividend but accrue a variable rate of return based on
three-month LIBOR plus 0.764 percent, which at December 31, 2002 equated to an
annual rate of approximately 2.144 percent. The Securities are in substance
perpetual and are callable by the subsidiary at par value plus any accrued but
unpaid return on the Securities in November 2008 and each 20-year anniversary
thereafter. The common equity securities, all of which are owned by the
Corporation, are entitled to all of the residual equity after satisfaction of
the preferred interests. As of December 31, 2002 and 2001, the authorized,
issued and outstanding 1 million shares of preferred securities had a balance
(and a liquidating value) of $553.5 million and $538.4 million, respectively,
which is shown as preferred securities of subsidiary on the consolidated balance
sheet. The increase in the balance of the Securities of $15.1 million and
$21.9 million during 2002 and 2001, respectively, is the return on
the Securities, which was included in minority owners' share of subsidiaries'
net income on the Corporation's consolidated income statement.
Note 10. Stockholders' Equity
Stockholders' Equity
At December 31, 2002, unremitted net income of equity companies included in
consolidated retained earnings was $778 million.
On June 21, 1988, the board of directors of the Corporation declared a
distribution of one preferred share purchase right for each outstanding share of
the Corporation's common stock. On June 8, 1995, the board amended the plan
governing such rights. The board of directors believed then and it continues to
believe that the preferred share purchase rights are important for protecting
the stockholders and other corporate constituents against abusive takeover
tactics.
A right will entitle its holder to purchase one two-hundredth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $225, but
will not become exercisable until 10 days after a person or group acquires or
announces a tender offer that would result in the ownership of 20 percent or
more of the Corporation's outstanding common shares.
Under certain circumstances, a right will entitle its holder to acquire either
shares of the Corporation's stock or shares of an acquiring company's common
stock, in either event having a market value of twice the exercise price of the
right. At any time after the acquisition by a person or group of 20 percent or
more, but fewer than 50 percent, of the Corporation's common shares, the
Corporation may exchange the rights, except for rights held by the acquiring
person or group, in whole or in part, at a rate of one right for one share of
the Corporation's common stock or for one two-hundredth of a share of Series A
Junior Participating Preferred Stock.
The rights may be redeemed at $.005 per right prior to the acquisition by a
person or group of 20 percent or more of the common stock. Unless redeemed
earlier, the rights expire on June 8, 2005.
Other Comprehensive Income (Loss)
The changes in the components of other comprehensive income (loss) are as
follows:
Year Ended December 31
--------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ---------------------------- --------------------------
Pretax Tax Net Pretax Tax Net Pretax Tax Net
(Millions of dollars) Amount Credit Amount Amount Credit Amount Amount Credit Amount
- -----------------------------------------------------------------------------------------------------------------------------
Unrealized translation ....... $ 96.4 $ - $ 96.4 $(256.7) $ - $(256.7) $(218.8) $ - $(218.8)
Minimum pension liability .... (869.2) 313.5 (555.7) (145.6) 43.5 (102.1) (6.5) 2.5 (4.0)
Deferred losses on cash
flow hedges ............... (2.6) .6 (2.0) (.1) - (.1) - - -
Unrealized holding gains on
securities ................ (.2) - (.2) .3 - .3 - - -
------- ------ ------- ------- ----- ------- ------- ---- -------
Other comprehensive
income (loss) ............. $(775.6) $314.1 $(461.5) $(402.1) $43.5 $(358.6) $(225.3) $2.5 $(222.8)
======= ====== ======= ======= ===== ======= ======= ==== =======
Accumulated balances of other comprehensive income (loss), net of applicable
income taxes are as follows:
December 31
-----------------------
(Millions of dollars) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized translation ........................................................................... $(1,483.8) $(1,580.2)
Minimum pension liability ........................................................................ (671.9) (116.2)
Deferred losses on cash flow hedges .............................................................. (2.1) (.1)
Unrealized holding gains on securities ........................................................... .1 .3
--------- ---------
Accumulated other comprehensive income (loss) .................................................... $(2,157.7) $(1,696.2)
========= =========
Note 11. Acquisitions and Intangible Assets
Acquisitions
Prior to 2001, the Corporation and its joint venture partner, Amcor Limited
("Amcor"), held a 50/50 ownership interest in KCA. In July 2001, the Corporation
purchased an additional 5 percent ownership interest in KCA for A$77.5 million
(approximately $39 million), and exchanged options with Amcor for the purchase
by the Corporation of the remaining 45 percent ownership interest. In June 2002,
the Corporation exercised this option and purchased the remaining 45 percent
interest from Amcor for A$697.5 million (approximately $390 million). The
acquisition of KCA reflects the Corporation's strategy to expand its three
business segments within Australia. As a result of these transactions, KCA
became a consolidated subsidiary effective July 1, 2001 and a wholly-owned
subsidiary on June 30, 2002. The Corporation recognized total goodwill on this
series of transactions of approximately $350 million, reflecting the
Corporation's expectation of continued growth and profitability of KCA.
On January 31, 2001, the Corporation acquired Linostar S.p.A., a leading
Italian-based diaper manufacturer that produces and markets Lines, Italy's
second largest diaper brand. The Corporation accounted for this acquisition
using the purchase method which resulted in recognizing goodwill and other
intangible assets of $28 million.
In February 2000, the Corporation completed the acquisition of Safeskin
Corporation ("Safeskin") through the exchange of approximately 10.7 million
shares of the Corporation's common stock for all the outstanding shares of
Safeskin. The value of the exchange of stock plus related acquisition costs was
approximately $750 million. Safeskin manufactures disposable gloves for the
health care, high-technology and scientific industries. In June 2000, the
Corporation completed the acquisition of S-K Corporation in Taiwan, a former
licensee which held trademark and distribution rights for the manufacture of
personal care and tissue products. These two acquisitions were recorded as
purchases and resulted in recognizing total goodwill and other intangible assets
of $791.1 million.
The costs of other acquisitions relating primarily to increased ownership
and expansion in Asia and Latin America in 2002, 2001 and 2000 were
$16.2 million, $78.8 million and $175.5 million, respectively. The Corporation
recognized goodwill on these other acquisitions of $8.9 million in 2002,
$38.1 million in 2001 and $130.0 million in 2000.
Goodwill
The changes in the carrying amount of goodwill by business segment are as
follows:
Personal Consumer Business-
(Millions of dollars) Care Tissue to-Business Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002....................... $269.3 $259.1 $1,420.8 $1,949.2
Acquisitions .................................... 173.0 88.1 64.8 325.9
Currency changes ................................ (33.8) 9.4 4.2 (20.2)
------ ------ -------- --------
Balance at December 31, 2002 .................... $408.5 $356.6 $1,489.8 $2,254.9
====== ====== ======== ========
Note 11. (Continued)
Pro forma disclosure of income and earnings per share as if the goodwill
requirements of SFAS 142 had been adopted as of January 1, 2000 follows:
Year Ended December 31
------------------------------------
(Millions of dollars, except per share amounts) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Reported net income ............................................................. $1,674.6 $1,609.9 $1,800.6
Goodwill amortization, net of income taxes ...................................... - 94.7 88.0
-------- -------- --------
Adjusted net income ............................................................. $1,674.6 $1,704.6 $1,888.6
======== ======== ========
Earnings Per Share - Basic
- --------------------------
Reported net income ............................................................. $ 3.24 $ 3.04 $ 3.34
Goodwill amortization, net of income taxes ...................................... - .18 .16
-------- -------- --------
Adjusted net income ............................................................. $ 3.24 $ 3.22 $ 3.50
======== ======== ========
Earnings Per Share - Diluted
- ----------------------------
Reported net income ............................................................. $ 3.22 $ 3.02 $ 3.31
Goodwill amortization, net of income taxes ...................................... - .18 .16
-------- -------- --------
Adjusted net income ............................................................. $ 3.22 $ 3.20 $ 3.47
======== ======== ========
Other Intangible Assets
Intangible assets subject to amortization are included in Other Assets and
consist of the following at December 31:
2002 2001
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(Millions of dollars) Amount Amortization Amount Amortization
- ------------------------------------------------------------------------------------------------------------
Trademarks .................................... $191.8 $37.7 $184.4 $28.6
Patents ....................................... 40.9 16.8 40.7 13.5
Other ......................................... 8.5 2.8 8.7 2.1
------ ----- ------ -----
Total .................................... $241.2 $57.3 $233.8 $44.2
====== ===== ====== =====
Amortization expense for intangible assets was approximately $12 million in 2002
and 2001 and $10 million in 2000. For each of the next five years, amortization
expense will be approximately $11 million.
Note 12. Contingencies and Legal Matters
Litigation
The following is a brief description of certain legal and administrative
proceedings to which the Corporation or its subsidiaries is a party or to which
the Corporation's or its subsidiaries' properties are subject. In management's
opinion, none of the legal and administrative proceedings described below,
individually or in the aggregate, is expected to have a material adverse effect
on the Corporation's business, financial condition or results of operations.
As of December 31, 2002, approximately 165 product liability lawsuits seeking
monetary damages, in most cases of an unspecified amount, are pending in federal
and state courts against Safeskin. Safeskin is typically one of several
defendants who manufacture or sell natural rubber latex gloves. These lawsuits
allege injuries ranging from dermatitis to severe allergic reactions caused by
the residual chemicals or latex proteins in gloves worn by health care workers
and other individuals while performing their duties. Safeskin has referred the
defense of these lawsuits to its insurance carriers and management believes its
insurance coverage is adequate for these types of claims.
Safeskin and certain of its former officers and directors are defendants in two
cases filed in 1999, prior to the acquisition of Safeskin by the Corporation.
One case is a class action lawsuit alleging violations of the federal securities
laws and the other is a shareholder derivative action alleging breach of
fiduciary duty, waste of corporate assets and gross negligence in connection
with a stock repurchase program undertaken by Safeskin. In December 2002, a
settlement agreement was entered into pursuant to which all claims against
Safeskin and the other defendants in these two cases are to be released and
dismissed with prejudice and without admission of liability or wrongdoing by any
party in exchange for $55 million, most of which is covered by insurance. The
Corporation recorded a charge of $21 million in the fourth quarter of 2002
related to this matter. The settlement is subject to notice to the class and
approval by the U.S. District Court for the Southern District of California.
Court approval is expected in March 2003.
As of December 31, 2002, the Corporation, along with many other nonaffiliated
companies, was a party to lawsuits with allegations of personal injury resulting
from asbestos exposure on the defendants' premises and allegations that the
defendants manufactured, sold, distributed or installed products which cause
asbestos-related lung disease. These general allegations are often made against
the Corporation without any apparent evidence or identification of a specific
product or premises of the Corporation. The Corporation has denied the
allegations and raised numerous defenses in all of these asbestos cases. All
asbestos claims have been tendered to the Corporation's insurance carriers for
defense and indemnity. The financial statements reflect appropriate accruals for
the Corporation's portion of the costs estimated to be incurred in connection
with settling these claims.
Contingency
One of the Corporation's North American tissue mills has an agreement to provide
its local utility company a specified amount of electric power per year for the
next 16 years. In the event that the mill was shut down, the Corporation would
be required to continue to operate the power generation facility on behalf of
its owner, the local utility company. The net present value of the cost to
fulfill this agreement as of December 31, 2002 is estimated to be approximately
$87 million. However, management considers the probability of closure of this
mill to be remote.
Note 12. (continued)
Environmental Matters
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 or results of operations.
Note 13. Variable Interest Entities
The Corporation has a controlling financial interest in the following three
types of variable interest entities despite not having voting control of them.
Accordingly, because the Corporation is the primary beneficiary under these
arrangements, it is reasonably possible that the Corporation will be required to
consolidate such entities beginning in the third quarter of 2003 in accordance
with the requirements of FIN 46. No current or former officer or employee of the
Corporation, its subsidiaries or affiliates or any person related to such
officer or employee is a participant in any of these arrangements and therefore
could not personally benefit in any way, financially or otherwise, from any of
these arrangements.
Financing Entities
The Corporation has sold certain nonstrategic timberlands and related assets in
1999 and 1989 to nonaffiliated buyers and received long-term notes from the
buyers of these assets. These transactions qualified for the installment method
of accounting for income tax purposes and met the criteria for immediate profit
recognition for financial reporting purposes contained in SFAS 66, Accounting
for Sales of Real Estate. The 1999 sale involved notes receivable having an
aggregate face value of $397 million and a fair value of approximately
$383 million at the date of sale. These notes do not require principal payments
before their December 31, 2009 maturity, are extendable at the option of the
note holder in five-year increments to December 31, 2029, and have floating
interest rates of LIBOR minus 15 basis points. The 1989 sale involved notes
receivable having an aggregate face value of $220 million and a fair value of
approximately $210 million at the date of sale. These notes do not require
principal payments before their July 7, 2011 maturity, are extendable at the
option of the note holder in three-year increments to July 7, 2019, and have
floating interest rates of LIBOR minus 12.5 basis points. The notes receivable
are backed by irrevocable standby letters of credit issued by money center
banks, which aggregated $617 million at December 31, 2002.
Because the Corporation desired to monetize the $617 million of notes receivable
and continue the deferral of current income taxes on the gains, in 1999 the
Corporation transferred the notes received from the 1999 sale to a noncontrolled
financing entity, and in 2000 it transferred the notes received from the 1989
sale to another noncontrolled financing entity. The Corporation has minority
voting interests in each of the financing entities (collectively, the "Financing
Entities"), and has accounted for these minority ownership interests using the
equity method of accounting. The transfers of the notes and certain other assets
to the Financing Entities were made at fair value, were accounted for as asset
sales and resulted in no gain or loss to the Corporation. A nonaffiliated
financial institution has made substantive capital investments in each of the
Financing Entities, has majority voting control over them and has substantive
risks and rewards of ownership of the assets in the Financing Entities. The
Financing Entities became obligated for $617 million in third-party debt
financing. The Corporation also contributed intercompany notes receivable
(guaranteed by the Corporation) aggregating $662 million and intercompany
preferred stock of $50 million to the Financing Entities, which serve as
secondary collateral for the third-party lending arrangements. The Corporation
retains equity interests in the Financing Entities for which the legal right of
offset exists against the intercompany notes. As a result, the intercompany
notes payable have been offset against the Corporation's equity interests in the
Financing Entities for financial reporting purposes. In the unlikely event of
default by the money center banks that provided the irrevocable standby letters
of credit, the Corporation could experience a maximum loss of $617 million under
these arrangements.
Note 13. (Continued)
Real Estate Entities
In 1994, the Corporation began participating in the U.S. affordable and historic
renovation real estate markets. Investments in these markets are encouraged by
laws enacted by the United States Congress and related federal income tax rules
and regulations. Accordingly, these investments generate income tax credits and
depreciation deductions that are used to reduce the Corporation's income tax
liabilities. The Corporation has invested in these markets through (i) a
partnership arrangement in which it is a limited partner, (ii) limited liability
companies ("LLCs") in which it is a nonmanaging member and (iii) investments in
various funds in which the Corporation is one of many noncontrolling investors.
The partnership, LLCs and funds borrow money from third parties on a nonrecourse
basis and invest in and own various real estate projects. These entities are not
consolidated because they are not controlled by the Corporation. The Corporation
has accounted for its interests in these entities by the equity method of
accounting or by the effective yield method, as appropriate, and accounts for
related income tax credits as a reduction in the income tax provision.
As of December 31, 2002, the Corporation had a net equity of $65 million in
these real estate entities. Income tax credits to be generated by these
investments are expected to exceed $163 million, of which approximately
$101 million will be claimed on the Corporation's income tax returns through
December 31, 2002. As of December 31, 2002, total permanent financing debt for
the projects was $325 million. This permanent financing debt is secured solely
by the properties, is nonrecourse to the Corporation and is not supported or
guaranteed by the Corporation. From time to time, temporary interim financing is
guaranteed by the Corporation. In general, the Corporation's interim financing
debt guarantees are eliminated at the time permanent financing is obtained. At
December 31, 2002, $76 million of temporary interim financing debt was
guaranteed by the Corporation. The Corporation considers its default risk from
these real estate investments and its temporary interim financing debt
guarantees to be minimal as a result of geographical dispersion of the projects
and because the permanent financing debt of the projects is nonrecourse to the
Corporation.
As of December 31, 2002, the total underlying market value of the properties is
estimated to be in excess of the total related permanent financing debt. If the
Corporation's investments in these real estate entities were to be disposed of
at their carrying amounts, a portion of the tax credits and depreciation
deductions claimed on the Corporation's income tax returns may be recaptured and
may result in a charge to income. As of December 31, 2002, this recapture risk
is estimated to be $41 million. The Corporation has no current intention of
disposing of these investments, nor does it anticipate the need to do so in the
foreseeable future in order to satisfy any anticipated liquidity need.
Accordingly, the Corporation considers its recapture risk to be remote.
At December 31, 2002, the Corporation's maximum loss exposure for its real
estate entities totaled $182 million and was composed of its net equity in these
entities of $65 million, its loan guarantees of $76 million and the income tax
credit recapture risk of $41 million.
Synthetic Leases
From time to time, the Corporation acquires the use of certain assets, such as
automobiles, fork lifts, trucks, warehouses and some manufacturing equipment
through synthetic leases. Synthetic leases are often desirable when they offer
administrative benefits, as would be the case in avoiding the burden of
acquiring and disposing of automobiles, fork lifts and trucks, or when long-term
interest-only financing is available, as is often the case in real estate
synthetic leases. Synthetic leases usually are cost-effective alternatives to
traditional operating leases because of their more favorable interest rates and
treatment under income tax laws. Under applicable accounting rules for such
leases, rent expense
Note 13. (Continued)
is recorded for financial reporting purposes and no asset or debt obligation is
recorded on the Corporation's balance sheet. At December 31, 2002, the fair
value of synthetically leased assets totaled about $27 million.
These synthetic leases have termination penalties or residual value guarantees.
However, because the assets under these leases are used in the conduct of the
Corporation's business operations, it is unlikely that any significant portion
of these leases would be terminated prior to the normal expiration of their
lease terms. At December 31, 2002, the Corporation's maximum loss exposure under
residual value guarantees for synthetic leases was approximately $24 million.
Note 14. Unaudited Quarterly Data
2002 2001
---------------------------------------- --------------------------------------------
(Millions of dollars,
except per share amounts) Fourth Third Second First Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------------
Net sales ...................... $3,339.8 $3,486.7 $3,408.9 $3,330.9 $3,345.4 $3,373.7 $3,245.3 $3,323.2
Gross profit ................... 1,120.2 1,240.2 1,242.8 1,212.4 1,147.1 1,211.0 1,140.8 1,170.7
Operating profit ............... 529.8 644.8 624.3 664.9 487.4 629.1 590.6 631.1
Income before cumulative
effect of accounting
change ...................... 369.6 441.2 424.6 450.6 341.7 419.4 415.4 433.4
Net income ..................... 369.6 441.2 424.6 439.2 341.7 419.4 415.4 433.4
Per share basis:
Basic
Income before
cumulative effect
of accounting
change ............... .72 .85 .82 .87 .65 .79 .78 .81
Net income .............. .72 .85 .82 .84 .65 .79 .78 .81
Diluted
Income before
cumulative effect
of accounting
change ................ .72 .85 .81 .86 .65 .79 .78 .81
Net income .............. .72 .85 .81 .84 .65 .79 .78 .81
Cash dividends declared
per share ................... .30 .30 .30 .30 .28 .28 .28 .28
Market price per share:
High ........................ 58.18 63.40 66.79 65.35 62.22 65.10 68.69 72.19
Low ......................... 45.30 52.45 60.43 57.05 52.06 53.30 55.15 60.50
Close ....................... 47.47 56.64 62.00 64.65 59.80 62.00 55.90 67.83
Note 15. Supplemental Data (Millions of dollars)
Supplemental Income Statement Data
December 31
------------------------------
Summary of Advertising and Research Expenses 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Advertising expense....................................................................... $406.9 $405.5 $370.2
Research expense.......................................................................... 289.0 295.3 277.4
Supplemental Balance Sheet Data
December 31
------------------------
Summary of Accounts Receivable, net 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Accounts Receivable:
From customers ............................................................................. $1,657.5 $1,543.9
Other ...................................................................................... 362.2 198.3
Less allowance for doubtful accounts and sales discounts ................................... (67.6) (69.8)
-------- --------
Total .................................................................................. $1,952.1 $1,672.4
======== ========
Accounts receivable are carried at amounts that approximate fair value.
December 31
------------------------
Summary of Inventories 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Inventories by Major Class:
At the lower of cost on the FIFO method, weighted-average cost method or
market:
Raw materials ............................................................................ $ 323.2 $ 366.1
Work in process .......................................................................... 186.7 179.5
Finished goods ........................................................................... 866.9 898.4
Supplies and other ....................................................................... 210.7 217.5
-------- --------
1,587.5 1,661.5
Excess of FIFO cost over LIFO cost ......................................................... (157.4) (167.4)
-------- --------
Total .................................................................................. $1,430.1 $1,494.1
======== ========
FIFO value of total inventories valued on the LIFO method were $642.7 million
and $715.2 million at December 31, 2002 and December 31, 2001, respectively.
December 31
------------------------
Summary of Accrued Expenses 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Accrued advertising and promotion.............................................................. $ 245.7 $ 212.2
Accrued salaries and wages .................................................................... 385.1 351.2
Other.......................................................................................... 640.6 661.9
-------- --------
Total .................................................................................. $1,271.4 $1,225.3
======== ========
Note 15. (Continued)
Supplemental Cash Flow Statement Data
Year Ended December 31
Summary of Cash Flow Effects of (Increase) Decrease in -----------------------------------
Operating Working Capital (a) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Accounts receivable ............................................................. $(120.2) $ 202.5 $ (88.8)
Inventories ..................................................................... 68.3 (37.7) (49.0)
Prepaid expenses ................................................................ (14.2) (6.9) 10.4
Trade accounts payable .......................................................... 88.2 (162.9) 26.5
Other payables .................................................................. (13.1) 9.2 (4.4)
Accrued expenses ................................................................ (28.5) (81.3) (116.3)
Accrued income taxes ............................................................ (219.1) (125.4) (77.4)
Currency rate changes ........................................................... 41.0 (30.1) (39.3)
------- ------- -------
Increase in operating working capital ........................................... $(197.6) $(232.6) $(338.3)
======= ======= =======
<FN>
(a) Excludes the effects of acquisitions and dispositions.
</FN>
Year Ended December 31
-----------------------------------
Other Cash Flow Data 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Interest paid ................................................................... $ 183.3 $ 230.8 $ 233.1
Income taxes paid ............................................................... 649.5 719.2 783.2
Year Ended December 31
-----------------------------------
Interest Expense 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Gross interest cost ............................................................. $ 193.1 $ 211.2 $ 242.7
Capitalized interest on major construction projects.............................. (11.0) (19.6) (20.9)
------- ------- -------
Interest expense ................................................................ $ 182.1 $ 191.6 $ 221.8
======= ======= =======
Note 16. Business Segment and Geographic Data Information
The Corporation is organized into 12 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. Each reportable segment is headed by an executive officer
who reports to our Chief Executive Officer and is 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 and research and development
programs, cost reductions including supply chain management, and capacity and
capital investments for each of these businesses. The principal sources of
revenue in each of our global business segments are described below. The
accounting policies of our reportable segments are the same as those described
in Note 1, Accounting Policies.
o The Personal Care segment manufactures and markets disposable diapers,
training and youth pants and swimpants; 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.
o The Consumer Tissue segment manufactures and markets facial and bathroom
tissue, paper towels and napkins for household use; wet wipes; and related
products. Products in this segment are sold under the Kleenex, Scott,
Cottonelle, Viva, Andrex, Scottex, Page, Huggies and other brand names.
o The Business-to-Business segment manufactures and markets facial and
bathroom tissue, paper towels, wipers and napkins for away-from-home use;
health care products such as surgical gowns, drapes, infection control
products, sterilization wraps, disposable face masks and exam gloves,
respiratory products, and other disposable medical products; printing,
premium business and correspondence papers; specialty and technical papers;
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.
Approximately 12 percent, 11 percent and 10 percent of net sales were to
Wal-Mart Stores, Inc. in 2002, 2001 and 2000, respectively, primarily in the
Personal Care and Consumer Tissue businesses.
Information concerning consolidated operations by business segment and
geographic area, as well as data for equity companies, is presented in the
tables on the following pages:
Note 16. (Continued)
Consolidated Operations by Business Segment
Business-
Personal Consumer to- Intersegment Unallocated, Consolidated
(Millions of dollars) Care Tissue Business Sales Net(a) Total
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales
2002 ................ $5,101.7 $5,018.6 $3,593.0 $(147.0) $ - $13,566.3
2001 ................ 5,156.6 4,747.9 3,544.6 (161.5) - 13,287.6
2000 ................ 4,959.9 4,552.0 3,593.4 (195.8) - 12,909.5
Operating Profit (b)
2002 ................ 1,042.7 921.7 670.0 - (170.6) 2,463.8
2001 ................ 1,042.7 863.7 599.4 - (167.6) 2,338.2
2000 ................ 1,136.7 825.1 666.0 - 6.0 2,633.8
Depreciation
2002 ................ 242.7 287.1 176.0 - .8 706.6
2001 ................ 225.1 259.8 164.2 - 1.1 650.2
2000 ................ 200.9 239.1 150.5 - 1.2 591.7
Assets
2002 ................ 4,065.8 5,281.4 4,714.9 - 1,523.7 15,585.8
2001 ................ 3,819.5 5,064.5 4,611.3 - 1,512.3 15,007.6
2000 ................ 3,667.7 4,732.4 4,624.2 - 1,455.5 14,479.8
Capital Spending
2002 ................ 289.7 340.4 236.5 - 4.1 870.7
2001 ................ 381.0 419.6 260.4 - 38.5 1,099.5
2000 ................ 410.7 500.7 256.3 - 2.6 1,170.3
<FN>
(a) Unallocated operating profit consists of other income (expense), net and
expenses not associated with the business segments. Unallocated assets
include investments in equity companies of $571.2 million, $705.3 million
and $798.8 million in 2002, 2001 and 2000, respectively.
(b) Goodwill amortization included in operating profit in the personal care,
consumer tissue and business-to-business segments is $16.0 million,
$14.6 million and $58.8 million, respectively, in 2001 and $11.8 million,
$13.9 million and $56.0 million, respectively, in 2000.
</FN>
Note 16. (Continued)
Consolidated Operations by Geographic Area
Asia,
Inter- Total Latin Inter-
(Millions United geographic North America geographic Consolidated
of dollars) States Canada Items(a) America Europe & Other Items Unallocated(b) Total
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales
2002 ....... $8,649.4 $831.4 $(601.2) $8,879.6 $2,482.8 $2,751.5 $(547.6) $ - $13,566.3
2001 ....... 8,638.3 900.7 (694.7) 8,844.3 2,341.3 2,661.7 (559.7) - 13,287.6
2000 ....... 8,460.5 954.2 (673.5) 8,741.2 2,201.7 2,515.8 (549.2) - 12,909.5
Operating
Profit (c)
2002 ....... 2,018.9 100.5 - 2,119.4 191.0 324.0 - (170.6) 2,463.8
2001 ....... 1,927.5 156.9 - 2,084.4 176.2 245.2 - (167.6) 2,338.2
2000 ....... 1,937.1 211.3 - 2,148.4 149.7 329.7 - 6.0 2,633.8
Assets
2002 ....... 7,527.5 466.0 (53.3) 7,940.2 2,982.7 3,467.4 (328.2) 1,523.7 15,585.8
2001 ....... 7,691.4 538.2 (70.8) 8,158.8 2,474.6 3,134.3 (272.4) 1,512.3 15,007.6
2000 ....... 7,599.9 517.0 (79.4) 8,037.5 2,447.3 2,676.0 (136.5) 1,455.5 14,479.8
<FN>
(a) Intergeographic net sales include $387.4 million, $431.1 million and
$409.2 million by operations in Canada to the U.S. in 2002, 2001 and 2000,
respectively.
(b) Unallocated operating profit consists of other income (expense), net and
expenses not associated with geographic areas. Unallocated assets include
investments in equity companies of $571.2 million, $705.3 million and
$798.8 million in 2002, 2001 and 2000, respectively.
(c) Goodwill amortization included in operating profit in the U.S., Europe and
Asia, Latin America and Other is $57.8 million, $9.2 million and
$22.4 million, respectively, in 2001 and $55.1 million, $8.6 million and
$18.0 million, respectively, in 2000.
</FN>
Note 16. (Continued)
Equity Companies' Data by Geographic Area
Kimberly-
Clark's
Share
Net Gross Operating Net of Net
(Millions of dollars) Sales Profit Profit Income Income
- -------------------------------------------------------------------------------------------------------------------------
For the year ended:
December 31, 2002
Latin America ................................. $1,824.2 $ 690.6 $435.2 $229.8 $ 108.9
Asia and Middle East .......................... 54.2 19.5 9.2 8.9 4.4
-------- --------- ------ ------ --------
Total ..................................... $1,878.4 $ 710.1 $444.4 $238.7 $ 113.3
======== ========= ====== ====== ========
For the year ended:
December 31, 2001
Latin America ................................. $1,855.5 $ 704.4 $490.3 $304.0 $ 140.6
Asia, Australia and Middle East(a) ............ 249.2 77.8 40.7 28.3 13.8
-------- --------- ------ ------ --------
Total .................................... $2,104.7 $ 782.2 $531.0 $332.3 $ 154.4
======== ========= ====== ====== ========
For the year ended:
December 31, 2000
Latin America ................................. $1,887.8 $ 715.4 $514.7 $339.1 $ 158.5
Asia, Australia and Middle East(b) ............ 531.3 172.2 88.9 56.9 27.9
-------- --------- ------- ------- --------
Total ..................................... $2,419.1 $ 887.6 $603.6 $396.0 $ 186.4
======== ========= ====== ====== ========
<FN>
(a) As of July 1, 2001, the Corporation consolidated KCA, its Australian
affiliate, in which the Corporation made an additional investment to gain
majority ownership.
(b) As of March 31, 2000, the Corporation consolidated Hogla-Kimberly Limited,
its Israeli affiliate, in which the Corporation made an additional
investment to gain majority ownership.
</FN>
Non- Non- Stock-
Current Current Current Current holders'
(Millions of dollars) Assets Assets Liabilities Liabilities Equity
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2002
Latin America .................................. $ 745.4 $1,109.6 $598.9 $358.0 $ 898.1
Asia and Middle East ........................... 28.9 30.7 17.9 .7 41.0
-------- -------- ------ ------ --------
Total ...................................... $ 774.3 $1,140.3 $616.8 $358.7 $ 939.1
======== ======== ====== ====== ========
December 31, 2001
Latin America .................................. $ 892.3 $1,291.2 $551.7 $482.6 $1,149.2
Asia and Middle East ........................... 25.5 29.3 21.1 .6 33.1
-------- -------- ------ ------ --------
Total ...................................... $ 917.8 $1,320.5 $572.8 $483.2 $1,182.3
======== ======== ====== ====== ========
December 31, 2000
Latin America .................................. $ 846.6 $1,172.0 $496.7 $382.7 $1,139.2
Asia, Australia and Middle East ................ 163.9 270.7 92.7 151.1 190.8
-------- -------- ------ ------ --------
Total ...................................... $1,010.5 $1,442.7 $589.4 $533.8 $1,330.0
======== ======== ====== ====== ========
Equity companies are principally engaged in operations in the Personal Care and
Consumer Tissue businesses.
Note 16. (Continued)
At December 31, 2002, the Corporation's equity companies and ownership interest
were as follows: KCK Tissue S.A. (50%), Kimberly-Clark Lever, Ltd. (50%),
Kimberly-Clark de Mexico S.A. de C.V. and subsidiaries (47.9%), Klabin Kimberly
S.A. (50%), Olayan Kimberly-Clark Arabia (49%), Olayan Kimberly-Clark
(Bahrain) WLL (49%), PT Kimsari Paper Indonesia (50%) and Tecnosur S.A. (34%).
Kimberly-Clark de Mexico, S.A. de C.V. is partially owned by the public and its
stock is publicly traded in Mexico. At December 31, 2002, the Corporation's
investment in this equity company was $417.4 million, and the estimated fair
value of the investment was $1.3 billion based on the market price of publicly
traded shares.
INDEPENDENT AUDITORS' REPORT
Kimberly-Clark Corporation and Subsidiaries
Kimberly-Clark Corporation, Its Directors and Stockholders:
We have audited the accompanying consolidated balance sheets of Kimberly-Clark
Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Kimberly-Clark Corporation and
Subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Corporation changed its method of accounting for customer
coupons and its method of accounting for goodwill.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Dallas, Texas
February 6, 2003
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Kimberly-Clark Corporation and Subsidiaries
The management of Kimberly-Clark Corporation is responsible for conducting all
aspects of the business, including the preparation of the consolidated financial
statements in this annual report. The consolidated financial statements have
been prepared using generally accepted accounting principles considered
appropriate in the circumstances to present fairly the Corporation's
consolidated financial position, results of operations and cash flows on a
consistent basis. Management also has prepared the other information in this
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
As can be expected in a complex and dynamic business environment, some financial
statement amounts are based on management's estimates and judgments. Even though
estimates and judgments are used, measures have been taken to provide reasonable
assurance of the integrity and reliability of the financial information
contained in this annual report. These measures include an effective
control-oriented environment in which the internal audit function plays an
important role, an Audit Committee of the board of directors that oversees the
financial reporting process, and independent audits.
One characteristic of a control-oriented environment is a system of internal
control over financial reporting and over safeguarding of assets against
unauthorized acquisition, use or disposition, designed to provide reasonable
assurance to management and the board of directors regarding preparation of
reliable published financial statements and such asset safeguarding. The system
is supported with written policies and procedures, contains self-monitoring
mechanisms and is audited by the internal audit function. Appropriate actions
are taken by management to correct deficiencies as they are identified. All
internal control systems have inherent limitations, including the possibility of
circumvention and overriding of controls, and, therefore, can provide only
reasonable assurance as to financial statement preparation and such asset
safeguarding.
The Corporation also has adopted a code of conduct that, among other things,
contains policies for conducting business affairs in a lawful and ethical manner
everyplace in which it does business, for avoiding potential conflicts of
interest and for preserving confidentiality of information and business ideas.
Internal controls have been implemented to provide reasonable assurance that the
code of conduct is followed.
The consolidated financial statements have been audited by the independent
accounting firm, Deloitte & Touche LLP. During their audits, independent
auditors were given unrestricted access to all financial records and related
data, including minutes of all meetings of stockholders and the board of
directors and all committees of the board. Management believes that all
representations made to the independent auditors during their audits were valid
and appropriate.
During the audits conducted by both the independent auditors and the internal
audit function, management received recommendations to strengthen or modify
internal controls in response to developments and changes. Management has
adopted, or is in the process of adopting, all recommendations that are cost
effective.
The Corporation has assessed its internal control system as of December 31,
2002, in relation to criteria for effective internal control over financial
reporting described in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2002, its system of
internal control over the preparation of its published interim and annual
consolidated financial statements and over safeguarding of assets against
unauthorized acquisition, use or disposition met those criteria.
/s/Thomas J. Falk /s/Mark A. Buthman
- ----------------- ------------------
Thomas J. Falk Mark A. Buthman
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
February 18, 2003
Additional Information
Transfer Agent, Registrar and Dividend Disbursing Agent
EquiServe Trust Company, N.A. is the Transfer Agent, Registrar and Dividend
Disbursing Agent for the Company's common stock and is responsible for
maintaining shareholder account records. Inquiries regarding dividend payments,
lost certificates, IRS Form 1099, changes in address, name or ownership, or
information regarding Kimberly-Clark's Dividend Reinvestment and Stock Purchase
Plan should be addressed to:
EquiServe Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
Telephone: 800-730-4001
Internet: http://www.equiserve.com
Dividends and Dividend Reinvestment Plan
Quarterly dividends have been paid continually since 1935. Dividends are
paid on or about the second day of January, April, July and October. The
Automatic Dividend Reinvestment service of EquiServe Trust Company, N.A. is
available to Kimberly-Clark stockholders of record. The service makes it
possible for Kimberly-Clark stockholders of record to have their dividends
automatically reinvested in common stock and to make additional cash
investments up to $3,000 per quarter.
Stock Exchanges
Kimberly-Clark common stock is listed on the New York, Chicago and Pacific stock
exchanges. The ticker symbol is KMB.
Annual Meeting of Stockholders
The Annual Meeting of Stockholders will be held at the Company's World
Headquarters, 351 Phelps Drive, Irving, Texas, at 11:00 a.m. on Thursday,
April 24, 2003.
Investor Relations
Securities analysts, portfolio managers and representatives of institutional
investors seeking information about the Company should contact
Michael D. Masseth, Vice President - Investor Relations, at 972-281-1478.
Investors may also obtain information about Kimberly-Clark and copies of
documents released by the Company by calling 800-639-1352.
Calendar
Kimberly-Clark's fiscal year ends December 31. The annual report is distributed
in March.
Electronic Delivery of Proxy Materials and Annual Report
Stockholders and Plan participants may elect to receive future Annual
Reports and Proxy Statements in electronic format rather than in printed form.
In electing to do so, you will help the Company save on production and mailing
costs. To sign up for electronic delivery service, go to our transfer agent's
Web site at www.econsent.com/kmb at any time and follow the instructions. If
your shares are not registered in you name, contact your bank or broker for
information on electronic delivery service.
Employees and Stockholders
In its worldwide consolidated operations, Kimberly-Clark had 63,900 employees
as of December 31, 2002. Equity companies had an additional 10,100 employees.
The Corporation had 38,155 stockholders of record and 510.8 million shares of
common stock outstanding as of the same date.
Trademarks
The brand names mentioned in this report - Andrex, Ballard, Classic Crest,
Cottonelle, Depend, GoodNites, Huggies, Kimberly-Clark, Kimwipes, Kleenex,
Kotex, Lightdays, Little Swimmers, Page, Poise, Pull-Ups, Safeskin, Scott,
Scottex, Scottfold, Surpass, Tecnol, Thank Goodness for Kleenex Tissue, Viva and
WypAll - are trademarks of Kimberly-Clark Corporation or its affiliates.