UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.............to.....................
Commission file number 1-225
KIMBERLY-CLARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-0394230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 619100
Dallas, Texas
75261-9100
(Address of principal executive offices)
(Zip Code)
(972) 281-1200
(Registrant's telephone number, including area code)
No change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X . No .
------ ------
As of August 1, 2003, there were 506,650,990 shares of the Corporation's
common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED INCOME STATEMENT
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ---------------------
(Millions of dollars, except per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Net Sales ........................................................... $ 3,544.6 $3,408.9 $7,004.3 $6,739.8
Cost of products sold .......................................... 2,337.4 2,166.1 4,593.5 4,284.6
--------- -------- -------- --------
Gross Profit ....................................................... 1,207.2 1,242.8 2,410.8 2,455.2
Marketing, research and general expenses ....................... 579.5 587.3 1,168.4 1,153.5
Other (income) expense, net .................................... 20.8 31.2 56.2 12.5
--------- -------- -------- --------
Operating Profit .................................................... 606.9 624.3 1,186.2 1,289.2
Interest income ................................................ 4.3 3.5 9.1 7.2
Interest expense ............................................... (44.6) (45.1) (87.6) (91.8)
--------- -------- -------- --------
Income Before Income Taxes .......................................... 566.6 582.7 1,107.7 1,204.6
Provision for income taxes ..................................... 164.9 163.2 322.4 348.3
--------- -------- -------- --------
Income Before Equity Interests ...................................... 401.7 419.5 785.3 856.3
Share of net income of equity companies ........................ 30.3 21.5 56.3 53.9
Minority owners' share of subsidiaries' net income ............. (14.7) (16.4) (26.6) (35.0)
--------- -------- -------- --------
Income Before Cumulative Effect of
Accounting Change .............................................. 417.3 424.6 815.0 875.2
Cumulative effect of accounting change,
net of income taxes ................................... - - - (11.4)
--------- -------- -------- --------
Net Income ....................................................... $ 417.3 $ 424.6 $ 815.0 $ 863.8
========= ======== ======== ========
Per Share Basis:
Basic
Income before cumulative effect of
accounting change ..................................... $ .82 $ .82 $ 1.60 $ 1.69
========= ======== ======== ========
Net income ................................................. $ .82 $ .82 $ 1.60 $ 1.66
========= ======== ======== ========
Diluted
Income before cumulative effect of
accounting change ..................................... $ .82 $ .81 $ 1.60 $ 1.67
========= ======== ======== ========
Net income ................................................. $ .82 $ .81 $ 1.60 $ 1.65
========= ======== ======== ========
Cash Dividends Declared ........................................ $ .34 $ .30 $ .68 $ .60
========= ======== ======== ========
Unaudited
See Notes to Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEET
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
June 30, December 31,
(Millions of dollars) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents ........................................................ $ 376.8 $ 494.5
Accounts receivable .............................................................. 1,876.4 1,952.1
Inventories ...................................................................... 1,559.5 1,430.1
Other current assets ............................................................. 512.6 397.2
--------- ---------
Total Current Assets ......................................................... 4,325.3 4,273.9
Property .............................................................................. 14,404.2 13,564.0
Less accumulated depreciation .................................................... 6,493.9 5,944.6
--------- ---------
Net Property ................................................................. 7,910.3 7,619.4
Investments in Equity Companies ....................................................... 614.1 571.2
Goodwill .............................................................................. 2,353.2 2,254.9
Other Assets ......................................................................... 966.8 866.4
--------- ---------
$16,169.7 $15,585.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Debt payable within one year ..................................................... $ 1,004.5 $ 1,086.6
Accounts payable ................................................................. 1,038.8 1,122.0
Accrued expenses ................................................................. 1,287.4 1,271.4
Other current liabilities ........................................................ 668.4 558.3
--------- ---------
Total Current Liabilities .................................................... 3,999.1 4,038.3
Long-Term Debt ........................................................................ 2,807.8 2,844.0
Noncurrent Employee Benefit and Other Obligations ..................................... 1,362.8 1,390.0
Deferred Income Taxes ................................................................. 862.3 854.2
Minority Owners' Interests in Subsidiaries ............................................ 258.1 255.5
Preferred Securities of Subsidiary .................................................... 559.7 553.5
Stockholders' Equity .................................................................. 6,319.9 5,650.3
--------- ---------
$16,169.7 $15,585.8
========= =========
Unaudited
See Notes to Consolidated Financial Statements.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
Six Months
Ended June 30
(Millions of dollars) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Operations
Net income ............................................................................. $ 815.0 $ 863.8
Cumulative effect of accounting change, net of income taxes ............................ - 11.4
Depreciation ........................................................................... 370.7 341.1
Changes in operating working capital ................................................... 39.3 (55.6)
Deferred income tax (benefit) provision ................................................ (10.7) 77.7
Equity companies' earnings in excess of dividends paid ................................. (30.9) (25.1)
Postretirement benefits ................................................................ (27.6) 6.7
Other .................................................................................. 53.6 97.9
-------- --------
Cash Provided by Operations ........................................................ 1,209.4 1,317.9
-------- --------
Investing
Capital spending ....................................................................... (402.1) (382.0)
Acquisitions of businesses, net of cash acquired ....................................... (45.2) (405.1)
Proceeds from sales of investments ..................................................... 17.0 27.9
Net (increase) decrease in time deposits ............................................... (144.0) 1.2
Investments in marketable securities ................................................... (10.9) (1.5)
Other .................................................................................. (14.6) 7.3
-------- --------
Cash Used for Investing ............................................................ (599.8) (752.2)
-------- --------
Financing
Cash dividends paid .................................................................... (327.5) (302.5)
Net decrease in short-term debt ........................................................ (132.5) (638.3)
Proceeds from issuance of long-term debt ............................................... 8.5 801.0
Repayments of long-term debt ........................................................... (19.7) (127.9)
Proceeds from exercise of stock options ................................................ 17.4 53.5
Acquisitions of common stock for the treasury .......................................... (251.7) (331.6)
Other .................................................................................. (27.3) (31.8)
-------- --------
Cash Used for Financing ............................................................ (732.8) (577.6)
-------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents ................................ 5.5 (8.6)
-------- --------
Decrease in Cash and Cash Equivalents ....................................................... (117.7) (20.5)
-------- --------
Cash and Cash Equivalents, beginning of year ................................................ 494.5 364.5
-------- --------
Cash and Cash Equivalents, end of period .................................................... $ 376.8 $ 344.0
======== ========
Unaudited
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
The unaudited consolidated financial statements have been prepared on a basis
consistent with that used in the Annual Report on Form 10-K for the year ended
December 31, 2002, and include all normal recurring adjustments necessary to
present fairly the condensed consolidated balance sheet, consolidated income
statement and condensed consolidated cash flow statement for the periods
indicated.
1. In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 148, Accounting for
Stock-Based Compensation and Disclosure, which amends SFAS 123, Accounting
for Stock-Based Compensation, 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,
Accounting for Stock Issued to Employees. No employee compensation
for stock options has been charged to earnings because the exercise prices
of all stock options granted have been equal to the market value of the
Corporation's common stock at the date of grant. The following presents
information about net income and earnings per share as if the Corporation
had applied the fair value expense recognition requirements of SFAS 123 to
all employee stock options granted.
Three Months Six Months
Ended June 30 Ended June 30
----------------- -----------------
(Millions of dollars, except per share amounts) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
Net income, as reported ........................................... $417.3 $424.6 $815.0 $863.8
Less: Stock-based employee compensation
determined under the fair value requirements
of SFAS 123, net of income tax benefits .................. 13.4 18.2 29.4 34.9
------ ------ ------ ------
Pro forma net income .............................................. $403.9 $406.4 $785.6 $828.9
====== ====== ====== ======
Earnings per share
Basic - as reported ........................................... $ .82 $ .82 $ 1.60 $ 1.66
====== ====== ====== ======
Basic - pro forma ............................................. $ .79 $ .79 $ 1.54 $ 1.60
====== ====== ====== ======
Diluted - as reported ......................................... $ .82 $ .81 $ 1.60 $ 1.65
====== ====== ====== ======
Diluted - pro forma ........................................... $ .79 $ .77 $ 1.54 $ 1.58
====== ====== ====== ======
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
2. There are no adjustments required to be made to net income for purposes of
computing basic and diluted earnings per share ("EPS"). The average number
of common shares outstanding used in the basic EPS computation is
reconciled to those used in the diluted EPS computation as follows:
Average Common Shares Outstanding
Three Months Six Months
Ended June 30 Ended June 30
--------------- ---------------
(Millions of shares) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Basic .............................................................. 508.1 518.5 509.2 519.4
Dilutive effect of stock options ............................... 1.3 3.8 .9 3.4
Dilutive effect of deferred compensation plan
shares .................................................... .3 .3 .3 .3
----- ----- ----- -----
Diluted ........................................................... 509.7 522.6 510.4 523.1
===== ===== ===== =====
Options outstanding during the three month and six month periods ended June
30, 2003 to purchase 20.5 million and 26.8 million shares of common stock,
respectively, were not included in the computation of diluted EPS because
the exercise prices of the options were greater than the average market
price of the common shares.
Options outstanding during the three month and six month periods ended June
30, 2002 to purchase 11.4 million and 5.8 million shares of common stock,
respectively, were not included in the computation of diluted EPS because
the exercise prices of the options were greater than the average market
price of the common shares.
The number of common shares outstanding as of June 30, 2003 and 2002 was
507.0 million and 517.2 million, respectively.
3. The following schedule presents inventories by major class as of June 30,
2003 and December 31, 2002:
June 30, December 31,
(Millions of dollars) 2003 2002
---------------------------------------------------------------------------------------------------------
At lower of cost on the First-In, First-Out (FIFO) method or market:
Raw materials .......................................................... $ 326.9 $ 323.2
Work in process ........................................................ 191.0 186.7
Finished goods ......................................................... 995.5 866.9
Supplies and other ..................................................... 227.4 210.7
-------- --------
1,740.8 1,587.5
Excess of FIFO cost over Last-In, First-Out (LIFO) cost ..................... (181.3) (157.4)
-------- --------
Total .................................................................. $1,559.5 $1,430.1
======== ========
FIFO cost of total inventories on the LIFO method was $724.7 million and
$642.7 million at June 30, 2003 and December 31, 2002, respectively.
4. In August 2003, the Corporation issued $500 million of 5.0% Notes due
August 15, 2013. The proceeds were used to retire commercial paper. During
June and July 2003, the Corporation issued redemption notices on
$200 million of 7 7/8% and $200 million of 7.0% debentures, respectively.
At June 30, 2003, the Corporation classified a net $100 million of
commercial paper to be refinanced as long-term debt.
In June 2003, the Corporation announced the repurchase of $45 million for
industrial revenue bonds to be effective August 1, 2003. At June 30, 2003,
the Corporation classified the $45 million as debt payable within one year
and reduced long-term debt by that same amount.
5. The following schedule presents the components of comprehensive income:
Six Months
Ended June 30
(Millions of dollars) 2003 2002
-------------------------------------------------------------------------------------------------------------
Net Income ............................................................................. $ 815.0 $863.8
Unrealized currency translation adjustments, net of tax ................................ 405.2 50.9
Deferred losses on cash flow hedges, net of tax ........................................ (5.7) (5.1)
Unrealized holding gains on securities ................................................. .3 -
-------- ------
Comprehensive income ................................................................... $1,214.8 $909.6
======== ======
6. The following schedule presents information concerning consolidated
operations by business segment:
Three Months Six Months
Ended June 30 Ended June 30
--------------------- ---------------------
(Millions of dollars) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------
NET SALES:
Personal Care .............................................. $1,328.9 $1,329.1 $2,611.4 $2,586.3
Consumer Tissue ............................................ 1,287.1 1,215.2 2,612.4 2,470.0
Business-to-Business ....................................... 967.4 898.4 1,855.2 1,751.3
Intersegment sales ......................................... (38.8) (33.8) (74.7) (67.8)
-------- -------- -------- --------
Consolidated ............................................... $3,544.6 $3,408.9 $7,004.3 $6,739.8
======== ======== ======== ========
OPERATING PROFIT (reconciled to income before income taxes):
Personal Care .............................................. $ 273.7 $ 293.3 $ 533.9 $ 557.4
Consumer Tissue ............................................ 197.9 221.0 431.7 466.2
Business-to-Business ....................................... 181.3 171.1 325.8 331.0
Other income (expense), net ................................ (20.8) (31.2) (56.2) (12.5)
Unallocated items - net .................................... (25.2) (29.9) (49.0) (52.9)
-------- -------- -------- --------
Total Operating Profit ..................................... 606.9 624.3 1,186.2 1,289.2
Interest income ........................................ 4.3 3.5 9.1 7.2
Interest expense ....................................... (44.6) (45.1) (87.6) (91.8)
-------- -------- -------- --------
Income Before Income Taxes ................................. $ 566.6 $ 582.7 $1,107.7 $1,204.6
======== ======== ======== ========
Note: Unallocated items - net, consists of expenses not associated with the
business segments.
Description of Business Segments:
The Corporation is organized into operating segments based on product groupings.
These operating segments have been aggregated into three reportable global
business segments: Personal Care; Consumer Tissue; and Business-to-Business.
Each reportable segment is headed by an executive officer who reports to the
Corporation's 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 the 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.
Unaudited
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS:
Second Quarter of 2003 Compared With Second Quarter of 2002
By Business Segment
(Millions of dollars)
Net Sales 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Personal Care ................................................................................. $1,328.9 $1,329.1
Consumer Tissue ............................................................................... 1,287.1 1,215.2
Business-to-Business .......................................................................... 967.4 898.4
Intersegment sales ............................................................................ (38.8) (33.8)
-------- --------
Consolidated .................................................................................. $3,544.6 $3,408.9
======== ========
Commentary:
Consolidated net sales for the second quarter of 2003 were 4.0 percent higher
than in 2002, primarily driven by an improvement of about 4 percent in currency
exchange rates. Sales volumes were essentially flat, reflecting
weaker-than-expected growth in a number of key categories in North America,
particularly diapers and consumer tissue products. Net selling prices were
approximately the same as last year, as price increases in certain geographies
were offset by continued high levels of competitive promotional spending
overall.
o Personal care net sales were flat in the second quarter. Favorable
currency effects of about 3 percent and slightly higher net selling prices
were offset by lower sales volumes. Sales volumes were affected by intense
competition in the diaper category in a number of key markets as well as a
slowdown in category growth in North America.
In North America, personal care sales volumes decreased approximately
4 percent versus the second quarter of 2002 despite record shipments of
Pull-Ups training pants, GoodNites youth pants and Huggies Little Swimmers
swimpants. Although sales volumes of Huggies diapers were lower than last
year, the brand's market share improved sequentially from the first quarter
to the second quarter of 2003. Net selling prices of personal care products
in North America were similar to last year. Personal care sales in Europe
increased more than 11 percent primarily due to favorable currency rates,
partially offset by lower sales volumes for diaper products. In Asia,
personal care net sales rose nearly 11 percent, highlighted by strong
double-digit growth in Australia from a combination of favorable currency
effects and higher sales volumes. Sales volumes were higher for a majority
of the Corporation's operations in the region. Finally, in Latin America,
sales decreased about 15 percent, as selling price increases were not
sufficient to offset weakness in sales volumes and unfavorable currency
effects throughout most of the region.
o Net sales of consumer tissue products increased 5.9 percent from 2002,
primarily driven by favorable currency effects in Europe and Australia.
Overall sales volumes increased nearly 1 percent. Net selling prices were
about the same as last year, as response to competitive promotional
activity in North America and Europe negated list price increases mainly in
those geographies.
In North America, sales volumes of tissue products rose 1 percent. Sales
volume growth remained solid for Cottonelle and Scott bathroom tissue
despite below-trend consumer demand for the overall category. Net selling
prices were down almost 1 percent due to increases in competitive promotion
spending. In Europe, net sales advanced about 20 percent primarily as a
result of favorable currency exchange rates for the euro and the British
pound. Sales volumes rose about 3 percent and net selling prices rose more
than 1 percent. Meanwhile, consumer tissue net sales were more than
5 percent higher in Asia, as sales volume increases in Korea and favorable
currency effects in Australia were partially offset by continued weakness
in Taiwan. In Latin America, net sales declined almost 1 percent, as
unfavorable currency effects more than offset sales volume increases of
nearly 4 percent.
o Net sales of business-to-business products increased 7.7 percent in the
quarter, boosted by sales volume growth of about 3 percent and a more than
4 percent benefit from favorable currency effects. The Corporation's global
health care business posted record quarterly net sales. Sales volumes for
health care products rose almost 10 percent, with strong growth outside
North America and substantially higher sales of face masks and gloves.
Sales volumes for the professional businesses increased approximately
4 percent in North America and nearly 10 percent in Asia, but were flat in
Europe. Overall segment selling prices declined about 1 percent compared
with the second quarter of last year.
Operating Profit 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Personal Care ................................................................................... $273.7 $293.3
Consumer Tissue ................................................................................. 197.9 221.0
Business-to-Business ............................................................................ 181.3 171.1
Other income (expense), net ..................................................................... (20.8) (31.2)
Unallocated items - net ......................................................................... (25.2) (29.9)
------ ------
Consolidated .................................................................................... $606.9 $624.3
====== ======
Note: Unallocated items - net, consists of expenses not associated with the
business segments.
Commentary:
Consolidated operating profit in the second quarter of 2003 declined 2.8 percent
from the prior year. The Corporation made further progress in its efforts to
reduce costs in 2003, as it achieved savings of nearly $50 million in the
quarter, up from more than $40 million in the first quarter. These savings are
net of higher resin costs. The cost reductions, however, were more than offset
by an increase in pension expense of about $35 million and higher fiber and
energy costs of approximately $40 million.
Each of the three business segments incurred more than $10 million of the
increased pension expense.
Included in the second quarter of 2002 were charges for business improvement
programs of $15.1 million primarily related to the previously announced plans to
streamline manufacturing operations in Latin America and to consolidate
administrative functions in Europe. The major components of the charge were
severance costs of approximately $9.7 million and additional depreciation of
$2.3 million. These costs were included in the business segments as follows:
personal care $4.6 million; consumer tissue $7.3 million; and
business-to-business $3.2 million. These charges were included in the
consolidated income statement as follows: cost of products sold $6.6 million;
and marketing, research and general expenses $8.5 million.
o Personal care segment operating profit declined 6.7 percent primarily due
to the lower diaper sales volumes, primarily in North America, partially
offset by cost reduction programs. Operating profit improved somewhat in
Europe, due to cost savings, and in Asia on the strength of performance in
Australia. However, in Latin America, operating profit declined primarily
because of the lower sales volumes attributable in part to weak economic
conditions in the region.
o Consumer tissue segment operating profit decreased 10.5 percent from last
year, despite the higher sales volumes and significant cost savings. These
benefits were more than offset by higher fiber and energy costs and
increased promotional activity. Promotional levels remained high for
consumer tissue products in North America and Europe, which limited
recovery of the higher fiber costs.
o Business-to-business segment operating profit increased 6.0 percent from
the prior year. Operating profit for the health care business achieved an
all-time record driven by the sales volume growth and the benefits of cost
savings programs. Operating profit for the Corporation's professional
businesses in both North America and Europe increased due to cost
reductions that more than offset higher fiber costs.
o Other income (expense), net included a charge of $26.5 million, or $.03 per
share, in 2002 for losses associated with tax credits in Brazil. The second
quarter of 2002 also included higher transaction currency gains compared
with 2003. The second quarter of 2003 reflects a higher level of expenses
related to affordable housing and historic renovation real estate projects
than 2002.
By Geography
(Millions of dollars)
Net Sales 2003 2002
- -------------------------------------------------------------------------------------------------------------------
North America .............................................................................. $2,232.4 $2,252.4
Outside North America ...................................................................... 1,456.0 1,293.5
Intergeographic sales ...................................................................... (143.8) (137.0)
-------- --------
Consolidated ............................................................................... $3,544.6 $3,408.9
======== ========
Operating Profit 2003 2002
- -------------------------------------------------------------------------------------------------------------------
North America .............................................................................. $ 514.6 $ 554.7
Outside North America ...................................................................... 138.3 130.7
Other income (expense), net ................................................................ (20.8) (31.2)
Unallocated items - net .................................................................... (25.2) (29.9)
-------- --------
Consolidated ............................................................................... $ 606.9 $ 624.3
======== ========
Note: Unallocated items - net, consists of expenses not associated with the
geographic areas.
Commentary:
o Net sales in North America decreased .9 percent from last year primarily
due to the lower sales volumes for personal care products.
o Net sales outside of North America increased 12.6 percent principally due
to the favorable currency effects in Europe.
o Operating profit in North America decreased 7.2 percent because the lower
personal care sales volumes, higher fiber and energy costs, and higher
pension expense more than offset the benefits of cost savings programs.
o Operating profit outside North America increased 5.8 percent. Personal care
operating results in Europe and Asia, and the growth of the health care
business contributed to the improvement but were partially offset by lower
earnings in the Latin American personal care business. Operating profit in
2002 included $11.0 million of charges for the previously discussed
business improvement programs.
Additional Income Statement Commentary:
o Interest expense decreased because the benefit of lower interest rates more
than offset a higher average level of debt.
o The effective tax rate increased from 28.0 percent in 2002 to 29.1 percent
in 2003 due to the favorable resolution of certain prior year income tax
matters in the second quarter of 2002.
o The Corporation's share of net income of equity companies in the second
quarter increased to $30.3 million in 2003 from $21.5 million in 2002
primarily due to higher net income at Kimberly-Clark de Mexico, S.A. de
C.V. ("KCM"). Most of the increase in KCM's results was attributable to
lower currency transaction losses compared with last year. Before currency
effects, KCM's second quarter sales improved approximately 6 percent,
nearly offsetting inflationary cost increases.
o On a diluted basis, net income was $.82 per share, an increase of 1.2
percent compared with $.81 per share in 2002.
First Six Months of 2003 Compared With First Six Months of 2002
By Business Segment
(Millions of dollars)
Net Sales 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Personal Care ................................................................................. $2,611.4 $2,586.3
Consumer Tissue ............................................................................... 2,612.4 2,470.0
Business-to-Business .......................................................................... 1,855.2 1,751.3
Intersegment sales ............................................................................ (74.7) (67.8)
-------- --------
Consolidated .................................................................................. $7,004.3 $6,739.8
======== ========
Operating Profit 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Personal Care ................................................................................. $ 533.9 $ 557.4
Consumer Tissue ............................................................................... 431.7 466.2
Business-to-Business .......................................................................... 325.8 331.0
Other income (expense), net ................................................................... (56.2) (12.5)
Unallocated items - net ....................................................................... (49.0) (52.9)
-------- --------
Consolidated .................................................................................. $1,186.2 $1,289.2
======== ========
Note: Unallocated items - net, consists of expenses not associated with the
business segments.
Commentary:
Consolidated net sales for the first six months of 2003 were 3.9 percent higher
than in the prior year. Excluding favorable currency effects, net sales were
essentially flat. Overall, an increase in sales volumes of about 1 percent was
offset by higher promotion spending of nearly 1 percent.
o Net sales of personal care products, excluding currency effects, were more
than 1 percent lower due to a decline in sales volumes. Net selling prices
were slightly below last year.
o Net sales of consumer tissue products, excluding currency effects,
increased about 1 percent. Sales volumes increased more than 1 percent,
however, net selling prices were slightly lower than last year.
o Excluding currency effects, net sales of business-to-business products were
nearly 2 percent higher due to increased sales volumes.
Consolidated operating profit declined 8.0 percent due to higher promotional
spending, higher fiber and energy costs and increased pension expense of
approximately $70 million that more than offset the benefits of cost reduction
programs of nearly $90 million.
Each of the three business segments incurred more than $20 million of the
increased pension expense.
Included in the first six months of 2002 were charges for business improvement
programs of $24.0 million primarily related to the previously announced plans to
streamline manufacturing operations in Latin America and to consolidate
administrative functions in Europe. The major components of the charge were
severance costs of nearly $11.5 million and additional depreciation of
$6.6 million. These costs were included in the business segments as follows:
personal care $8.0 million; consumer tissue $11.5 million; and business-to-
business $4.5 million. These charges were included in the consolidated income
statement as follows: cost of products sold $14.1 million; and marketing,
research and general expenses $9.9 million.
o Personal care segment operating profit decreased 4.2 percent primarily due
to lower sales volumes and net selling prices because of the competitive
environment.
o Consumer tissue segment operating profit declined 7.4 percent because lower
net selling prices, due to promotional spending, and higher fiber, energy
and distribution costs more than offset higher sales volumes and the
benefit of cost savings programs.
o Business-to-business segment operating profit declined 1.6 percent because
cost savings and higher sales volumes for health care products were not
sufficient to overcome lower net selling prices and higher fiber costs for
other operations in the segment.
o Other income (expense), net included a charge of $15.6 million, or $.02 per
share, in 2003 for a legal judgment in Europe, compared with the previously
mentioned $26.5 million in 2002 for tax credit related losses in Brazil. In
addition to these charges, other expense in 2003 reflected currency
transaction losses compared with other income in 2002 for currency
transaction gains, including a gain of $17.3 million on Australian dollar
forward contracts related to last year's acquisition of the remaining
45 percent interest in Kimberly-Clark Australia Pty. Limited.
By Geography
(Millions of dollars)
Net Sales 2003 2002
- -------------------------------------------------------------------------------------------------------------------
North America .............................................................................. $4,429.3 $4,463.2
Outside North America ...................................................................... 2,847.4 2,545.4
Intergeographic sales ...................................................................... (272.4) (268.8)
-------- --------
Consolidated ............................................................................... $7,004.3 $6,739.8
======== ========
Operating Profit 2003 2002
- -------------------------------------------------------------------------------------------------------------------
North America .............................................................................. $1,013.3 $1,092.8
Outside North America ...................................................................... 278.1 261.8
Other income (expense), net ................................................................ (56.2) (12.5)
Unallocated items - net .................................................................... (49.0) (52.9)
-------- --------
Consolidated ............................................................................... $1,186.2 $1,289.2
======== ========
Note: Unallocated items - net, consists of expenses not associated with the
geographic areas.
Commentary:
o Net sales in North America declined .8 percent, as the lower net selling
prices for personal care and consumer tissue products and lower personal
care sales volumes more than offset higher sales volumes for consumer
tissue and business-to-business products.
o Net sales outside North America increased 11.9 percent primarily due to
favorable currency effects in Europe.
o Operating profit in North America decreased 7.3 percent because the effects
of the lower net sales for personal care and consumer tissue products,
higher fiber and energy costs and increased pension expense more than
offset cost savings benefits.
o Operating profit outside North America increased 6.2 percent. Personal care
results in Europe and Asia, and the growth of the health care business
contributed to this improvement. Lower earnings in the Latin American
personal care business partially offset this improvement. Operating profit
in 2002 included $18.8 million of charges for the previously discussed
business improvement programs.
Additional Income Statement Commentary:
o Interest expense decreased because the benefit of lower interest rates more
than offset a higher average level of debt.
o The Corporation's share of net income of equity companies increased to
$56.3 million in 2003 from $53.9 million in 2002, as lower net income from
KCM was more than offset by higher earnings elsewhere in Latin America.
o On a diluted basis, net income was $1.60 per share in 2003, a decrease of
3.0 percent compared with $1.65 per share in 2002. The first six months of
2002 included a charge of $.02 per share for the cumulative effect of an
accounting change related to the adoption of an accounting pronouncement
regarding trade and consumer promotion.
LIQUIDITY AND CAPITAL RESOURCES
o Cash provided by operations for the first six months of 2003 decreased
$108.5 million or 8 percent compared with the first six months of 2002. The
effect on working capital of higher levels of finished goods inventory,
principally due to the lower sales volumes, was primarily offset by
increased income tax liabilities due to net refunds of prior year taxes and
lower payments of U.S. federal taxes. In 2003, cash provided by operations
was reduced by a contribution of $100 million to the Corporation's U.S.
defined benefit pension plan.
o During the first six months of 2003, the Corporation repurchased
4.7 million shares of its common stock at a cost of approximately
$225 million, including 2.2 million shares repurchased in the second
quarter at a cost of approximately $113 million.
o At June 30, 2003, total debt and preferred securities was $4.4 billion, a
decrease of $.1 billion from December 31, 2002. Net debt (total debt net of
cash and cash equivalents and time deposits) and preferred securities was
$3.8 billion at June 30, 2003 compared with $3.9 billion at December 31,
2002. The ratio of net debt and preferred securities to capital at June 30,
2003 was 36.4 percent, which is within the Corporation's target range of
35 to 45 percent.
o In July 2003, Standard & Poor's ("S&P") revised the Corporation's credit
rating for long-term debt from AA to AA-. Moody's Investor Service
maintained its short- and long-term ratings but changed the Corporation's
outlook to negative from stable, indicating that a ratings downgrade could
be possible within the next 12 months. These changes were primarily based
on the Corporation's recent business performance in the heightened
competitive environment and because S&P changed the way in which it
evaluates liabilities for pensions and other postretirement benefits.
Management believes that these actions will not have a material adverse
effect on the Corporation's access to credit or its borrowing costs since
these credit ratings remain strong and are in the top eight percent of
companies listed in S&P's ranking of the 500 largest companies. The
Corporation's commercial paper continues to be rated in the top category.
o In June 2003, the Corporation filed a registration statement with the
Securities and Exchange Commission to issue up to $1.5 billion in long-term
debt securities.
As part of its financing plan, in August 2003, the Corporation issued
$500 million of 5.0% Notes due August 15, 2013. The proceeds were used to
retire commercial paper. In connection with the borrowing, the Corporation
entered into an interest rate swap agreement maturing on August 15, 2013
with a counterparty under which the difference between fixed- and floating-
rate interest amounts calculated on a $300 million notional amount is
exchanged on a quarterly basis. The floating rate is 3-month average LIBOR
plus 4.4 basis points. The swap agreement will permit the Corporation to
maintain its desired ratio of fixed and floating-rate borrowings. During
June and July 2003, the Corporation issued redemption notices on
$200 million of 7 7/8% and $200 million of 7.0% debentures, respectively.
At June 30, 2003, the Corporation classified a net $100 million of
commercial paper to be refinanced as long-term debt. The costs associated
with redeeming the debentures, totaling approximately $20 million, will be
recorded in the third quarter.
In June 2003, the Corporation announced the repurchase of $45 million of
industrial revenue bonds to be effective August 1, 2003. At June 30, 2003,
the Corporation classified the $45 million as debt payable within one year
and reduced long-term debt by that same amount.
o During the first quarter of 2003, a minority owner in Kimberly-Clark Peru
S.A. informed the Corporation of its intent to exercise an option to sell
its 49 percent ownership to the Corporation. This acquisition closed in
July 2003. During the second quarter of 2003, the Corporation's partner in
its joint tissue venture in Brazil informed the Corporation of its intent
to exercise its option to sell its 50 percent ownership in the venture to
the Corporation. This acquisition is expected to close in August 2003. The
combined cash cost of these transactions is approximately $200 million.
o Management believes that the Corporation's ability to generate cash from
operations and its capacity to issue short-term and long-term debt are
adequate to fund working capital, capital spending and other needs of the
business in the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
requires that certain instruments classified as part of stockholders' equity or
between stockholders' equity and liabilities be classified as liabilities
effective in the third quarter of 2003. The Corporation currently has no such
instruments and, accordingly, adoption of SFAS 150 will have no effect on the
Corporation's consolidated financial position.
In January 2003, the FASB issued Interpretation ("FIN") 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB 51. FIN 46 requires
consolidation of certain entities in which the primary beneficiary has a
controlling financial interest despite not having voting control. Likewise, it
does not permit consolidation of entities in which an entity has voting control
but not a controlling financial interest. The Corporation is continuing to
evaluate the impact of applying FIN 46 and has not yet completed this analysis.
It is reasonably possible that the Corporation will be required to consolidate
certain of the entities described in Note 13 to the consolidated financial
statements included in the Corporation's Form 10-K for the year ended
December 31, 2002, beginning in the third quarter of 2003. Also, it is
reasonably possible that the Corporation will be required to deconsolidate its
Luxembourg financing subsidiary described in Note 9 to such consolidated
financial statements. The debt of the entities that may become consolidated is
nonrecourse and the notes receivable are guaranteed, and the net obligation to a
third party in the Luxembourg financing subsidiary is presently included as
preferred securities of subsidiary and included in the Corporation's ratio of
net debt and preferred securities to capital. Therefore, consolidation/
deconsolidation 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.
ENVIRONMENTAL MATTERS
The Corporation has been named as a potentially responsible party 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 its
business, financial condition or results of operations.
OUTLOOK
Based on soft growth in the product categories in which it competes, intense
competition and higher raw material and energy costs, the Corporation expects
its business environment will remain difficult. Management will continue to
focus on increasing sales volumes and aggressively reducing costs over the
balance of 2003 in order to manage the challenges the Corporation is facing.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain information contained in this report is forward-looking and is based on
various assumptions. Such information includes, without limitation, the business
outlook, including new product introductions, cost savings and acquisitions,
anticipated financial and operating results, strategies, contingencies and
contemplated transactions of the Corporation. These forward-looking statements
are based upon management's expectations and beliefs concerning future events
impacting the Corporation. There can be no assurance that such events will occur
or that the Corporation's results will be as estimated. For a description of
certain factors that could cause the Corporation's future results to differ
materially from those expressed in any such forward-looking statements, see the
section of Part I, Item 1 of the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2002 entitled "Factors That May Affect Future
Results."
Item 4. Controls and Procedures.
As of June 30, 2003, an evaluation was performed under the supervision and with
the participation of the Corporation's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures. Based on that
evaluation, the Corporation's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that the Corporation's disclosure
controls and procedures were effective as of June 30, 2003. There have been no
significant changes in the Corporation's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of the
most recent evaluation of internal controls.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3)a Restated Certificate of Incorporation, dated June 12, 1997,
incorporated by reference to Exhibit No. (3)a of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1999.
(3)b By-Laws, as amended April 24, 2003, filed herewith.
(4) Copies of instruments defining the rights of holders of
long-term debt will be furnished to the Securities and
Exchange Commission on request.
(31)a Certification of Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), filed herewith.
(31)b Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed
herewith.
(32)a Certification of Chief Executive Officer required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code,
filed herewith.
(32)b Certification of Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code,
filed herewith.
(b) Reports on Form 8-K
The Corporation filed the following Current Report after March 31, 2003 and
prior to June 30, 2003:
Current Report on Form 8-K dated April 22, 2003, to furnish the text
of a press release issued on April 22, 2003 regarding first quarter
results of operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KIMBERLY-CLARK CORPORATION
(Registrant)
By: /s/ Mark A. Buthman
----------------------------------------
Mark A. Buthman
Senior Vice President and
Chief Financial Officer
(principal financial officer)
By: /s/ Randy J. Vest
----------------------------------------
Randy J. Vest
Vice President and Controller
(principal accounting officer)
August 7, 2003
EXHIBIT INDEX
Exhibit No. Description
(3)a Restated Certificate of Incorporation, dated June 12, 1997,
incorporated by reference to Exhibit No. (3)a of the Coporation's
Annual Report on Form 10-K for the year ended December 31, 1999.
(3)b By-Laws, as amended April 24, 2003, filed herewith.
(4) Copies of instruments defining the rights of holders of long-term debt
will be furnished to the Securities and Exchange Commission on
request.
(31)a Certification of Chief Executive Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), filed herewith.
(31)b Certification of Chief Financial Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act, filed herewith.
(32)a Certification of Chief Executive Officer required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code, filed herewith.
(32)b Certification of Chief Financial Officer required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code, filed herewith.