FORM 10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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)
Registrant's telephone number, including area code: (972) 281-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Stock - $1.25 Par Value New York Stock Exchange
Preferred Stock Purchase Rights Chicago Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of August 2, 1999, 532,757,486 shares of common stock were
outstanding, and the aggregate market value of the registrant's common stock
held by non-affiliates on such date (based on the closing stock price on the
New York Stock Exchange) was approximately $32.9 billion.
(Continued)
FACING SHEET
(CONTINUED)
DOCUMENTS INCORPORATED BY REFERENCE
Kimberly-Clark Corporation's 1998 Annual Report to Stockholders and 1999 Proxy
Statement contain certain information required in this Form 10-K, and portions
of those documents are incorporated by reference herein from the applicable
sections thereof. The following table identifies the sections of this Form
10-K which incorporate by reference portions of the Corporation's 1998 Annual
Report to Stockholders and 1999 Proxy Statement. The items of this Form 10-K,
where applicable, specify which portions of such documents are incorporated by
reference. The portions of such documents that are not incorporated by
reference shall not be deemed to be filed with the Commission as part of this
Form 10-K.
DOCUMENT OF WHICH PORTIONS ITEMS OF THIS FORM 10-K
ARE INCORPORATED BY REFERENCE IN WHICH INCORPORATED
- ---------------------------------- -----------------------
1998 Annual Report to Stockholders PART I
(Year ended December 31, 1998) ITEM 1. Business
PART II
ITEM 5. Market for the Registrant's
Common Stock and Related
Stockholder Matters
1999 Proxy Statement PART III
ITEM 10. Directors and Executive
Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of
Certain Beneficial Owners and
Management
ITEM 13. Certain Relationships and
Related Transactions
SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENTS
On December 15, 1998, Kimberly-Clark Corporation ("Kimberly-Clark" or the
"Corporation") filed a Registration Statement on Form S-3 (the "Form S-3")
with the Securities and Exchange Commission (the "SEC"). The Form S-3 related
to the shelf registration of $500 million of debt securities to be issued by
Kimberly-Clark from time to time.
On January 29, 1999 and February 2, 1999, Kimberly-Clark received from the
SEC's Division of Corporation Finance (the "Division") a number of legal and
accounting comments, respectively, with respect to the Form S-3. On March 12,
1999, Kimberly-Clark responded to each set of comments and filed a Current
Report on Form 8-K to report its audited consolidated financial statements for
the year ended December 31, 1998, the related notes and management's
discussion and analysis with respect thereto.
On March 26, 1999, Kimberly-Clark filed its Annual Report on Form 10-K for the
year ended December 31, 1998 (the "1998 Form 10-K"). On May 12, 1999,
Kimberly-Clark filed its Quarterly Report on Form 10-Q for the three months
ended March 31, 1999.
From April through early July of 1999, representatives of Kimberly-Clark and
the Division engaged in an extensive dialogue concerning specific accounting
comments that the Division had raised. The primary focus of the comments
related to the restructuring and other charges that Kimberly-Clark had
previously recorded in connection with its 1995 merger with Scott Paper
Company ("Scott"), its 1997 restructuring plan and its 1998 facilities
consolidation plan.
Following these discussions, Kimberly-Clark management concluded that it would
recommend to the Board of Directors that there should be a restatement of the
Corporation's 1995, 1996, 1997, 1998 and first quarter 1999 financial
statements and related disclosures (the "Restatement"). On July 20, 1999, the
Kimberly-Clark Board of Directors authorized the Restatement, and on July 21,
1999, the Corporation issued a press release to that effect. On August 5,
1999 the Board of Directors approved the restated financial statements
reflected in this Annual Report on Form 10-K/A for the year ended December 31,
1998 (this "Form 10-K/A") and the related Quarterly Report on
Form 10-Q/A for the period ended March 31, 1999.
The purpose of this Form 10-K/A is to restate the Corporation's 1996, 1997 and
1998 financial statements to reflect, among other things, the following
changes.
- - Certain merger related costs originally recorded in 1995 at the time of
the Scott merger have been recorded as costs of subsequent periods
when they were incurred.
- - Certain employee severance costs originally recorded in 1995 in
connection with the Scott merger have been recorded as costs of
subsequent periods when such employee severances and benefits
were appropriately communicated.
- - The effects of changes in estimates to restructuring and other unusual
charges and facility closure charges have been recorded in the periods
when estimates for individual programs included in the applicable plan
changed. In prior presentations, on an aggregate basis, the changes
in estimates were either reallocated to other components of each such
plan or were returned to earnings at the time aggregate amounts were
identified as being in excess of the then current estimate to
complete each plan.
- - Certain assets that were to be disposed of but which were not
immediately removed from operations have been depreciated on an
accelerated basis over their remaining useful life. In prior
presentations, these assets had been written down to estimated fair
value as of the date such assets were expected to be removed from
service, assuming continuation of normal depreciation until the
estimated date of removal.
- - An energy contract termination penalty has been recorded in the
second quarter of 1998 and employee severance costs have been
recorded in the third quarter of 1998 in connection with the
planned closure of the Corporation's pulp mill in Mobile, Alabama.
The Corporation had originally intended to record these charges in
the third quarter of 1999 when the entire integrated pulp operation
is to be disposed of, including the related sale of the
associated woodlands operations, with a net gain resulting from the
overall transaction. The Corporation continues to expect a net gain
on the overall transaction.
The principal effects of these items on the accompanying financial statements
are presented in Note 17 to the Consolidated Financial Statements.
For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, Kimberly-Clark has amended and
restated in its entirety each item of the 1998 Form 10-K which has been
affected by the Restatement. In order to preserve the nature and character of
the disclosures set forth in such items as of March 26, 1999, the date on
which the 1998 Form 10-K was originally filed, no attempt has been made in
this Form 10-K/A to modify or update such disclosures except as required to
reflect the effects of the Restatement and other potentially material
events.
PART I
ITEM 1. BUSINESS
Kimberly-Clark Corporation was incorporated in Delaware in 1928. As used in
Items 1, 2 and 7 of this Form 10-K, the term "Corporation" refers to
Kimberly-Clark Corporation and its consolidated subsidiaries. In the
remainder of this Form 10-K, the terms "Kimberly-Clark" or "Corporation" refer
only to Kimberly-Clark Corporation. Financial information by business segment
and geographic area, and information about principal products and markets of
the Corporation, are contained under the caption "Management's Discussion and
Analysis" and in Note 16 to the Consolidated Financial Statements.
RECENT DEVELOPMENTS. Historically, the Corporation has been engaged in a wide
variety of diversified businesses, including the manufacture and sale of
consumer products, paper and forest products, airline services and various
other businesses. In recent years, the Corporation has been undergoing a
transition to a global consumer products company based on the strategy of
building on its core technologies, well-known trademarks and consumer product
franchises. The Corporation also has been seeking opportunities to expand its
health care business. Those businesses that did not, or could not, build on
the Corporation's strengths were candidates for divestiture. Those businesses
that fit into the Corporation's strategy were candidates for further
investment and support. Outside businesses that were perceived as
opportunities consistent with the strategy were candidates for acquisition.
As a result, since 1992, the Corporation has completed over 30 strategic
acquisitions and approximately 20 strategic divestitures, including the
following transactions:
- - On December 12, 1995, Scott became a wholly-owned subsidiary of
Kimberly-Clark upon completion of a merger transaction in which
the outstanding Scott common shares were converted into shares of
Kimberly-Clark common stock. The transaction was valued at
approximately $9.4 billion and accounted for as a pooling of interests.
On February 14, 1996, Scott changed its name to Kimberly-Clark
Tissue Company ("KCTC").
- - On June 28, 1996, the Corporation sold the baby and child wipe
businesses previously conducted by Scott, consisting of the Baby Fresh,
Wash a-Bye Baby and Kid Fresh brands and the Dover, Delaware production
facility, to The Procter & Gamble Company. This divestiture was
required by the U.S.Justice Department as part of the Scott
merger.
- - On September 16, 1996, the Corporation sold its tissue mill in Prudhoe,
England and certain consumer tissue businesses in the United
Kingdom and Ireland to Svenska Cellulosa Aktiebolaget (SCA) of Sweden.
This divestiture was required by the European Commission as part
of the Scott merger.
- - On March 27, 1997, the Corporation sold its Coosa Pines, Alabama pulp
and newsprint operations, and related woodlands ("Coosa"), to Alliance
Forest Products Inc., a publicly-held Canadian corporation, for
approximately $600 million in cash.
- - On June 6, 1997, the Corporation sold its 50.1 percent interest in Scott
Paper Limited ("SPL"), a publicly-traded Canadian company to Kruger,
Inc., a Canadian paper and forest products company, for approximately
$127 million.
- - On December 18, 1997, the Corporation acquired Tecnol Medical Products,
Inc. ("Tecnol"), a leading maker of disposable face masks and patient
care products, in a merger transaction which involved the
conversion of all outstanding shares of Tecnol common stock into shares
of Kimberly-Clark common stock. The transaction was valued at
approximately $428 million and was accounted for as a purchase.
PART I
(Continued)
ITEM 1. BUSINESS (Continued)
- - On May 28, 1998, the Corporation purchased a 50 percent equity interest
in Klabin Tissue S.A. (now known as Klabin Kimberly S.A.), the leading
tissue manufacturer in Brazil.
- - On July 21, 1998, the Corporation purchased an additional 10 percent
ownership interest in its Korean affiliate, YuHan-Kimberly,
Limited, increasing its ownership interest to 70 percent.
- - On July 29, 1998, the Corporation purchased a 51 percent ownership
interest in Kimberly Bolivia, S.A., a new joint venture company in
Bolivia.
- - On August 19, 1998, the Corporation sold the outstanding shares of K-C
Aviation Inc. ("KCA"), a leading provider of business aviation
services, to Gulfstream Aerospace Corporation for $250 million
in cash.
- - On June 10, 1999, the Corporation purchased the European consumer and
away-from-home tissue businesses of Attisholz Holding AG for
approximately $365 million. Such businesses are located in Germany,
Switzerland and Austria.
In the fourth quarter of 1995, in connection with the Scott merger, the
Corporation announced a plan to restructure the combined operations and to
accomplish other business improvement objectives (the "1995 Plan"). The
original estimated pretax cost of the 1995 Plan was $1,440.0 million. The
plan was ultimately accomplished at a pretax cost of $1,305.0 million, which
was charged to earnings as follows: $814.3 million in 1995, $429.9 million in
1996 and $64.1 million in 1997. A credit of $3.3 million was recorded in
1998.
On November 21, 1997, the Corporation announced a restructuring plan (the
"1997 Plan"). The plan includes the sale, closure or downsizing of
17 manufacturing facilities worldwide and a workforce reduction of
approximately 4,800 employees. The estimated total pretax cost of the
1997 Plan is $679.5 million. The Corporation recorded $414.2 million of
such total cost in 1997. In 1998, the Corporation recorded $250.8 million of
such total cost at the time the costs became accruable under appropriate
accounting principles, including accelerated depreciation expense on certain
assets that were to be disposed of but which remained or will remain in use
until disposed of in 1999 and 2000.
In the fourth quarter of 1998, the Corporation announced a facilities
consolidation plan to, among other things, further align tissue manufacturing
capacity with demand in Europe, close a diaper manufacturing facility in
Canada, shut down and dispose of a tissue machine in Thailand and write down
certain excess feminine care production equipment in North America. Of the
$124.0 million aggregate cost of such plan (the "1998 Facilities Charge"),
$49.1 million was recorded in 1998. The remaining $74.9 million of total
costs of the plan, primarily related to a tissue manufacturing facility in the
United Kingdom, which will remain in use until its expected shutdown in
October 2000, will be recorded as accelerated depreciation expense and
employee severance costs in 1999 and 2000.
On May 5, 1998, the Corporation announced its intention to dispose of its
entire integrated pulp operation in Mobile, Alabama (the "Mobile pulp
operation"), including the related sale of the associated woodlands operations
(the "Southeast Timberlands"). On June 10, 1999, the Corporation announced it
had agreed to sell approximately 460,000 acres of the Southeast Timberlands to
Joshua Management, LLC for approximately $400 million. Because the sale of
the Southeast Timberlands is associated with the planned closure of the Mobile
PART I
(Continued)
ITEM 1. BUSINESS (Continued)
pulp mill in September 1999, the net effect of the transaction, which is
expected to be a net gain, will be recorded at the time of the closing of
the sale of the Southeast Timberlands.
On December 23, 1998, the Corporation announced that it had signed a
definitive agreement to acquire Ballard Medical Products ("Ballard"), a
leading maker of disposable medical devices for respiratory care,
gastroenterology and cardiology. Under the agreement, Ballard shareholders
will receive $25 for each share of Ballard common stock, payable in shares of
the Corporation's common stock. The transaction, which is valued at
approximately $764 million, remains subject to regulatory clearances and
approval by the Ballard shareholders. The transaction is expected to be
completed by September 30, 1999 and will be accounted for as a purchase.
DESCRIPTION OF THE CORPORATION. The Corporation is principally engaged in the
manufacturing and marketing throughout the world of a wide range of products
for personal, business and industrial uses. Most of these products are made
from natural and synthetic fibers using advanced technologies in fibers,
nonwovens and absorbency.
For financial reporting purposes, the Corporation's businesses are separated
into three global business segments: Tissue; Personal Care; and Health Care
and Other.
The Tissue segment includes facial and bathroom tissue, and paper towels and
wipers for household and away-from-home use; wet wipes; printing, premium
business and correspondence papers; and related products. Products in this
business segment are sold under the Kleenex, Scott, Kimberly-Clark, Kleenex
Cottonelle, Kleenex Viva, Huggies, Kimwipes, Wypall and other brand names.
The Personal Care segment includes disposable diapers, training and youth
pants and swimpants; feminine and incontinence care products; and related
products. Products in this business segment are primarily for household use
and are sold under a variety of well-known brand names, including Huggies,
Pull-Ups, Little Swimmers, GoodNites, Kotex, New Freedom, Lightdays, Depend,
Poise and KimCare.
The Health Care and Other segment includes health care products, consisting of
surgical gowns, drapes, infection control products, sterilization wraps,
disposable face masks, cold therapy products, patient restraints and other
disposable medical products; specialty and technical papers; and other
products. Products in this segment are sold under the Kimberly-Clark, Tecnol
and other brand names.
Products for household use are sold directly and through wholesalers to
supermarkets, mass merchandisers, drugstores, warehouse clubs, home health
care, variety and department stores and other retail outlets. Products for
away-from-home use are sold through distributors and directly to
manufacturing, lodging, office building, food service and health care
establishments and other high volume public facilities. Paper products are
sold directly to users, converters, manufacturers, publishers and printers,
and through paper merchants, brokers, sales agents and other resale agencies.
Health care products are sold to distributors, converters and end-users.
PATENTS AND TRADEMARKS. The Corporation owns various patents and trademarks
registered domestically and in many foreign countries. The Corporation
considers the patents and trademarks which it owns and the trademarks under
which it sells certain of its products to be material to its
PART I
(Continued)
ITEM 1. BUSINESS (Continued)
business. Consequently, the Corporation seeks patent and trademark protection
by all available means, including registration. A partial list of the
Corporation's trademarks is included under the caption "Trademarks" contained
in the 1998 Annual Report to Stockholders and is incorporated herein by
reference.
RAW MATERIALS. Superabsorbent materials are important components in
disposable diapers, training and youth pants and incontinence care products.
Polypropylene and other synthetics and chemicals are primary raw materials for
manufacturing nonwoven fabrics which are used in disposable diapers, training
and youth pants, feminine pads, incontinence and health care products, and
away-from-home wipers.
Cellulose fiber, in the form of kraft pulp or recycled fiber, is the primary
raw material for the Corporation's tissue and paper products and is an
important component in disposable diapers, training pants, feminine pads and
incontinence care products.
Most recovered paper and all synthetics are purchased from third parties.
Pulp and recycled fiber are produced by the Corporation and purchased from
others. The Corporation considers the supply of such raw materials to be
adequate to meet the needs of its businesses. See "Factors That May Affect
Future Results - Raw Materials."
The Corporation owns or controls approximately 6.4 million acres of forestland
in North America, principally as a fiber source for pulp production which is
consumed internally within the tissue and personal care businesses. In the
United States, approximately .5 million acres are owned in Alabama and
Mississippi. In Canada, approximately 1.0 million acres in the province of
Nova Scotia are owned by the Corporation, and approximately 4.9 million acres,
principally in the province of Ontario, are held under long-term Crown rights
or leases.
COMPETITION. For a discussion of the competitive environment in which the
Corporation conducts its business, see "Factors That May Affect Future Results
- - Competitive Environment."
RESEARCH AND DEVELOPMENT. A major portion of total research and development
expenditures is directed toward new or improved personal care, health care and
tissue products, and nonwoven materials. Consolidated research and development
expense was $224.8 million in 1998, $211.8 million in 1997 and $207.9
million in 1996.
ENVIRONMENTAL MATTERS. Total worldwide capital expenditures for environmental
controls to meet legal requirements and otherwise relating to the protection
of the environment at the Corporation's facilities are expected to be about
$107 million in 1999 and $72 million in 2000. Of this amount, approximately
$51 million in 1999 and $34 million in 2000 are expected to be spent at
facilities in the United States. Approximately $9 million and $19 million of
such U.S. expenditures in 1999 and 2000, respectively, relate to compliance
with the Environmental Protection Agency's ("EPA") Cluster Rule for sulfite
pulping operations at the Corporation's Everett, Washington pulp mill. The
remainder of the expected U.S. expenditures, approximately $42 million in 1999
and $15 million in 2000, is expected to be applied at various other production
facilities for other environmental control system improvements. For
facilities outside the U.S., capital expenditures for environmental controls
are expected to be approximately $56 million in 1999 and $38 million in 2000.
PART 1
(Continued)
ITEM 1. BUSINESS (Continued)
Total worldwide operating expenses for environmental compliance are expected
to be about $144 million in 1999 and $148 million in 2000. U.S. operating
expenses are expected to be $83 million in 1999 and $84 million in 2000.
Operating expenses for facilities outside the U.S. are expected to be $61
million in 1999 and $64 million in 2000. Operating expenses include pollution
control equipment operation and maintenance costs, governmental payments, and
research and engineering costs.
Total environmental capital expenditures and operating expenses are not
expected to have a material effect on the Corporation's total capital and
operating expenditures, consolidated earnings or competitive position.
However, current environmental spending estimates could be modified as a
result of changes in the Corporation's plans, changes in legal requirements or
other factors.
In connection with certain divestitures, including those described in "Recent
Developments," the Corporation has agreed to indemnify the purchasers of
certain divested businesses against certain contingent environmental
liabilities. Generally, these indemnification obligations apply only to
environmental liabilities which are actually incurred by the purchaser within
a specified time period after closing and are limited to a specified
dollar amount of coverage. The Corporation does not consider these
obligations to be material and has established appropriate accrued
liabilities with respect thereto.
EMPLOYEES. In its worldwide consolidated operations, the Corporation had
54,700 employees as of December 31, 1998.
Approximately 25 percent of the Corporation's United States workforce and
approximately 40 percent of the Corporation's non-United States workforce are
represented by unions. In the United States, the largest concentration of
union membership is with the Paper, Allied-Industrial, Chemical & Energy
Workers International Union (PACE). Other employees are represented by the
International Brotherhood of Electrical Workers (IBEW), the International
Association of Machinists and Aerospace Workers (IAM), the Association of
Western Pulp and Paper Workers (AWPPW), and various independent unions.
At those facilities where one or more unions represent employees, the
Corporation and the unions generally have good working relationships. The
labor agreements are generally three years or more in duration and contain
wage and fringe benefit programs which management of the Corporation believes
are competitive within the applicable industry segment and geographic region.
Throughout the Corporation, management seeks to establish and maintain an open
and respectful relationship with its employees. Management believes that
communications should flow freely in the organization to provide all employees
the opportunity to maximize the use of their talents in the attainment of the
Corporation's business objectives.
INSURANCE. The Corporation maintains coverage consistent with industry
practice for most risks that are incident to its operations.
PART 1
(Continued)
ITEM 1. BUSINESS (Continued)
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain matters discussed in this Form 10-K/A, or documents a portion of which
are incorporated herein by reference, concerning, among other things, the
business outlook, anticipated financial and operating results, strategies,
contingencies and contemplated transactions of the Corporation, including, but
not limited to, the adequacy of the charges under the 1997 Plan, the adequacy
of the 1998 Facilities Charge, the anticipated sale of the Southeast
Timberlands, the anticipated acquisition of Ballard, the "Year 2000" readiness
program, and the adoption of the Euro, 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 following factors, as well as factors described elsewhere in this Form
10-K/A, or in other SEC filings, among others, could cause the Corporation's
future results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Corporation.
Such factors are described in accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, which encourages companies to
disclose such factors.
COMPETITIVE ENVIRONMENT. The Corporation experiences intense competition for
sales of its principal products in its major markets, both domestically and
internationally. The Corporation's products compete with widely advertised,
well-known, branded products, as well as private label products which are
typically sold at lower prices. The Corporation has several major competitors
in most of its markets, some of which are larger and more diversified than the
Corporation. The principal methods and elements of competition include brand
recognition and loyalty, product quality and performance, price, marketing and
distribution capabilities. Inherent risks in the Corporation's competitive
strategy include uncertainties concerning trade and consumer acceptance, the
effects of recent consolidations of retailers and distribution channels, and
competitive reaction. Aggressive competitive reaction may lead to increased
advertising and promotional spending by the Corporation in order to maintain
market share. Increased competition with respect to pricing would reduce
revenue and could have an adverse impact on the Corporation's financial
results. In addition, the Corporation relies on the development and
introduction of new products and line extensions as a means of achieving
and/or maintaining category leadership. In order to maintain its competitive
position, the Corporation must develop technological innovation with respect
to its products.
COST SAVING STRATEGY. A significant portion of the Corporation's anticipated
cost savings are expected to result from operating efficiencies, the 1997 Plan
and the 1998 Facilities Charge. However, such savings will require the
continued consolidation and integration of facilities, functions, systems and
procedures, all of which present significant management challenges. There can
be no assurance that such actions will be successfully accomplished as rapidly
as expected or of the extent to which such cost savings and efficiencies will
be achieved.
RAW MATERIALS. Cellulose fiber, in the form of kraft pulp or recycled fiber,
is used extensively in the Corporation's tissue and paper products and is
subject to significant price fluctuations due to the cyclical nature of the
pulp markets. Recycled fiber accounts for approximately 20 percent of the
Corporation's overall fiber requirements. On a worldwide basis, the
Corporation has reduced its internal supply of pulp to approximately 70
percent of its virgin fiber requirements. Closure of the
PART 1
(Continued)
ITEM 1. BUSINESS (Continued)
Mobile pulp mill in September 1999 will reduce the percentage of integration
of the Corporation's pulp requirements to approximately 40 percent. The
Corporation has announced its intention to reduce its level of pulp
integration to approximately 20 percent. However, such a reduction in pulp
integration could increase the Corporation's commodity price risk.
Specifically, increases in pulp prices could adversely affect the
Corporation's earnings if selling prices are not adjusted or if such
adjustments significantly trail the increases in pulp prices. Conversely, if
the Corporation does not lower its level of pulp integration and the market
price for pulp declines, thereby possibly causing selling prices for tissue
products to fall, the Corporation's profit margin could suffer. The
Corporation has not used derivative instruments in the management of these
risks.
ACQUISITION AND DIVESTITURE STRATEGY. The Corporation's anticipated financial
results and business outlook are dependent in part upon the consummation of
projected divestitures on terms advantageous to the Corporation and the
availability of suitable acquisition candidates. There can be no assurance
that such divestitures will be consummated, or, if consummated, that the terms
of such divestitures will be advantageous to the Corporation.
In addition, the Corporation could encounter significant challenges in
locating suitable acquisition candidates that are consistent with its
strategic objectives and will contribute to its long-term success.
Furthermore, there can be no assurance that any such acquired business
can or will be successfully integrated with the Corporation's businesses
in order to provide anticipated synergies and earnings growth.
VOLUME FORECASTING. The Corporation's anticipated financial results reflect
forecasts of future volume increases in the sales of its products. Challenges
in such forecasting include anticipating consumer preferences, estimating
sales of new products, estimating changes in population characteristics (such
as birth rates and changes in per capita income), anticipating changes in
technology and estimating the acceptance of the Corporation's products in new
markets. As a result, there can be no assurance that the Corporation's volume
increases will be as estimated.
FOREIGN MARKET RISKS. Because the Corporation and its equity companies have
manufacturing facilities in 40 countries and its products are sold in more
than 150 countries, the Corporation's results may be substantially affected by
foreign market risks. The Corporation is subject to the impact of economic
and political instability in developing countries. Recent economic
uncertainty and currency devaluations in Asia and Latin America have and may
continue to have an impact on the Corporation's earnings. Also, the extremely
competitive situation in European personal care and tissue markets, and the
challenging economic environments in Mexico and developing countries in
eastern Europe and Latin America, may slow the Corporation's sales growth and
earnings potential. In addition, the Corporation is subject to (i) foreign
exchange translation risk associated with the introduction of the Euro in
certain European countries, and the strengthening or weakening of various
currencies against each other and local currencies versus the U.S. dollar, and
(ii) foreign currency risk arising from transactions and commitments
denominated in non-local currencies. See "Management's Discussion and
Analysis - Market Risk Sensitivity and Inflation Risks" and " - Adoption of
the Euro." Translation exposure for the Corporation's balance sheet with
respect to foreign operations is not hedged. Although the Corporation uses
instruments to hedge its foreign currency risks (through foreign currency
forward, swap and option contracts), these instruments are used selectively to
manage risk and there can be no assurance that the Corporation will be fully
protected against substantial foreign currency fluctuations.
PART 1
(Continued)
ITEM 1. BUSINESS (Continued)
CONTINGENCIES. The costs and other effects of pending litigation and
administrative actions against the Corporation cannot be determined with
certainty. Although management believes that no such proceedings will have a
material adverse effect on the Corporation, there can be no assurance that the
outcome of such proceedings will be as expected. See "Item 3. Legal
Proceedings."
"YEAR 2000" READINESS. For a discussion of the Corporation's readiness for
the "Year 2000" in terms of its computer systems, see "Management's Discussion
and Analysis - 'Year 2000' Readiness."
PART II
ITEM 6. SELECTED FINANCIAL DATA
(Millions of dollars, Year Ended December 31
-----------------------------------------------------
except per share amounts) 1994 1995 1996 1997 1998
- ---------------------------- --------- --------- --------- --------- ---------
(As Restated - See Note 1)
------------------------------------------
Net Sales. . . . . . . . . . . . . . $11,627.9 $13,373.0 $13,149.1 $12,546.6 $12,297.8
Charges for business improvement
and other programs:
Restructuring and Other Unusual
Charges. . . . . . . . . . . . - 814.3 275.7 349.5 111.8
Accelerated Depreciation . . . . - - 143.1 37.6 85.3
Other Charges. . . . . . . . . . - - 11.1 91.2 180.7
Mobile pulp mill fees and severances - - - - 42.3
--------- --------- --------- --------- ---------
- 814.3 429.9 478.3 420.1
--------- --------- --------- --------- ---------
Operating Profit . . . . . . . . . . 1,277.1 838.7 1,558.8 1,468.4 1,573.3
Share of Net Income of Equity
Companies. . . . . . . . . . . . . 110.5 113.3 152.4 157.3 137.1
Income from Continuing Operations
Before Extraordinary Items and
Cumulative Effect of Accounting
Change . . . . . . . . . . . . . . 766.5 507.2 1,035.4 985.4 1,114.3
Per Share Basis:
Basic. . . . . . . . . . . . . 1.38 .91 1.84 1.77 2.02
Diluted. . . . . . . . . . . . 1.37 .90 1.83 1.76 2.01
Net Income . . . . . . . . . . . . . 753.8 507.2 1,035.4 1,002.9 1,103.1
Per Share Basis:
Basic. . . . . . . . . . . . . 1.35 .91 1.84 1.80 2.00
Diluted. . . . . . . . . . . . 1.34 .90 1.83 1.79 1.99
Cash Dividends Per Share
Declared . . . . . . . . . . . . .88 .90 .92 .96 1.00
Paid . . . . . . . . . . . . . . .88 .90 .92 .95 .99
Total Assets . . . . . . . . . . . . $12,555.7 $11,561.0 $11,820.4 $11,417.1 $11,687.8
Long-Term Debt . . . . . . . . . . . 2,085.4 1,984.7 1,738.6 1,803.9 2,068.2
Stockholders' Equity . . . . . . . . 4,145.9 4,141.3 4,595.0 4,340.3 4,031.5
NOTES TO SELECTED FINANCIAL DATA
(1) The financial data as of and for the years ended December 31, 1995, 1996,
1997 and 1998 has been restated as described in Notes 1 and 17 to the
Consolidated Financial Statements.
(2) In 1994, share of net income of equity companies and net income includes
a charge of $39.2 million, or $.07 per share, for foreign currency
losses incurred by Kimberly-Clark de Mexico S.A. de C.V. ("KCM")
on the translation of the net exposure of U.S. dollar-denominated
liabilities into pesos.
(3) Results for 1994 include income of a discontinued operation, net of taxes,
of $48.4 million, or $.08 per share, related to S.D. Warren Company, a
former printing and publishing papers subsidiary, which was sold in
December 1994.
(4) Results for 1994 include an extraordinary loss related to the early
extinguishment of debt of $61.1 million, or $.11 per share.
(5) The original estimated pretax cost of the 1995 Plan was $1,440.0 million.
The plan was ultimately accomplished at a pretax cost of $1,305.0
million, which was charged to earnings as follows: $814.3 million in
1995, $429.9 million in 1996 and $64.1 million in 1997. A credit of
$3.3 million was recorded in 1998. Charges and the credit under the
1995 Plan were reported in the following income statement categories
for the periods indicated.
PART II
(Continued)
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Year Ended December 31
----------------------------------
(Millions of dollars) 1995 1996 1997 1998
----------------------- ------ ------ ------ ------
Cost of products sold. . . . . . . . . . $ - $154.2 $15.1 $ 1.7
Restructuring and other unusual charges. 814.3 275.7 49.0 (5.0)
------ ------ ----- ------
Total charges (credits). . . . . . . . . $814.3 $429.9 $64.1 $(3.3)
====== ====== ===== ======
The effects of the 1995 Plan decreased (increased) operating profit, net
income and net income per share as follows:
(Millions of dollars, Year Ended December 31
--------------------------------------
except per share amounts) 1995 1996 1997 1998
- ---------------------------- ------ ------ ------ ------
Operating profit . . . . . . . . . . . . $814.3 $429.9 $64.1 $(3.3)
Net income . . . . . . . . . . . . . . . 596.9 328.6 51.3 (.9)
Basic net income per share . . . . . . . 1.07 .58 .09 -
(6) In 1995, share of net income of equity companies and net income
includes a charge of $38.5 million, or $.07 per share, for foreign
currency losses incurred by KCM on the translation of the
net exposure of U.S. dollar-denominated liabilities into pesos.
(7) Share of net income of equity companies and net income for 1996 includes
a charge recorded by KCM for restructuring costs related to its
merger with Scott's former Mexican affiliate. The Corporation's share of
the after-tax charge was $5.5 million, or $.01 per share.
(8) The estimated pretax cost of the 1997 Plan is $679.5 million. The
Corporation recorded $414.2 million of such cost in 1997. In 1998,
the Corporation recorded $250.8 million of such cost at the time
costs became accruable under appropriate accounting principles,
including accelerated depreciation expense on assets that were to be
disposed of but which remained or will remain in use until disposed of in
1999 and 2000. The remaining $14.5 million of the cost of the 1997
Plan will be recorded as accelerated depreciation expense over the
remaining useful lives of such assets. Approximately 1,100 additional
employees are expected to be notified of their termination benefits in
1999 and 2000 and the associated costs will be charged to earnings at that
time.
Charges under the 1997 Plan were reported in the following income
statement categories for the two years ended December 31.
(Millions of dollars) 1997 1998
----------------------- ------ ------
Cost of products sold . . . . . . . . . $113.7 $134.0
Restructuring and other unusual charges 300.5 116.8
------ ------
Total Charges . . . . . . . . . . . . . $414.2 $250.8
====== ======
PART II
(Continued)
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Charges under the 1997 Plan reduced operating profit, net income and net
income per share as follows:
Year Ended
December 31
-----------------
(Millions of dollars, except per share amounts) 1997 1998
- ----------------------------------------------------- ------ ------
Operating profit . . . . . $414.2 $250.8
Net income . . . . . . . . 315.0 178.9
Basic net income per share .57 .33
(9) In 1997, the Corporation sold its equity interest in SPL and Coosa.
Also, the Corporation recorded impairment losses on certain tissue and
pulp manufacturing facilities. These transactions were aggregated and
reported as extraordinary gains totaling $17.5 million, or $.03
per share.
(10) Share of net income of equity companies and net income for 1997 includes
a net gain of $16.3 million, or $.03 per share, primarily related to the
sale of a portion of the tissue business of KCM. The sale was required by
the Mexican regulatory authorities following the merger of KCM and
Scott's former Mexican affiliate.
(11) In connection with the pulp mill closure at the Mobile pulp operation,
and as permitted by the terms of the governing contract, on May 5, 1998,
the Corporation gave notice to Mobile Energy Services Company, L.L.C.
("MESC") of the Corporation's intent to terminate MESC's long-term contract
for power, steam and liquor processing services with respect to the Mobile
pulp mill. The resulting termination penalty of $24.3 million which is
specified in the contract and employee severance costs of $18.0 million
were charged to cost of products sold in the second and third quarters
of 1998, respectively. On January 14, 1999, MESC and Mobile Energy
Services Holdings,Inc. filed an action against the Corporation claiming
unspecified damages in connection with the cancellation of the contract.
This action is not expected to have a material adverse effect on the
Corporation's business or results of operations.
(12) Of the 1998 Facilities Charge, $49.1 million was recorded in 1998. The
remaining $74.9 million of total costs of the plan, primarily related to a
tissue manufacturing facility in the United Kingdom, which will remain in
use until its expected shutdown in October 2000, will be recorded as
accelerated depreciation expense and employee severance costs in 1999
and 2000. The 1998 Facilities Charge, which was charged to cost of
products sold, reduced 1998 operating profit $49.1 million, and net
income $34.1 million, or $.06 per share.
(13) In 1998, the carrying amounts of trademarks and unamortized goodwill of
certain European businesses were determined to be impaired and written
down. In addition, the Corporation began depreciating the cost of all
newly acquired personal computers ("PCs") over two years. In
recognition of the change in estimated useful lives, PC assets with a
remaining net book value of $16.6 million became subject to
accelerated depreciation charges. These charges, along with $8.8
million of charges for write-downs of other assets and a loss on a pulp
contract, reduced 1998 operating profit $81.2 million and net income
$64.7 million, or $.12 per share. Of the $81.2 million, $6.8
million was charged to cost of products sold and $74.4 million was
charged to general expense.
PART II
(Continued)
ITEM 6. SELECTED FINANCIAL DATA (Continued)
(14) Net income and net income per share for 1998 includes a gain on the
sale of KCA of $78.3 million and $.14, respectively.
(15) In 1998, the Corporation changed its method of accounting for the
costs of start-up activities effective January 1, 1998, as
required by Statement of Position 98-5, Reporting on the Costs
of Start-up Activities. The Corporation recorded a net after income
tax charge of $11.2 million, or $.02 per share, as the cumulative
effect of this accounting change.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management believes that the following commentary and tables
appropriately discuss and analyze the comparative results of operations and
the financial condition of the Corporation for the periods covered.
Restatement
Subsequent to the issuance of the Corporation's 1998 financial statements
and the filing of its 1998 Form 10-K with the Securities and Exchange
Commission (the "SEC"), and following extensive discussions with
representatives of the SEC's Division of Corporation Finance concerning its
review of the Corporation's financial statements, Kimberly-Clark concluded
that it would restate its 1995, 1996, 1997, 1998 and first quarter 1999
financial statements and related disclosures (the "Restatement"). Additional
information concerning the Restatement is contained in "Significant Financial
and Accounting Developments" contained elsewhere in this Form 10-K/A.
The following discussion should be read in conjunction with the
accompanying December 31, 1998 and 1997 consolidated financial statements as
of and for the three years ended December 31, 1998. For additional
information on the Restatement, refer to Notes 1, 2, 3, 13, 14, 15, 16 and 17
to the Consolidated Financial Statements.
GLOBAL BUSINESS SEGMENTS
The Corporation is organized into three global business segments, each of
which is headed by a group president who reports to the chief executive
officer. Each of these three group presidents is responsible for the
development of global strategies to expand the Corporation's worldwide tissue,
personal care, and health care and other businesses. They are responsible for
developing and managing global plans for branding and product positioning,
cost reductions, technology and research and development programs, and
capacity and capital investment for their respective businesses. Each
business segment is managed separately in view of the substantially different
product lines each manufactures and markets.
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") 131, Disclosures about Segments of an Enterprise and Related
Information, in the fourth quarter of 1998. This discussion and analysis has
been prepared on the basis of these global business segments. Prior year
information has been reclassified to the current year basis of presentation.
The major products manufactured and marketed by each of the Corporation's
business segments are as follows:
- - Tissue - facial and bathroom tissue, and paper towels and wipers for
household and away-from-home use; wet wipes; printing, premium business and
correspondence papers; and related products.
- - Personal Care - disposable diapers, training and youth pants; feminine
and incontinence care products; and related products.
- - Health Care and Other - health care products such as surgical packs and
gowns, sterilization wraps and disposable face masks; specialty and
technical papers and related products; and other products.
BUSINESS IMPROVEMENT AND OTHER PROGRAMS
The Corporation has undertaken a number of actions in recent years to
address ongoing business competitiveness by improving its operating efficiency
and cost structure. These programs began in 1995, at the time of the merger
with Scott Paper Company ("Scott"), and will be completed in 2000. A summary
of these programs beginning with the 1995 program is set forth below.
1995 SCOTT MERGER AND RESTRUCTURING PLAN
In connection with the Scott merger, in December 1995, the Corporation
announced a plan to restructure the combined operations and to accomplish
other business improvement objectives (the "1995 Plan"). The 1995 Plan
includes (i) the cost of plant rationalizations and employee terminations to
eliminate duplicate facilities and excess capacity; (ii) disposition of
facilities to comply with the merger-related decrees of the U.S. Justice
Department and the European Commission; (iii) costs of terminating leases,
contracts and other long-term agreements; (iv) the direct costs of the merger,
including fees of investment bankers, outside legal counsel and accountants;
(v) impaired asset charges; and (vi) accelerated depreciation charges on
assets that were to be disposed of but which were not to be immediately
removed from operations.
The original estimated pretax cost of the 1995 Plan was $1,440.0 million.
It was ultimately accomplished at a pretax cost of $1,305.0 million, which was
charged against earnings for the four years ended December 31, 1998, as
summarized below:
Amounts Charged to Earnings
----------------------------------------------------
(Millions of dollars) 1995 1996 1997 1998 Total
----------------------- ------ ------ ------ ------ --------
Workforce reduction . . . . . . . . . . . $109.0 $ 74.4 $32.5 $(3.5) $ 212.4
Write-downs of property, plant and
equipment and other assets. . . . . . . 285.1 (8.0) (3.6) - 273.5
Contract settlements, lease terminations
and other costs . . . . . . . . . . . . 111.1 298.8 30.7 .2 440.8
Merger fees and expenses. . . . . . . . . 83.4 2.2 .5 86.1
Asset impairments . . . . . . . . . . . . 225.7 (80.6) - - 145.1
Accelerated depreciation. . . . . . . . . - 143.1 4.0 - 147.1
------ ------- ------ ------ --------
Total pretax charge . . . . . . . . . . $814.3 $429.9 $64.1 $(3.3) $1,305.0
====== ======= ====== ====== ========
Income statement classification:
Cost of products sold . . . . . . . . . $ - $154.2 $15.1 $ 1.7 $ 171.0
Restructuring and other unusual charges 814.3 275.7 49.0 (5.0) 1,134.0
------ ------- ------ ------ --------
Total pretax charge . . . . . . . . . . $814.3 $429.9 $64.1 $(3.3) $1,305.0
====== ======= ====== ====== ========
The effects of the 1995 Plan were included in operating profit by
business segment and geography as follows:
Year Ended December 31
-----------------------------------
(Millions of dollars) 1996 1997 1998
- ----------------------- ------ ---- ------
By Business Segment:
Tissue. . . . . . . . $329.4 $60.5 $ .7
Personal Care . . . . 77.0 1.9 .9
Health Care . . . . . .7 (.3) (.8)
Unallocated . . . . . 22.8 2.0 (4.1)
------ ------ ------
Total pretax charge $429.9 $64.1 $(3.3)
====== ====== ======
By Geography:
North America . . . . $228.5 $11.5 $(2.9)
Outside North America 178.6 50.6 3.7
Unallocated . . . . . 22.8 2.0 (4.1)
------ ------ ------
Total pretax charge $429.9 $64.1 $(3.3)
====== ====== ======
The effects of the 1995 Plan decreased (increased) operating profit, net
income and net income per share as follows:
Year Ended December 31
----------------------------------
(Millions of dollars, except per share amounts) 1995 1996 1997 1998
- ------------------------------------------------ ------ ---- ----- -----
Operating profit . . . . . $814.3 $429.9 $64.1 $(3.3)
Net income . . . . . . . . 596.9 328.6 51.3 (.9)
Basic net income per share 1.07 .58 .09 -
The principal components of the 1995 Plan were as follows:
- - Workforce reduction comprises severance payments and termination
benefits for approximately 4,200 duplicate staff and sales positions
and workforce reductions in operations that were disposed of. These
costs were charged to earnings in the period in which such employee
severances and benefits were appropriately communicated.
- - Write-downs of property, plant and equipment and other assets comprise
write-downs of certain assets that became obsolete as a result of the
merger, or which were no longer to be used, and the net book value of
less efficient and duplicate machinery and equipment not needed in the
combined restructured manufacturing operations.
- - Contract settlements and lease terminations represent the estimated costs
of terminating long-term leases for Scott's Wilmington, Delaware and
Boca Raton, Florida office facilities, sales distributor contracts
and an operating lease for a deinking facility related to a Scott
tissue mill.
- - Merger fees and expenses are comprised of the costs of investment bankers
advising on the Scott merger, outside legal counsel engaged with
respect to the merger and independent auditors for work on the joint
proxy statement/prospectus and due diligence work concerning the
merger. These costs were recorded at the time liabilities arose for
these obligations.
- - Asset impairments are for facilities or operations whose future cash
flows were estimated to be insufficient to cover their carrying amounts.
The most significant items are a Scott tissue facility in the U.S., one
in Canada and a Scott pulp facility in Spain. The U.S. facility was
written down to its estimated fair value, based on the Corporation's
assessment of expected pretax future cash flows discounted at a rate
commensurate with the risk involved. The pulp facility had estimated
negative future cash flows (undiscounted), and consequently the mill
was written down. The Canadian facility was impaired and planned to be
sold, but, as explained in the following "Modifications to the 1995
Plan" section, the mill was not sold, but rather the Corporation's
ownership in the entity which owned the mill was sold at a gain.
- - Accelerated depreciation has been recorded on facilities and other
depreciable assets that were to be disposed of as part of the 1995 Plan
but which were not immediately removed from operations. These
assets were depreciated down to fair value by charges to cost of
products sold over the remaining period of time that they remained
in use.
- - The 1995 Plan also contemplated disposals to comply with consent decrees
of the U.S. Justice Department and the European Commission. These
agreements required the sale of the Scott Baby Fresh baby wipes and
Scotties facial tissue operations in the U.S. and the Kleenex Velvet
bathroom tissue business in the United Kingdom and Ireland. Under the
agreements, Scott's baby wipes mill in Dover, Delaware and a
Kimberly-Clark tissue mill in Europe were to be sold, as well as up
to two of four other tissue mills located in the U.S. During the second
and third quarter of 1996, the regulatory disposals were accomplished,
and the resulting net pretax gains were recorded in other income.
MODIFICATIONS TO THE 1995 PLAN
Certain aspects of the Corporation's original plans for integrating the
organizations and accomplishing the objectives of the 1995 Plan were modified.
These modifications were charged to earnings in the period in which they
became known. The most significant modifications are described below:
- - Plans to eliminate duplicate facilities, excess assets and certain other
assets were revised due to a fundamental change in plans in 1996 with
respect to disposal of a Canadian tissue facility owned by Scott
Paper Limited ("SPL"), a 50.1 percent-owned subsidiary. Prior to the merger
with Scott, the Corporation entered into an agreement with the Canadian
Bureau of Competition Policy (the "Bureau") in which the Corporation agreed
not to manage SPL and to hold SPL separate until agreement was reached
on required divestitures in Canada. The Corporation had originally
planned to acquire the outstanding minority interest in SPL and
subsequently eliminate excess Canadian tissue-making capacity. After
the merger, the Corporation was advised by the Bureau that it would have
to dispose of additional SPL brands and associated facilities. During the
time the Corporation was assessing the impact of the additional
divestitures, the market price of SPL's publicly held shares increased
substantially in anticipation of the Corporation's potential bid to acquire
the remaining SPL shares. As a consequence of this increased cost and the
unfavorable impact of the divestitures required to merge the Corporation's
Canadian operations, management decided to sell its interest in SPL.
Because the SPL sale was expected to result in a gain, $83.6 million
primarily related to the reserve for asset impairments was no longer
needed and was reversed to earnings in 1996.
- - In 1996, estimated deductions to be taken by certain Scott customers for
1995 promotional rebates and cooperative advertising in the consumer
business, and accrued costs for unprofitable contract business in the
away-from-home business were determined to be underestimated. In
addition, during 1996, management decided to approve certain
promotional allowances claimed by certain Scott customers in the
away-from-home business. These changes in estimates, which are shown as
"other costs" on the foregoing summary, resulted in $122.4 million and
$12.9 million being charged to earnings in 1996 and 1997, respectively,
at the time such changes in estimates became known.
- - In the first quarter of 1996, the European Commission required the
Corporation to sell its tissue mill in Prudhoe, England, and certain
consumer tissue businesses in the United Kingdom and Ireland. These
disposals were completed in the third quarter of 1996. During the time
the Prudhoe facility and related businesses were being marketed, management
conducted more in-depth studies and evaluations of a number of the
European facilities it had originally planned to close or divest. As a
result, management decided to restructure certain European operations.
Management decided to consolidate the Corporation's feminine care
products production at its Forchheim mill in Germany and close a
feminine care products mill in Veenendaal, Netherlands. In addition,
management restructured its tissue mill in Larkfield, England and downsized
other facilities in Flensburg and Koblenz, Germany and Gennep,
Netherlands. These changes resulted in employee severance costs, facility
integration costs and accelerated depreciation charges, which were charged
to earnings in 1996.
- - In 1996, costs of integrating facilities and operations, primarily in
the U.S., were charged to 1996 earnings as incurred and shown as
"other costs" in the foregoing summary.
Set forth below is a summary of the types and amounts of charges that
were recognized as accrued expenses for the 1995 Plan together with the cash
payments made against such accruals for the three years ended December 31,
1998.
1996
----------------------
Balance Charges Balance
(Millions of dollars) 12/31/95 (Credits) Payments 12/31/96
- ----------------------- -------- --------- -------- --------
Workforce severance . . . . . . . . . . . . . . $ 74.4 $ 74.4 $(113.9) $ 34.9
Asset removal costs . . . . . . . . . . . . . . 9.9 19.9 (16.8) 13.0
Contract settlement and lease termination costs 127.7 (27.9) (34.1) 65.7
Other costs . . . . . . . . . . . . . . . . . . 14.0 118.2 (50.7) 81.5
------ ------- -------- ------
$226.0 $184.6 $(215.5) $195.1
====== ======= ======== ======
1997
----------------------
Balance Charges Balance
(Millions of dollars) 12/31/96 (Credits) Payments 12/31/97
- ----------------------- -------- --------- -------- --------
Workforce severance . . . . . . . . . . . . . . $ 34.9 $ 32.5 $ (59.3) $ 8.1
Asset removal costs . . . . . . . . . . . . . . 13.0 (1.6) (9.5) 1.9
Contract settlement and lease termination costs 65.7 (24.2) (14.4) 27.1
Other costs . . . . . . . . . . . . . . . . . . 81.5 (28.6) (43.8) 9.1
------ ------- -------- -----
$195.1 $(21.9) $(127.0) $46.2
====== ======= ======== =====
1998
----------------------
Balance Charges Balance
(Millions of dollars) 12/31/97 (Credits) Payments 12/31/98
- ----------------------- -------- --------- -------- --------
Workforce severance . . . . . . . . . . . . . . $ 8.1 $ (3.5) $ (4.6) $ -
Asset removal costs . . . . . . . . . . . . . . 1.9 - (1.9) -
Contract settlement and lease termination costs 27.1 (6.1) (5.7) 15.3
Other costs . . . . . . . . . . . . . . . . . . 9.1 (1.4) (7.0) .7
----- ------- ------- -----
$46.2 $(11.0) $(19.2) $16.0
===== ======= ======= =====
The balance at December 31, 1998 is estimated to be adequate to complete the
actions contemplated in this plan. The activities involved in this plan have
not disrupted the Corporation's business operations to any significant extent.
The principal benefits of this plan have resulted in lower production costs
and simplified manufacturing and sourcing strategies.
1997 PLAN
On November 21, 1997, the Corporation announced a restructuring plan (the
"1997 Plan"). The plan includes the sale, closure or downsizing of 17
manufacturing facilities worldwide and a workforce reduction of approximately
4,800 employees. The estimated pretax cost of the 1997 Plan was $679.5
million. The Corporation recorded $414.2 million of such cost in 1997. In
1998, the Corporation recorded $250.8 million of such cost at the time the
costs became accruable under appropriate accounting principles, including
accelerated depreciation charged to cost of products sold on assets that were
to be disposed of but which remained or will remain in use until disposed of
in 1999 and 2000. The remaining $14.5 million of the cost of the 1997 Plan
will be recorded as accelerated depreciation expense over the remaining useful
lives of such assets.
The charges under the 1997 Plan for the two years ended December 31 are
summarized below:
Amounts Charged
to Earnings
----------------
(Millions of dollars) 1997 1998
- ----------------------- ------ ------
Workforce related . . . . . . . . . . . . . . . . . . . . . . $ 35.4 $ 53.2
Write-downs of property, plant and equipment and other assets 93.6 56.2
Contract settlements, lease terminations and other costs. . . 64.2 31.3
Asset impairments . . . . . . . . . . . . . . . . . . . . . . 187.4 31.3
Accelerated depreciation. . . . . . . . . . . . . . . . . . . 33.6 78.8
------ ------
Total pretax charge . . . . . . . . . . . . . . . . . . . $414.2 $250.8
====== ======
Income statement classification:
Cost of products sold . . . . . . . . . . . . . . . . . . . $113.7 $134.0
Restructuring and other unusual charges . . . . . . . . . . 300.5 116.8
------ ------
Total pretax charge . . . . . . . . . . . . . . . . . . . $414.2 $250.8
====== ======
The costs of the 1997 Plan were included in operating profit by business
segment and geography as follows:
Year Ended
December 31
---------------
1997 1998
----- -----
By Business Segment
Tissue. . . . . . . . $324.4 $149.3
Personal Care . . . . 72.8 87.6
Health Care . . . . . 8.7 13.2
Unallocated . . . . . 8.3 .7
------ ------
Total pretax charge $414.2 $250.8
====== ======
By Geography:
North America . . . . $181.5 $160.9
Outside North America 224.4 89.2
Unallocated . . . . . 8.3 .7
------ ------
Total pretax charge $414.2 $250.8
====== ======
Charges under the 1997 Plan reduced operating profit, net income and net
income per share as follows:
Year Ended
December 31
-----------------
(Millions of dollars, except per share amounts) 1997 1998
- ----------------------------------------------------- ------ ------
Operating profit . . . . . $414.2 $250.8
Net income . . . . . . . . 315.0 178.9
Basic net income per share .57 .33
The principal components of the 1997 Plan were as follows:
- - The sale, closure or downsizing of 17 manufacturing facilities
worldwide, 12 of which have been closed or downsized through December 31,
1998. These actions will result in the consolidation of the Corporation's
manufacturing operations into fewer, larger and more efficient facilities
and eliminate excess production capacity, including more than 200,000
metric tons of high-cost tissue manufacturing capacity in North America and
Europe. Five facilities are expected to be disposed of by the third
quarter of 1999, the largest of which is a tissue manufacturing facility
in Gennep, Netherlands, which was closed in March 1999.
- - A workforce reduction of approximately 4,800 employees. Through
December 31, 1998, a total workforce reduction of 3,700 has been
realized. These costs were charged to earnings in the period in which
such employee severances and benefits were appropriately communicated.
Approximately 1,100 additional employees are expected to be notified of
their termination benefits in 1999 and 2000, and the associated costs will
be charged to earnings at that time.
- - The write-down of property, plant and equipment and other assets not
used in the restructured manufacturing operations, the elimination of
excess manufacturing capacity, and the write-down of certain
inventories in restructured operations and other assets.
- - The elimination of certain of the Corporation's facilities and capacity
which became excessive as a result of the combination of the
Corporation's health care operations with those of Tecnol Medical Products,
Inc. ("Tecnol").
- - Contract terminations and other costs.
- - Recording accelerated depreciation on facilities and other depreciable
assets that were to be disposed of as part of the 1997 Plan but which were
not immediately removed from operations. Such facilities and other
depreciable assets were or are being depreciated down to fair value by
charges to cost of products sold over the remaining period of time that
they remained or will remain in use.
Modifications to the 1997 Plan
- ----------------------------------
Certain aspects of the 1997 Plan have been modified, the most significant
of which are described below:
- - In addition to the original 17 facilities in 1998, management committed
to a plan to close a tissue manufacturing facility in order to
continue to align capacity with demand. The facility, the name of which
has not yet been announced publicly, will be closed by the end of
2000. This closure will increase the elimination of high-cost production
capacity to 230,000 annual metric tons. Based on this disposal plan,
the facility became an impaired asset because its cash flows from use and
disposal were insufficient to cover the carrying amount of the asset.
Consequently, a charge to earnings of $26.8 million was recorded in the
fourth quarter of 1998.
- - Also in 1998, management established reserves by charges to 1998
earnings to cover other qualifying programs that had either been
underestimated in 1997 or were extensions of such programs, the largest
item being a $12.1 million charge for the write-down of European
feminine care equipment removed from service.
Set forth below is a summary of the types and amounts of charges that
were recognized as accrued expenses for the 1997 Plan together with cash
payments made against such accruals for the two years ended December 31, 1998.
Charges Balance Charges Balance
(Millions of dollars) in 1997 Payments 12/31/97 in 1998 Payments 12/31/98
- ----------------------- ------- -------- -------- -------- -------- --------
Workforce severance . . . . . $35.4 $(3.3) $32.1 $53.2 $(42.6) $ 42.7
Asset removal costs . . . . . 17.2 - 17.2 .3 (4.8) 12.7
Environmental costs and lease
contract terminations . . . 32.3 (0.2) 32.1 23.2 (15.1) 40.2
Other costs . . . . . . . . . 14.7 (5.5) 9.2 7.8 (1.6) 15.4
----- ------ ----- ----- ------- ------
$99.6 $(9.0) $90.6 $84.5 $(64.1) $111.0
===== ====== ===== ===== ======= ======
The balance at December 31, 1998 is estimated to be adequate to complete the
actions contemplated in this plan. The activities involved in this plan have
not disrupted the Corporation's business operations to any significant extent.
The principal benefits of this plan have resulted in lower production costs
and simplified manufacturing and sourcing strategies.
1998 PLANS
1998 Facilities Charge
- ------------------------
In the fourth quarter of 1998, the Corporation announced a facilities
consolidation plan to, among other things, further align tissue manufacturing
capacity with demand in Europe, close a diaper manufacturing facility in
Canada, shut down and dispose of a tissue machine in Thailand and write down
certain excess feminine care production equipment in North America. Of the
$124.0 million aggregate cost of the facilities consolidation plan (the "1998
Facilities Charge"), $49.1 million was recorded in 1998. The remaining $74.9
million of total costs of the plan, primarily related to a tissue
manufacturing facility in the United Kingdom, which will remain in use until
its expected shutdown in October 2000, will be recorded as accelerated
depreciation expense and employee severance costs in 1999 and 2000. Included
in the 1998 Facilities Charge was $2.8 million for accelerated depreciation
related to the 1999 closure of a diaper facility in Canada. Related employee
severance costs of $11.1 million also were recorded as part of the 1998
Facilities Charge for approximately 450 employees who were notified prior to
December 31, 1998 of the Corporation's plans to terminate their employment.
Asset write-downs to estimated fair value and inventory losses associated with
the diaper facility shutdown and capacity alignment totaling $35.2 million
also were included in the 1998 Facilities Charge.
The 1998 Facilities Charge, which was charged to cost of products sold,
reduced 1998 operating profit $49.1 million, and net income $34.1 million, or
$.06 per share. Approximately 70 percent of the pretax charge relates to the
Personal Care segment and 30 percent relates to the Tissue segment. The
employee severance costs and other cash costs of closures and consolidations
of $18.8 million are included in other accrued expenses at December 31, 1998.
Write-down of Certain Intangible and Other Assets
- -------------------------------------------------------
- - During the third quarter of 1998, the Corporation completed an
impairment review of its intangible assets, such as trademarks and
goodwill. Impairment is deemed to exist whenever the undiscounted
estimated future cash flows are less than the carrying amount of such
intangible assets. Impairment losses are measured by the difference
between the asset carrying amount and the present value of the estimated
future cash flows. As a result of the review, the carrying amounts of
trademarks and unamortized goodwill of certain European businesses were
determined to be impaired and were written down. These write-downs,
which were charged to general expense, reduced 1998 operating profit
$70.2 million and net income $57.1 million, or $.10 per share.
- - During the third quarter of 1998, the Corporation completed a technology
review of its personal computers ("PCs") which demonstrated that
(i) PCs have reduced economic lives as a consequence of rapid
technological improvements, (ii) more sophisticated software
applications require more powerful PCs, and (iii) most of the Corporation's
PCs acquired prior to 1997 were technologically obsolete. Consequently,
the Corporation concluded that its previous practice of capitalizing
the costs of PCs and depreciating them over five years should be modified.
Accordingly, the Corporation began depreciating the cost of all newly
acquired PCs over two years. In recognition of the change in estimated
useful lives, PC assets with a remaining net book value of $16.6
million became subject to accelerated depreciation charges of $2.1
million, $8.3 million and $6.2 million in 1998, 1999 and 2000, respectively.
The effect of accelerated depreciation for 1998, together with $8.8
million of charges for write-downs of other assets and a loss on a
pulp contract, reduced 1998 operating profit $11.0 million and net
income $7.6 million, or $. 01 per share. Of the $11.0 million, $6.8
million was charged to cost of products sold and $4.2 million was
charged to general expense.
- - Approximately 91 percent of the write-down of certain intangible and
other assets and accelerated depreciation on PCs described above relates
to the Personal Care segment and 9 percent relates to the Tissue segment.
OTHER INFORMATION
During 1997 and 1998, in accordance with SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
depreciation expense was suspended on facilities included in the 1997 Plan
that were held for disposal. Depreciation for these facilities would have
been $7.5 million in 1998 and $3.3 million in 1997.
In addition, during 1997 and 1998, in accordance with SFAS 121,
depreciation was suspended on certain pulp producing facilities and the
depreciable property of SPL that were held for disposal or disposed of.
Depreciation for these facilities would have been $23.8 million in 1998 and
$47.3 million in 1997. The lower amount of suspended depreciation in 1998
versus 1997 was a result of the sale of a noncore pulp and newsprint facility
located in Coosa Pines, Alabama ("Coosa") in March 1997, the sale of SPL in
June 1997 and the reclassification of the New Glasgow, Nova Scotia and the
Terrace Bay, Ontario pulp manufacturing facilities from assets held for sale
to property during 1998.
ANALYSIS OF CONSOLIDATED NET SALES - THREE YEARS ENDED DECEMBER 31, 1998
By Business Segment
Net Sales
--------------------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------- ---- ---- ----
Tissue. . . . . . . . $ 6,706.2 $ 7,182.7 $ 8,183.6
Personal Care . . . . 4,577.8 4,493.8 4,091.8
Health Care and Other 1,047.1 908.0 926.7
Intersegment sales. . (33.3) (37.9) (53.0)
---------- ---------- ----------
Consolidated. . . . . $12,297.8 $12,546.6 $13,149.1
========== ========== ==========
By Geographic Area
Net Sales
-------------------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------- ---- ---- ----
United States. . . . . . . . . $ 8,018.2 $ 7,878.7 $ 8,142.5
Canada . . . . . . . . . . . . 785.1 1,052.5 1,311.0
Intergeographic sales. . . . . (409.1) (397.3) (451.7)
---------- ---------- ---------
Total North America. . . . . 8,394.2 8,533.9 9,001.8
Europe . . . . . . . . . . . . 2,471.2 2,548.1 2,881.8
Asia, Latin America and Africa 1,688.4 1,772.2 1,603.5
Intergeographic sales. . . . . (256.0) (307.6) (338.0)
---------- ---------- ---------
Consolidated . . . . . . . . . $12,297.8 $12,546.6 $13,149.1
========== ========== ==========
Commentary:
1998 versus 1997
- ------------------
Consolidated net sales were 2.0 percent lower than in 1997. In 1997, the
Corporation divested Coosa and sold its 50.1 percent interest in SPL.
In 1998, the Corporation sold its subsidiary, K-C Aviation Inc. ("KCA").
Excluding the revenues from these divested businesses for both years,
consolidated net sales remained essentially even. Sales volumes, however,
increased more than 2 percent and selling prices were nearly 2 percent higher,
primarily due to improved pricing for consumer tissue products in the United
States. However, changes in foreign currency exchange rates, primarily in
Asia, reduced consolidated net sales slightly more than 3 percent. Although
the preceding tables include the divested businesses, the following net sales
commentary excludes their results in order to facilitate a more meaningful
discussion.
- - Worldwide net sales for tissue products declined slightly more than 3
percent primarily due to changes in currency exchange rates in Asia.
Sales volumes declined approximately 1 percent as sales volume increases
in Latin America and for wet wipes products, primarily in North America,
were offset by lower sales volumes in Europe and Asia and lower
consumer towel volume in North America. The decline in sales volumes,
however, was more than offset by an increase of nearly 2 percent in
selling prices.
- - Worldwide net sales of personal care products increased nearly 2
percent. Sales volumes grew by nearly 5 percent and selling prices
increased by about 2 percent; however, changes in foreign currency
exchange rates reduced net sales by approximately 4 percent.
Training and youth pants in North America and sales volume growth in
Latin America were the primary factors contributing to the overall sales
volume increase. These increases more than offset lower diaper sales
volumes in North America and Europe which were attributable to the
transition to larger size product packaging, the introduction of unisex
product and increased competition.
- - Net sales for health care and other products increased more than 23
percent due to sales volume growth in health care products, driven, in
large part, by the acquisition of Tecnol in December 1997.
1997 versus 1996
- ------------------
Consolidated net sales were 4.6 percent lower than in 1996. In 1996, the
Corporation divested certain businesses to satisfy U.S. and European
regulatory requirements associated with the Corporation's merger with Scott.
In 1997, the Corporation sold Coosa and its interest in SPL. Excluding
revenues from these businesses and KCA in both years, consolidated net sales
remained essentially even. Sales volumes, however, increased approximately 5
percent. Selling prices were nearly 2 percent lower than in 1996,
primarily due to the lower selling prices for tissue products worldwide.
Changes in currency exchange rates reduced consolidated sales more than 2
percent in 1997. Although the preceding tables include the divested
businesses, in order to facilitate a meaningful discussion, such
results have been excluded from the following sales commentary.
- - Worldwide net sales for the tissue segment decreased approximately 5
percent primarily due to lower selling prices and changes in currency
exchange rates in Europe and Asia. Sales volumes increased about 2 percent,
as higher sales volumes in the U.S., Latin America and Asia more than
offset lower volumes in Europe.
- - Worldwide net sales for personal care products increased slightly more
than 10 percent and sales volumes were more than 14 percent higher. Nearly
all of the businesses in this segment participated in the increased sales
volumes, with the primary contributors being training and youth pants
and incontinence care products in North America and disposable diapers in
Europe, Latin America and Asia. Diaper volume resulting from acquisitions
in France, Spain, Portugal and Brazil accounted for about 35 percent of the
sales volume increase in personal care products.
- - Net sales for health care and other products increased approximately 6
percent primarily due to higher sales volumes in health care products.
For purposes of this Management's Discussion and Analysis, and in order
to facilitate a meaningful discussion of the ongoing operations of the
Corporation, the charges described in the "Business Improvement and Other
Programs" section and a total of $42.3 million of charges recorded in 1998 for
the Mobile pulp mill fees and severances are considered to be unusual items
("Unusual Items") and have been excluded from operating profit in the
"Excluding Unusual Items" columns in the following Consolidated Operating
Profit tables.
ANALYSIS OF CONSOLIDATED OPERATING PROFIT - THREE YEARS ENDED DECEMBER 31,
1998
BY BUSINESS SEGMENT
1998 1997 1996
------------------------- --------------------------- ----------------------------
EXCLUDING Excluding Excluding
AS UNUSUAL As Unusual As Unusual
(Millions of dollars) RESTATED ITEMS Restated Items Restated Items
- ----------------------- -------- --------- -------- --------- -------- -------------
Tissue. . . . . . . . $ 911.4 $1,125.8 $ 693.9 $1,078.8 $ 952.1 $1,281.5
Personal Care . . . . 581.7 778.3 731.4 806.1 589.7 666.7
Health Care and Other 178.1 190.6 151.9 160.3 137.3 138.0
Unallocated - net . . (97.9) (101.3) (108.8) (98.5) (120.3) (97.5)
---------- --------- --------- ---------- ---------- ----------
Consolidated. . . . . $1,573.3 $1,993.4 $1,468.4 $1,946.7 $1,558.8 $1,988.7
========== ========= ========= ========== ========== ==========
BY GEOGRAPHIC AREA
1998 1997 1996
------------------------- --------------------------- ----------------------------
EXCLUDING Excluding Excluding
AS UNUSUAL As Unusual As Unusual
(Millions of dollars) RESTATED ITEMS Restated Items Restated Items
- ----------------------- -------- --------- -------- --------- -------- -------------
United States . . . . . . . . . $1,409.3 $1,665.5 $1,350.5 $1,540.8 $1,256.8 $1,527.3
Canada. . . . . . . . . . . . . 112.7 104.8 151.9 154.6 180.4 138.4
Europe. . . . . . . . . . . . . (39.7) 123.1 (63.6) 141.2 46.8 220.4
Asia, Latin American and Africa 188.9 201.3 138.4 208.6 195.1 200.1
Unallocated - net . . . . . . . (97.9) (101.3) (108.8) (98.5) (120.3) (97.5)
--------- --------- --------- --------- --------- ---------
Consolidated. . . . . . . . . . $1,573.3 $1,993.4 $1,468.4 $1,946.7 $1,558.8 $1,988.7
========= ========= ========= ========= ========= =========
Note: Unallocated - net, consists of expenses not associated with the
business segments or geographic areas.
Commentary:
1998 versus 1997
- ------------------
Excluding the Unusual Items, operating profit increased 2.4 percent in
absolute terms and increased to 16.2 percent in 1998 from 15.5 percent in 1997
as a percentage of net sales. Excluding the divested businesses and the
Unusual Items for both years, operating profit increased approximately 4.1
percent. The increase in operating profit was due to the price and sales
volume increases partially offset by higher spending for advertising and
promotion, the negative effect of changes in foreign currency exchange rates
and additional goodwill amortization. The following operating profit
commentary excludes the Unusual Items and the results of divested businesses
in both years.
- - Tissue operating profit increased 7.3 percent principally due to the selling
price increases. Restructuring and other cost savings were partially offset
by changes in currency exchange rates.
- - Operating profit for personal care declined 3.2 percent, as increased
advertising and promotion, and product improvement costs, primarily in
North America, and changes in currency exchange rates more than offset the
gains in selling prices and sales volumes.
- - Operating profit for health care and other products increased
approximately 21 percent due, in large part, to the acquisition of Tecnol,
partially offset by increased goodwill amortization.
- - Changes in currency exchange rates reduced consolidated operating profit
by more than 2 percent.
1997 versus 1996
- ------------------
Excluding the Unusual Items, operating profit declined 2.1 percent in
absolute terms, but increased to 15.5 percent from 15.1 percent in 1996 as a
percentage of net sales. Excluding the divested businesses in both years and
the Unusual Items, operating profit increased approximately 2 percent. The
operating profit increase was attributable to the sales volume increases,
manufacturing efficiencies and lower pulp costs. These improvements were
partially offset by the lower selling prices, heightened competition in Europe
and the transitional effects of strategic changes made in the away-from-home
portion of the Corporation's North American tissue business. The following
operating profit commentary excludes the Unusual Items in 1997 and the results
of divested businesses in both years.
- - Cost reductions and manufacturing efficiencies were achieved in the North
American personal care and consumer tissue businesses.
- - The transitional effects of the strategic changes in the tissue business had
a negative impact on operating profit of approximately $75 million in
1997.
- - Marketing costs were lower in the North American personal care and consumer
tissue businesses, but were higher in Latin America, primarily to support
business expansions.
- - General expenses were higher principally as a result of business expansions
outside North America.
- - Changes in currency exchange rates reduced consolidated operating profit by
approximately 1 percent in 1997.
ADDITIONAL INCOME STATEMENT COMMENTARY
1998 versus 1997
- ------------------
- - Interest expense increased primarily due to higher average debt levels.
- - The Corporation's effective income tax rate was 34.3 percent in 1998
compared with 36.5 percent in 1997. Excluding the Unusual Items from
both years, the Corporation's effective income tax rate was 32.9 percent
in 1998 compared with 32.8 percent in 1997.
- - Other income in 1998 includes a gain on the sale of KCA equal to $.14 per
share.
- - Other income in 1997 includes a gain on the sale of the Corporation's
interest in Ssangyong Paper Co., Ltd. ("Ssangyong"), of Korea, equal to
$.03 per share.
- - The Corporation's 1998 share of net income of equity companies includes
a charge equal to $.02 per share related to the change in the value of
the Mexican peso. In 1997, a gain equal to $.03 per share, primarily
related to the sale of a portion of the tissue business of Kimberly-Clark de
Mexico, S.A. de C.V. ("KCM") to meet Mexican regulatory requirements in
connection with KCM's merger with Scott's former Mexican affiliate,
was included in the Corporation's share of net income of equity companies.
Also included in the Corporation's share of 1997 net income of equity
companies was $2.2 million of Unusual Items. Excluding these items in
both years, the Corporation's share of net income of equity companies
increased 2.2 percent.
- - Minority owners' share of subsidiaries' net income in 1998 and 1997 includes
$.8 million and $6.5 million, respectively, attributable to other owners'
share of the Unusual Items. Also included in 1997 is $8.7 million of
other owners' share of the net income of SPL. Excluding these items,
minority owners' share of subsidiaries' net income decreased $4.8
million.
- - In March 1997, the Corporation sold Coosa for approximately $600 million
in cash. Also, the Corporation recorded impairment losses on certain
tissue and pulp manufacturing facilities. These impairment losses totaled
$111.5 million before income tax benefits. In June 1997, the Corporation
completed the sale of its interest in SPL for approximately $127 million.
Accounting regulations require that certain transactions following a
business combination accounted for as a pooling of interests, such as the
Scott merger, be reported as extraordinary items. Accordingly, the above
described transactions were aggregated and reported as extraordinary gains
totaling $17.5 million, net of applicable income taxes of $38.4 million.
These extraordinary gains were equal to $.03 per share.
- - Effective January 1, 1998, the Corporation changed its method of
accounting for preoperating and start-up costs to expense these costs
as incurred in accordance with new accounting requirements. Previously,
these costs on major projects were capitalized and amortized over five
years. As required, 1998 first quarter results were restated to record a
pretax charge of $17.8 million for the write-off of deferred
preoperating and start-up costs. The cumulative effect of this accounting
change is presented on the income statement net of income taxes. This charge
reduced reported net income for the first quarter and the year by
$.02 per share.
- - Excluding the Unusual Items in 1998 and 1997, the gains on asset disposals
in both years, the change in the value of the Mexican peso, the
cumulative effect of the accounting change in 1998, and the extraordinary
gains in 1997, earnings per share from operations increased to $2.45 from
$2.37 in 1997.
1997 versus 1996
- ------------------
- - Interest expense declined primarily as a result of lower average debt
levels.
- - The Corporation's effective income tax rate was 36.5 percent in 1997
compared with 38.2 percent in 1996. Excluding the Unusual Items,
the Corporation's effective income tax rate for 1997 was 32.8 percent.
The decline in the effective rate to 32.8 percent from 34.9 percent in 1996
was primarily due to additional tax planning opportunities, some of which
arose from the Scott merger.
- - Other income in 1996 includes a net pretax gain from regulatory
divestitures required in connection with the Scott merger and from the sale
of the Corporation's remaining interest in Midwest Express Holdings, Inc.
These transactions resulted in a gain of $.13 per share.
- - In 1996, a portion of the operations of KCM was restructured to, among
other things, eliminate duplicate capacity and to satisfy regulatory
requirements. The Corporation's share of KCM's after-tax restructuring
charge in 1996 was equal to $.01 per share. Excluding the previously
mentioned 1997 equity company items and this 1996 item, the Corporation's
share of equity company net income declined 9.3 percent. The decline was
attributable to KCM. Although KCM's sales and operating profit showed
year-to-year increases of more than 5 and 8 percent, respectively, the
year-to-year comparison of the Corporation's share of KCM's net income was
adversely affected by an unusually low effective tax rate in 1996 and by
a required change to hyperinflationary accounting for Mexican operations
in 1997.
- - Excluding the previously mentioned minority owners' share of the Unusual
Items in 1997 and $1.7 million attributable to other owners' share of
the Unusual Items in 1996, minority owners' share of subsidiaries' net
income declined about 25 percent. The decline is primarily due to the
sale of the Corporation's interest in SPL and increased ownership in
certain subsidiaries in Central America in 1997.
- - The effective income tax rate on the extraordinary gains, which are
described in the "1998 versus 1997" narrative, was higher than the
normal effective rate due to income tax loss carryforwards that precluded
the current recognition of the income tax benefit on certain impairment
losses and the tax basis in SPL being substantially lower than the
carrying amount of the investment in the financial statements.
- - Excluding the Unusual Items, the gains on asset disposals in both years,
the extraordinary gains in 1997, and the Corporation's share of KCM's
1996 restructuring charge, earnings per share from operations increased
to $2.37 from $2.30 in 1996.
SALES OF PRINCIPAL PRODUCTS
Year Ended December 31
--------------------------------------------
(Billions of dollars) 1998 1997 1996 1995
- ------------------------ ---- ---- ---- ----
Tissue-based products $ 5.7 $ 6.1 $ 6.9 $ 6.9
Diapers . . . . . . . 2.6 2.7 2.3 2.1
All other . . . . . . 4.0 3.7 3.9 4.4
----- ----- ----- -----
Consolidated. . . . . $12.3 $12.5 $13.1 $13.4
===== ===== ===== =====
- - Consolidated net sales have decreased $1.1 billion, or 8.2 percent,
since 1995 primarily due to the divestment of noncore businesses and
those businesses that were sold in connection with the Scott merger.
- - The decrease in sales from 1995 to 1996 is primarily attributable to the
loss of revenues from businesses that were divested in 1995 --
Schweitzer-Mauduit International, Inc. and Midwest Express Airlines, Inc.
-- and the businesses that were sold in 1996 in connection with the Scott
merger. Excluding the net sales of these businesses in both years,
consolidated net sales increased 4.6 percent.
LIQUIDITY AND CAPITAL RESOURCES
Year Ended December 31
-------------------------
(Millions of dollars) 1998 1997
- ----------------------- ---- ----
Cash provided by operations. . . . . . . $1,991.3 $1,406.6
Capital spending . . . . . . . . . . . . 669.5 944.3
Acquisitions of businesses . . . . . . . 342.5 82.2
Proceeds from dispositions of businesses 324.9 779.6
Ratio of net debt to capital . . . . . . 35.6% 32.4%
Pretax interest coverage - times . . . . 8.7 9.0
Cash Flow Commentary:
- - Cash provided by operations increased $584.7 million. Although net income
plus net noncash charges included in net income was approximately $2
billion in both 1998 and 1997, the Corporation reduced its investment in
operating working capital in 1998 compared with 1997, which is the
principal reason for the increase in cash flow from operations. Major
operating uses of cash in 1998 were the cash used to reduce trade accounts
payable and accrued expenses partially offset by a reduction in accounts
receivable and the timing of income tax payments.
- - Approximately $64 million and $9 million of cash payments were charged to
the reserves related to the 1997 Plan in 1998 and 1997, respectively.
- - Cash proceeds received in 1998 in connection with the sale of KCA and
other asset disposals totaled $324.9 million. Cash proceeds received in
1997 in connection with the Coosa and SPL disposals, the sale of
Ssangyong and other asset sales totaled $779.6 million.
- - In 1998, the Corporation purchased 19.5 million shares of its common stock
in connection with its share repurchase program at a total cost of
approximately $900 million. In October 1998, the Corporation's board
of directors authorized the repurchase of 25 million shares, of
which the remaining authority at December 31, 1998 was 21.0 million
shares. In 1997, the Corporation purchased 17.9 million shares of
its common stock in connection with its share repurchase program at a
total cost of approximately $900 million.
Financing Commentary:
- - At December 31, 1998, total debt was $2.7 billion compared with $2.5
billion at December 31, 1997. Net debt (total debt net of cash,
cash equivalents and $220 million of long-term notes receivable) was $2.3
billion at December 31, 1998 compared with $2.2 billion at December 31,
1997. The Corporation's ratio of net debt to capital was 35.6 percent at
December 31, 1998 compared with 32.4 percent at December 31, 1997,
which is within its target range of 30 percent to 40 percent.
- - The decline in the pretax interest coverage is due to a smaller
year-to-year increase in pretax income compared to the year-to-year
increase in interest cost. Excluding the effect of the Unusual Items in
1998 and 1997, the pretax interest coverage was 10.7 times and 11.6
times, respectively.
- - On January 9, 1998, the Corporation issued $200 million principal amount
of 6 3/8% Debentures due January 1, 2028. This issuance supported
the Corporation's classification of $200 million of short-term commercial
paper as long-term debt in the December 31, 1997 Consolidated
Balance Sheet.
- - On July 20, 1998, the Corporation issued $300 million principal amount of
6 1/4% Debentures due July 15, 2018, and used the proceeds to retire
commercial paper.
- - A shelf registration statement for $200 million of debt securities is on
file with the SEC. The registration provides flexibility to issue debt
promptly if the Corporation's needs and market conditions warrant.
The Corporation has filed a new shelf registration statement for an
additional $500 million of debt securities which, as of the date of this
Form 10-K/A, has not yet been declared effective by the SEC.
- - Revolving credit facilities of $1.0 billion are in place for general
corporate purposes and to back up commercial paper borrowings.
- - The Corporation's long-term debt securities have a Double-A rating, and
its commercial paper is rated in the top category.
Other Commentary:
- - On May 5, 1998, the Corporation announced its intention to shut down its
pulp mill in Mobile, Alabama on September 1, 1999 and to sell the
associated woodlands operations (the "Southeast Timberlands"). On
June 10, 1999, the Corporation announced it had agreed to sell
approximately 460,000 acres of the Southeast Timberlands to Joshua
Management, LLC for approximately $400 million. Because the
sale of the Southeast Timberlands is associated with the planned
closure of the Mobile pulp mill in September 1999, the net effect of the
transaction, which is expected to be a net gain, will be recorded at the
time of the closing of the sale of the Southeast Timberlands.
- - In connection with the pulp mill closure at the Mobile pulp operation, and
as permitted by the terms of the governing contract, on May 5, 1998, the
Corporation gave notice to Mobile Energy Services Company, L.L.C. ("MESC")
of the Corporation's intent to terminate MESC's long-term contract for
power, steam and liquor processing services with respect to the Mobile
pulp mill. The resulting termination penalty of $24.3 million which is
specified in the contract and employee severance costs of $18.0 million
were charged to cost of products sold in the second and third
quarters of 1998, respectively.
- - On December 23, 1998, the Corporation announced that it had signed a
definitive agreement to acquire Ballard Medical Products ("Ballard"),
a leading maker of disposable medical devices for respiratory care,
gastroenterology and cardiology. Under the agreement, Ballard
shareholders will receive $25 for each share of Ballard common stock,
payable in shares of the Corporation's common stock. The transaction,
which is valued at approximately $764 million, remains subject to
regulatory clearances and approval by the Ballard shareholders. The
transaction is expected to be completed by September 30, 1999 and will
be accounted for as a purchase.
- - In May 1998, the Corporation purchased a 50 percent equity interest in
Klabin Tissue, S.A. (now known as Klabin Kimberly S.A.), the leading
tissue manufacturer in Brazil.
- - In July 1998, the Corporation purchased a 51 percent ownership interest
in Kimberly Bolivia, S.A., a new joint venture company in Bolivia.
- - In July 1998, the Corporation purchased an additional 10 percent
ownership interest in its Korean affiliate, YuHan-Kimberly, Limited,
increasing its ownership interest to 70 percent.
- - On December 18, 1997, the Corporation completed the acquisition of Tecnol,
a leading maker of disposable face masks and patient care products, through
the exchange of approximately 8.7 million shares of the Corporation's common
stock for all outstanding shares of Tecnol common stock. The transaction,
which was valued at approximately $428 million, was accounted for as
a purchase.
- - 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
in the foreseeable future.
MARKET RISK SENSITIVITY AND INFLATION RISKS
As required by Financial Accounting Reporting Release No. 48 issued by
the SEC, the Corporation is disclosing information concerning market risk with
respect to foreign exchange rates, interest rates and commodity prices. The
Corporation has elected to make such disclosures utilizing a sensitivity
analysis approach based on hypothetical changes in foreign exchange rates,
interest rates and commodity prices.
As a multinational enterprise, the Corporation is exposed to changes in
foreign currency exchange rates, interest rates and commodity prices. The
Corporation employs a variety of practices to manage these market risks,
including its operating and financing activities and, where deemed
appropriate, the use of derivative financial instruments. The Corporation
uses derivative financial instruments only for risk management purposes and
does not use them for speculation or for trading. All derivative instruments
are either exchange traded or are entered into with major financial
institutions for the purpose of reducing the Corporation's credit risk and the
risk of nonperformance by third parties.
Foreign Currency Risk
Foreign currency risk is managed by the use of foreign currency forward,
swap and option contracts. The use of these contracts allows the Corporation
to manage its 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. The
Corporation's most significant foreign currency risk relates to the Mexican
peso. There have been no significant changes in how foreign currency
transactional exposures were managed during 1998, and management does not
foresee or expect any significant changes 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, 1998, a ten
percent unfavorable change in the exchange rate of the U.S. dollar against the
prevailing market rates of the foreign currencies in which the Corporation has
transactional exposures would have resulted in a net pretax loss of
approximately $39 million. Gains or losses on foreign currency contracts and
transactional exposures are defined as the difference between the contract
rates and the hypothetical exchange rates. In the view of management, the
above losses resulting from the hypothetical changes in foreign currency
exchange rates are not material to the Corporation's consolidated financial
position, results of operations or cash flows.
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, 1998, the Corporation's debt portfolio was
composed of approximately 31 percent variable-rate debt, adjusted for the
effect of variable-rate assets, and 69 percent fixed-rate debt. The strategy
employed by the Corporation to manage its exposure to interest rate
fluctuations did not change significantly during 1998, 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.
Various financial instruments issued by the Corporation and its
subsidiaries are sensitive to changes in interest rates. Interest rate
changes would result in gains or losses in the market value of the
Corporation's fixed-rate debt due to differences between the current market
interest rates and the rates governing these instruments. With respect to the
Corporation's fixed-rate debt outstanding at December 31, 1998, a ten percent
change in interest rates would have resulted in no material change in the fair
value of the Corporation's fixed-rate debt. With respect to the Corporation's
commercial paper and other variable-rate debt, a ten percent increase in
interest rates would have had no material effect on the Corporation's pro
forma interest expense for 1998.
Commodity Price Risk
The Corporation is subject to commodity price risk arising from price
movement for purchased pulp, the market price of which is determined by
industry supply and demand. Selling prices of the Corporation's tissue
products are influenced by the market price for pulp. On a worldwide basis,
the Corporation has reduced its internal pulp supply to approximately 70
percent of its virgin fiber needs. Closure of the Mobile pulp mill in
September 1999 will reduce the percentage of integration of the Corporation's
pulp requirements to approximately 40 percent. The Corporation has announced
its intention to further reduce its level of pulp integration to approximately
20 percent. However, such a reduction in pulp integration could increase the
Corporation's commodity price risk. Specifically, increases in pulp prices
could adversely affect the Corporation's earnings if selling prices are not
adjusted or if such adjustments significantly trail the increases in pulp
prices. Conversely, if the Corporation does not lower its level of pulp
integration and the market price for pulp declines, thereby possibly causing
selling prices for tissue products to fall, the Corporation's profit margin
could suffer, and if the price of pulp increases, thereby possibly causing the
selling prices of tissue products to rise, the Corporation's profits could
improve. The Corporation has not used derivative instruments in the
management of these risks.
Inflation Risk
The Corporation's inflation risks are 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.
"YEAR 2000" READINESS
Since 1995, the Corporation has been involved in a worldwide program to
be "Year 2000" ready. The program involves reviews of major business,
financial and other information systems, including equipment with embedded
microprocessors; development of specific plans for modification or replacement
of date-sensitive software or microprocessors; execution of such plans; and
the testing of such systems to ensure their "Year 2000" readiness. Included
within the scope of the program are contacts with key suppliers and customers
to determine the extent of their "Year 2000" readiness in order to ensure a
steady flow of goods and services to the Corporation and continuity with
respect to customer service.
The Corporation's Crisis Management Program has been expanded, where
necessary, to include contingency plans relating to possible "Year 2000"
issues. This program includes, among other things, contingency plans and
backup procedures to be followed in case of failure of production operations,
the inability of major suppliers to fulfill their commitments, and the
inability of major customers to submit orders and receive product.
The Corporation's "Year 2000" contingency plans are developed and managed
at the individual business and staff levels. Consequently, such plans vary
depending on the requirements of the individual and staff units, and their
customers, vendors and service providers. Examples of contingency plans that
are being considered and may be implemented are as follows: stockpiling
certain critical raw materials; negotiating alternative vendors to use in the
event a primary vendor experiences a "Year 2000" problem; use of manual
processing procedures in the event of computer failure; and on-site visits and
consultation with major customers and suppliers to ensure a continuation of
normal operations from the end of 1999 to early 2000. The Corporation expects
to have the majority of its contingency plans formalized by mid-year 1999.
Progress against the "Year 2000" readiness plan is monitored and reported
to senior management and to the Corporation's board of directors on a regular
basis. As of December 31, 1998, management estimates that it has completed
more than 60 percent of the work involved in modifying, replacing and testing
the Corporation's major systems and microprocessors, and management plans to
have substantially all such work completed by June 30, 1999.
The total cost to ensure "Year 2000" readiness, which is primarily
comprised of staff time and the cost of replacing certain computerized systems
and microprocessors, is estimated to be approximately $80 million. Management
estimates that $39 million has been incurred for this purpose as of
December 31, 1998.
Neither the "Year 2000" issue nor the financial effects of the reviews,
modifications, replacements and testing discussed above are expected to have a
material adverse effect on the Corporation's business or its consolidated
financial position, results of operations or cash flows.
Management believes that its "Year 2000" readiness program has
encompassed all reasonable actions and contingency plans to avoid business
interruptions resulting from "Year 2000" problems. The Corporation has no
information that indicates that a significant vendor may be unable to sell to
the Corporation; that a significant customer may be unable to purchase from
the Corporation; or that a significant service provider may be unable to
provide services to the Corporation. Notwithstanding the above, the effect,
if any, on the Corporation's future results of operations, due to the
Corporation's major customers or suppliers not being "Year 2000" ready, cannot
be reasonably estimated. Management believes that this latter risk is
mitigated somewhat by the Corporation's broad base of customers and suppliers
and the worldwide nature of its operations.
ADOPTION OF THE EURO
In 1997 the Corporation established a task force to address the business
issues raised by the introduction of a European single currency (the "Euro")
for initial implementation on January 1, 1999 and during the transition period
through January 1, 2002. During January 1999, the Corporation's European
operations began processing certain transactions denominated in the Euro.
These transactions have been processed accurately and efficiently. At an
appropriate point during the transition period, the Corporation's financial
systems located in the participating countries will be converted from local
currency denominations to Euros. Management does not expect the introduction
of the Euro to result in any material risk or a material increase in costs to
the Corporation. All costs associated with the introduction of the Euro will
be charged to earnings as incurred.
CONTINGENCIES AND LEGAL MATTERS
In connection with the Mobile pulp mill closure, and as permitted by the
terms of the governing contract, on May 5, 1998, the Corporation gave notice
to Mobile Energy Services Company, L.L.C. ("MESC") of the Corporation's intent
to terminate MESC's long-term contract for power, steam and liquor processing
services with respect to the pulp mill. The resulting termination penalty
which is specified in the contract of $24.3 million was recorded in the second
quarter of 1998. On January 14, 1999, MESC and Mobile Energy Services
Holdings, Inc. filed an action against the Corporation claiming unspecified
damages in connection with the cancellation of the contract described in
"Liquidity and Capital Resources - Other Commentary." This action is not
expected to have a material adverse effect on the Corporation's business or
results of operations.
On May 13, 1997, the State of Florida, acting through its attorney
general, filed a complaint in the Gainesville Division of the United States
District Court for the Northern District of Florida (the "Florida District
Court"), alleging that manufacturers of tissue products for away-from-home
use, including the Corporation and Scott, agreed to fix prices by coordinating
price increases for such products. Following Florida's complaint, an action
by the states of Maryland, New York and West Virginia, as well as
approximately 45 class action complaints, have been filed in various federal
and state courts around the United States. These actions contain allegations
similar to those made by the State of Florida in its complaint. The actions
in federal courts have been consolidated for pretrial proceedings in the
Florida District Court. Class certification was granted in the federal
proceedings in July 1998 and will be contested in the state cases. The
foregoing actions seek an unspecified amount of actual and treble damages.
The Corporation has answered the complaints in these actions and has denied
the allegations contained therein as well as any liability. Discovery is
proceeding.
The Corporation intends to contest these claims vigorously. Management
does not expect these actions to have a material adverse effect on the
Corporation's business or results of operations.
The Corporation also is subject to routine litigation from time to time,
which, individually or in the aggregate, is not expected to have a material
adverse effect on the Corporation's business or results of operations.
ENVIRONMENTAL MATTERS
The Corporation is subject to federal, state and local environmental
protection laws and regulations with respect to its business operations and is
operating in compliance with, or taking action aimed at ensuring compliance
with, such laws and regulations. Compliance with these laws and regulations
is not expected to have a material adverse effect on the Corporation's
business or results of operations. 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 the Corporation's business or results of
operations.
OUTLOOK
The Corporation encountered difficult challenges in 1998, primarily in
Europe and Asia. In Europe, financial results suffered due to intense
competition in tissue and the costs of expanding diaper manufacturing capacity
and launching improved diapers and feminine care products. In response, a new
management team was formed for the European operations and it has moved
quickly to address the issues in that area. In Asia, despite the economic
turmoil in that region, the Corporation has improved its market share in many
of its product categories.
The Corporation expects to sustain the double-digit growth in earnings
per share from operations that it achieved in the second half of 1998. Among
other things, this expectation is based on the Corporation's strengths in
product brands and technology which are expected to enable the Corporation to
continue to bring product innovation into the marketplace and build its
presence in markets around the world. The Corporation intends to continue to
employ the strategy that it has successfully used in the personal care and
health care businesses and is now applying to the tissue businesses.
Specifically, the Corporation intends to utilize technology to deliver
superior-performing products that are favored in the marketplace. In
addition, the Corporation intends to leverage its technology and cost
advantages in nonwoven fabrics to attain continued growth in the health care
business.
Management believes that as a result of its three-year process of
redesigning and rationalizing the Corporation's asset base--by eliminating
excess, high-cost capacity and consolidating its operations into fewer, larger
and more efficient facilities--the Corporation has realized, and will continue
to realize, significant cost savings. In addition, management believes that
the reconfigured operations give the Corporation the right technologies in the
right locations to support the Corporation's future growth.
Management also believes that the Corporation's new global organizational
structure will drive sales growth, improve efficiency and increase the speed
at which the Corporation brings new products to the marketplace.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K/A, or documents a portion of
which are incorporated herein by reference, concerning, among other things,
the business outlook, anticipated financial and operating results, strategies,
contingencies and contemplated transactions of the Corporation including, but
not limited to, the adequacy of the charges under the 1997 Plan, the adequacy
of the 1998 Facilities Charge, the anticipated sale of the Southeast
Timberlands, the anticipated acquisition of Ballard, the "Year 2000" readiness
program, and the adoption of the Euro, 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, including cost savings as a result of the 1997 Plan and
the 1998 facilities consolidation plan, and the ability to achieve intended
facilities consolidations, projected volume increases and projected
divestitures on terms advantageous to the Corporation. 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 "Factors That May Affect Future Results."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this item is set forth in Item 7 of this Form 10-K. See
"Management's Discussion and Analysis - Market Risk Sensitivity and Inflation
Risks."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth in Item 14(a) of this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. Financial statements (As Restated):
The Consolidated Balance Sheet as of December 31, 1998 and 1997, and the
related Consolidated Statements of Income, Stockholders' Equity and Cash Flow
for the years ended December 31, 1998, 1997 and 1996, and the related Notes
thereto, and the Independent Auditors' Report of Deloitte & Touche LLP thereon
are attached hereto commencing on page F-1 of this Form 10-K.
2. Financial statement schedule:
The following information is filed as part of this Form 10-K and should be
read in conjunction with the financial statements contained herein.
Independent Auditors' Reports
Schedule for Kimberly-Clark Corporation and Subsidiaries:
Schedule II Valuation and Qualifying Accounts (As Restated)
All other schedules have been omitted because they were not applicable or
because the required information has been included in the financial statements
or notes thereto.
3. Exhibits:
Exhibit No. (3)a. Restated Certificate of Incorporation, dated June 12, 1997,
incorporated by reference to Exhibit No. (3)a to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
Exhibit No. (3)b. By-Laws, as amended November 22, 1996, incorporated by
reference to Exhibit No. 4.2 of the Corporation's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on December 6, 1996
(File No. 333-17367).
Exhibit No. (4). Copies of instruments defining the rights of holders of
long-term debt will be furnished to the Securities and Exchange Commission on
request.
Exhibit No. (10)a. Management Achievement Award Program, as amended and
restated as of January 1, 1998, incorporated by reference to Exhibit No. (10)a
of the Corporation's Annual Report on Form 10-K for the year ended December
31, 1997.
Exhibit No. (10)b. Executive Severance Plan, as amended and restated as of
December 10, 1998, has been previously filed as Exhibit No. (10)b of the 1998
Form 10-K.
Exhibit No. (10)c. Fourth Amended and Restated Deferred Compensation Plan for
Directors, incorporated by reference to Exhibit No. (10)c of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
Exhibit No. (10)d. 1986 Equity Participation Plan, as amended effective
November 20, 1997, incorporated by reference to Exhibit No. (10)d of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
Exhibit No. (10)e. 1992 Equity Participation Plan, as amended effective
November 20, 1997, incorporated by reference to Exhibit No. (10)e of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
Exhibit No. (10)f. Deferred Compensation Plan, effective as of October 1,
1994, incorporated by reference to Exhibit No. (10)g of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
Exhibit No. (10)g. First Amendment to Deferred Compensation Plan, effective as
of November 22, 1996, incorporated by reference to Exhibit No. (10)g of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1996.
Exhibit No. (10)h. Outside Directors' Stock Compensation Plan, incorporated by
reference to Exhibit No. 4.5 to the Corporation's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on April 18, 1996
(File No. 33-02607).
Exhibit No. (10)i. Supplemental Benefit Plan to Salaried Employees' Retirement
Plan, amended and restated as of November 17, 1994, incorporated by reference
to Exhibit No. (10)i of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1996.
Exhibit No. (10)j. Second Supplemental Benefit Plan to Salaried Employees'
Retirement Plan, amended and restated as of November 17, 1994, incorporated by
reference to Exhibit No. (10)j of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996.
Exhibit No. (10)k. Retirement Contribution Excess Benefit Program, as amended
and restated as of August 19, 1998, has been previously filed as Exhibit No.
(10)k of the 1998 Form 10-K.
Exhibit No. (10)l. 1999 Restricted Stock Plan, effective as of January 1,
1999, incorporated by reference to Exhibit No. 4.5 to the Corporation's
Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on February 3, 1999 (File No. 333-71661).
Exhibit No. (12). Computation of ratio of earnings to fixed charges for the
five years ended December 31, 1998.*
Exhibit No. (13). Portions of the Corporation's 1998 Annual Report to
Stockholders incorporated by reference in this Form 10-K.*
Exhibit No. (21). Subsidiaries of the Corporation, previously filed as Exhibit
No. (21) of the 1998 Form 10-K.
Exhibit No. (23). Independent Auditors' Consent of Deloitte & Touche LLP.*
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
Exhibit No. (24). Powers of Attorney.*
Exhibit No. (27). Financial Data Schedule.*
________________
*Filed herewith
(B) REPORTS ON FORM 8-K
(i) The Corporation filed a Current Report on Form 8-K, dated
January 26, 1999, to report its 1998 fourth quarter earnings.
(ii) The Corporation filed a Current Report on Form 8-K, dated
March 12, 1999, to report its 1998 audited financial
statements.
(iii) The Corporation filed a Current Report on Form 8-K, dated
March 16, 1999, to report the mutual termination of the agreement
to sell its Southeast Timberlands to Southstar Timber Resources,
LLC.
(iv) The Corporation filed a Current Report on Form 8-K, dated July 22,
1999, to report the Restatement and its 1999 second
quarter earnings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
August 6, 1999
By: /s/ John W. Donehower
--------------------------
John W. Donehower
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Wayne R. Sanders Chairman of the Board August 6, 1999
- --------------------------------
Wayne R. Sanders and Chief Executive Officer
and Director
(principal executive officer)
/s/ John W. Donehower Senior Vice President and August 6, 1999
- --------------------------------
John W. Donehower Chief Financial Officer
(principal financial officer)
/s/ Randy J. Vest Vice President and August 6, 1999
- --------------------------------
Randy J. Vest Controller
(principal accounting officer)
Directors
John F. Bergstrom Louis E. Levy
Pastora San Juan Cafferty Frank A. McPherson
Paul J. Collins Linda Johnson Rice
Robert W. Decherd Wolfgang R. Schmitt
William O. Fifield Randall L. Tobias
Claudio X. Gonzalez
By: /s/ O. George Everbach August 6, 1999
------------------------
O. George Everbach, Attorney-in-Fact
CONSOLIDATED INCOME STATEMENT
Kimberly-Clark Corporation and Subsidiaries
Year Ended December 31
---------------------------------
(Millions of dollars, except per share amounts) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(As Restated - See Note 17)
NET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,297.8 $12,546.6 $13,149.1
Cost of products sold . . . . . . . . . . . . . . . . . . . . 7,700.2 7,939.0 8,460.6
---------- ---------- ----------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . . 4,597.6 4,607.6 4,688.5
Advertising, promotion and selling expenses . . . . . . . . . 1,937.4 1,937.2 2,029.7
Research expense. . . . . . . . . . . . . . . . . . . . . . . 224.8 211.8 207.9
General expense . . . . . . . . . . . . . . . . . . . . . . . 717.0 623.9 603.0
Goodwill amortization . . . . . . . . . . . . . . . . . . . . 33.3 16.8 13.4
Restructuring and other unusual charges . . . . . . . . . . . 111.8 349.5 275.7
---------- ---------- ----------
OPERATING PROFIT. . . . . . . . . . . . . . . . . . . . . . . . 1,573.3 1,468.4 1,558.8
Interest income . . . . . . . . . . . . . . . . . . . . . . . 24.3 31.4 28.1
Interest expense. . . . . . . . . . . . . . . . . . . . . . . (198.7) (164.8) (186.7)
Other income (expense), net . . . . . . . . . . . . . . . . . 124.4 17.7 107.2
---------- ---------- ----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . 1,523.3 1,352.7 1,507.4
Provision for income taxes. . . . . . . . . . . . . . . . . . 522.2 493.3 576.0
---------- ---------- ----------
INCOME BEFORE EQUITY INTERESTS. . . . . . . . . . . . . . . . . 1,001.1 859.4 931.4
Share of net income of equity companies . . . . . . . . . . . 137.1 157.3 152.4
Minority owners' share of subsidiaries' net income. . . . . . (23.9) (31.3) (48.4)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY GAINS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE . . . . . . . . . . . . . . . . 1,114.3 985.4 1,035.4
Extraordinary gains, net of income taxes. . . . . . . . . . - 17.5 -
Cumulative effect of accounting change, net of income taxes (11.2) - -
---------- ---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,103.1 $ 1,002.9 $ 1,035.4
========== ========== ==========
PER SHARE BASIS
BASIC
Income before extraordinary gains and cumulative effect
of accounting change. . . . . . . . . . . . . . . . . . . $ 2.02 $ 1.77 $ 1.84
========== ========== ==========
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 2.00 $ 1.80 $ 1.84
========== ========== ==========
DILUTED
Income before extraordinary gains and cumulative effect
of accounting change. . . . . . . . . . . . . . . . . . . $ 2.01 $ 1.76 $ 1.83
========== ========== ==========
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1.99 $ 1.79 $ 1.83
========== ========== ==========
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
Kimberly-Clark Corporation and Subsidiaries
December 31
-----------------
(Millions of dollars) ASSETS 1998 1997
- ----------------------------------------------------------------------------------
(As Restated - See Note 17)
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . $ 144.0 $ 90.8
Accounts receivable . . . . . . . . . . . . . . . . . . 1,465.2 1,606.3
Inventories . . . . . . . . . . . . . . . . . . . . . . 1,283.8 1,319.5
Deferred income taxes . . . . . . . . . . . . . . . . . 375.3 327.7
Prepaid expenses and other. . . . . . . . . . . . . . . 117.5 130.8
---------- ---------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . 3,385.8 3,475.1
PROPERTY
Land and timberlands. . . . . . . . . . . . . . . . . . 161.1 200.4
Buildings . . . . . . . . . . . . . . . . . . . . . . . 1,673.1 1,465.7
Machinery and equipment . . . . . . . . . . . . . . . . 8,461.2 7,661.1
Construction in progress. . . . . . . . . . . . . . . . 264.6 365.5
---------- ---------
10,560.0 9,692.7
Less accumulated depreciation . . . . . . . . . . . . . 4,561.9 3,932.3
---------- ---------
NET PROPERTY. . . . . . . . . . . . . . . . . . . . . 5,998.1 5,760.4
INVESTMENTS IN EQUITY COMPANIES . . . . . . . . . . . . . 813.1 567.7
ASSETS HELD FOR SALE. . . . . . . . . . . . . . . . . . . 109.5 280.0
GOODWILL, NET OF ACCUMULATED AMORTIZATION . . . . . . . . 589.4 594.8
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . 791.9 739.1
---------- ---------
$11,687.8 $11,417.1
========= =========
See Notes to Consolidated Financial Statements.
December 31
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- --------------------------------------------------------------------------------------------------
(As Restated - See Note 17)
CURRENT LIABILITIES
Debt payable within one year. . . . . . . . . . . . . . . . . . . . . . . $ 635.4 $ 663.1
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 663.0 747.1
Other payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340.2 302.3
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,419.1 1,314.6
Accrued income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 570.9 416.8
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.5 131.4
---------- ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 3,764.1 3,575.3
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,068.2 1,803.9
NONCURRENT EMPLOYEE BENEFIT AND OTHER OBLIGATIONS . . . . . . . . . . . . . 899.9 887.1
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 721.6 643.0
MINORITY OWNERS' INTERESTS IN SUBSIDIARIES. . . . . . . . . . . . . . . . . 202.5 167.5
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, 1998 and 1997 . . . . . . . 710.8 710.8
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 86.3 113.3
Common stock held in treasury, at cost - 30.3 million and 12.3 million
shares at December 31, 1998 and 1997, respectively. . . . . . . . . . . (1,454.7) (617.1)
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . (964.3) (966.6)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,653.4 5,099.9
---------- ----------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . . . . 4,031.5 4,340.3
---------- ----------
$11,687.8 $11,417.1
========== ==========
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Kimberly-Clark Corporation and Subsidiaries
Common Stock Accumulated
Issued Additonal Treasury Stock Other Total
(Millions of dollars ------------------ Paid-In ------------------- Comprehensive Retained Stockholders' Comprehensive
except share amounts) Shares Amount Capital Shares Amount Income (Loss) Earnings Equity Income
- ----------------------- ------------------------------------------------------------------------------------------------------
(As Restated - See Note 17)
--------------------------------------
Balance at
December 31, 1995. . .564,560,236 $705.8 $ 66.1 2,959,448 $ (74.9) $(668.6) $4,112.9 $4,141.3
Shares issued for the
exercise of stock
options and awards . . 4,036,574 5.0 70.6 (6,688,178) 209.3 - - 284.9
Shares purchased for
treasury . . . . . . . - - - 8,951,924 (348.8) - - (348.8)
Comprehensive income:
Net income (As
Restated - See
Note 17) . . . . . . - - - - - - 1,035.4 1,035.4 $1,035.4
Other comprehensive
income (loss):
Unrealized
translation
adjustments. . . - - - - - (16.3) - (16.3) (16.3)
Minimum pension
liability
adjustment . . . - - - - - 17.5 - 17.5 17.5
---------
Comprehensive
income . . . . . . . . - - - - - - - - $1,036.6
=========
Dividends declared on
common shares. . . . . - - - - - - (519.0) (519.0)
----------- ------ ------- ----------- -------- -------- --------- ---------
Balance at
December 31, 1996. . .568,596,810 710.8 136.7 5,223,194 (214.4) (667.4) 4,629.3 4,595.0
Shares issued for the
exercise of stock
options and awards . . - - (18.2) (2,434,504) 88.2 - - 70.0
Shares purchased for
treasury . . . . . . . - - - 18,143,208 (910.6) - - (910.6)
Shares issued for the
acquisition of Tecnol. - - (5.2) (8,681,530) 419.7 - - 414.5
Comprehensive income:
Net income (As
Restated - See
Note 17) . . . . . . - - - - - - 1,002.9 1,002.9 $1,002.9
Other comprehensive
income (loss):
Unrealized
translation
adjustments. . . - - - - - (296.4) - (296.4) (296.4)
Minimum pension
liability
adjustment . . . - - - - - (2.8) - (2.8) (2.8)
---------
Comprehensive
income . . . . . . . . - - - - - - - - $ 703.7
=========
Dividends declared on
common shares. . . . . - - - - - - (532.3) (532.3)
----------- ------ ----- ---------- ---------- -------- --------- -------
Balance at
December 31, 1997. . .568,596,810 710.8 113.3 12,250,368 (617.1) (966.6) 5,099.9 4,340.3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (continued)
Common Stock Accumulated
Issued Additonal Treasury Stock Other Total
(Millions of dollars ------------------ Paid-In ------------------- Comprehensive Retained Stockholders' Comprehensive
except share amounts) Shares Amount Capital Shares Amount Income (Loss) Earnings Equity Income
- ----------------------- -------------------------------------------------------------------------------------------------------
(As Restated - See Note 17)
--------------------------------------
Shares issued for the
exercise of stock 55.1
options and awards . - - (27.0) (1,643,718) 82.1 - -
Shares purchased for
treasury . . . . . . - - - 19,732,752 (919.7) - - (919.7)
Comprehensive income:
Net income (As
Restated - See
Note 17) . . . . . - - - - - 1,103.1 1,103.1 $1,103.1
Other comprehensive
income (loss):
Unrealized
translation
adjustments. . - - - - 3.1 - 3.1 3.1
Minimum pension
liability
adjustment . . - - - - (.8) - (.8) (.8)
----------
Comprehensive
income . . . . . . . - - - - - - - $1,105.4
==========
Dividends declared on
common shares. . . . - - - - - (549.6) (549.6)
----------- ------ ----- ---------- ---------- -------- --------- -------
Balance at
December 31, 1998. . 568,596,810 $710.8 $86.3 30,339,402 $(1,454.7) $(964.3) $5,653.4 4,031.5
=========== ====== ===== ========== ========== ======== ========= ========
See Notes to Consolidated Financial Statements.
CONSOLIDATED CASH FLOW STATEMENT
Kimberly-Clark Corporation and Subsidiaries
Year Ended December 31
---------------------------------
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
(As Restated - See Note 17)
OPERATIONS
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,103.1 $ 1,002.9 $ 1,035.4
Charges for business improvement and other programs
Restructuring and other unusual charges . . . . . . . . . 111.8 349.5 275.7
Other charges . . . . . . . . . . . . . . . . . . . . . . 180.7 91.2 11.1
Cumulative effect of accounting change, net of income taxes 11.2 - -
Extraordinary gains, net of income taxes. . . . . . . . . . - (17.5) -
Mobile pulp mill fees and severances. . . . . . . . . . . . 42.3 - -
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 594.5 528.5 704.1
Goodwill amortization . . . . . . . . . . . . . . . . . . . 33.3 16.8 13.4
Deferred income tax provision . . . . . . . . . . . . . . . 13.6 71.4 (92.3)
Net gains on asset sales. . . . . . . . . . . . . . . . . . (125.9) (8.4) (75.1)
Equity companies' earnings in excess of dividends paid. . . (15.1) (62.1) (100.2)
Minority owners' share of subsidiaries' net income. . . . . 23.9 31.3 48.4
Decrease (Increase) in operating working capital. . . . . . 63.6 (588.4) (133.6)
Pension funding in excess of expense. . . . . . . . . . . . (45.9) (10.2) (16.8)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.6 4.1
---------- ---------- ----------
CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . 1,991.3 1,406.6 1,674.2
---------- ---------- ----------
INVESTING
Capital spending. . . . . . . . . . . . . . . . . . . . . . (669.5) (944.3) (883.7)
Acquisitions of businesses, net of cash acquired. . . . . . (342.5) (82.2) (223.6)
Proceeds from dispositions of property and businesses . . . 324.9 779.6 455.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (11.3) (58.9) 18.9
---------- ---------- ----------
CASH USED FOR INVESTING . . . . . . . . . . . . . . . . (698.4) (305.8) (633.0)
---------- ---------- ----------
FINANCING
Cash dividends paid . . . . . . . . . . . . . . . . . . . . (545.5) (530.6) (461.5)
Net (decrease) increase in short-term debt. . . . . . . . . (2.6) 355.3 (348.8)
Increases in long-term debt . . . . . . . . . . . . . . . . 538.3 107.5 75.8
Decreases in long-term debt . . . . . . . . . . . . . . . . (319.1) (253.8) (321.2)
Proceeds from exercise of stock options . . . . . . . . . . 38.3 49.2 207.9
Acquisitions of common stock for the treasury . . . . . . . (919.7) (910.6) (348.8)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (29.4) 89.8 17.0
---------- ---------- ----------
CASH USED FOR FINANCING . . . . . . . . . . . . . . . . (1,239.7) (1,093.2) (1,179.6)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . $ 53.2 $ 7.6 $ (138.4)
========== ========== ==========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kimberly-Clark Corporation and Subsidiaries
NOTE 1. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND RESTATEMENT
The consolidated financial statements include the accounts of
Kimberly-Clark Corporation and all subsidiaries that are more than 50 percent
owned. Investments in nonconsolidated companies that are at least 20 percent
owned are stated at cost plus equity in undistributed net income. These
latter companies are referred to as equity companies. 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.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingencies at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. Differences from those estimates are recorded in the period
they become known.
Subsequent to the issuance of the Corporation's 1998 financial statements
and the filing of its 1998 Form 10-K with the Securities and Exchange
Commission (the "SEC"), and following extensive discussions with
representatives of the SEC's Division of Corporation Finance concerning its
review of the Corporation's financial statements, Kimberly-Clark concluded
that it would restate its 1995, 1996, 1997, 1998 and first quarter
1999 financial statements and related disclosures. (See Notes 2, 3, 13,
14, 15, 16 and 17.)
INVENTORIES
Most U.S. inventories are valued at cost on the Last-In, First-Out (LIFO)
method for U.S. income tax purposes and for financial reporting purposes. The
balance of the U.S. inventories and inventories of consolidated operations
outside the U.S. are generally valued at the lower of cost, generally using
the First-In, First-Out (FIFO) method, or market.
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. Depreciation is
calculated on the straight-line or units-of-production method for financial
reporting purposes and generally on an accelerated method for income tax
purposes. 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.
NOTE 1. (Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized on the straight-line method over various periods
not exceeding 40 years. The realizability and period of benefit of goodwill
is evaluated periodically to assess recoverability and, if warranted,
impairment or adjustment of the period benefited would be recognized.
Accumulated amortization of goodwill at December 31, 1998 and 1997 was $150.8
million and $94.1 million, respectively.
ADVERTISING EXPENSE
Advertising expense is comprised of media, agency and production
expenses. Advertising expenses are charged to income during the period
incurred, except for expenses related to the development of a major commercial
or media campaign which are charged to income during the period in which the
advertisement or campaign is first presented by the media. The Corporation
uses no direct response advertising. Advertising expenses charged to income
totaled $295.3 million in 1998, $306.6 million in 1997 and $284.9 million in
1996.
REVENUE RECOGNITION
Sales revenue is recognized at the time of product shipment to
unaffiliated customers and appropriate provision is made for uncollectible
accounts.
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 COMPENSATION
Compensation cost for stock options and awards is measured based on
intrinsic value under Accounting Principles Board Opinion ("APB") 25,
Accounting for Stock Issued to Employees. (See Note 8 to the
Consolidated Financial Statements.)
NOTE 1. (Continued)
ACCOUNTING STANDARDS CHANGES
In 1998, the Corporation adopted the following Statements of Financial
Accounting Standards ("SFAS"):
- - SFAS 130, Reporting Comprehensive Income, which requires the components of
comprehensive income to be disclosed in the financial statements.
- - SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which requires disclosures of certain information about
the Corporation's operating segments on a basis consistent with the way
in which the Corporation is managed and operated.
- - SFAS 132, Employer's Disclosures about Pensions and Other Postretirement
Benefits, which revises disclosures about pensions and other
postretirement benefits and requires presentation of information
about such plans in a standardized format.
Adoption of these new standards required that the Corporation reclassify
prior years' information and make certain new disclosures in the notes to the
consolidated financial statements.
In 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-5, Reporting on the Costs of Start-up Activities, which
requires that such costs be expensed as incurred. The Corporation's practice
had been to record the costs of bringing significant new or expanded
facilities into operation as deferred charges and to amortize them over
periods of not more than five years. The Corporation adopted SOP 98-5
effective January 1, 1998, and restated 1998 first quarter results to record
a pretax charge of $17.8 million, $11.2 million after taxes, or $.02 per
share, as the cumulative effect of this accounting change. This change had
no material effect on total costs and expenses for 1998.
NEW PRONOUNCEMENTS
In 1998, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This standard, which establishes new accounting and
reporting standards for derivative financial instruments, must be adopted no
later than 2000. The Corporation is currently analyzing the effect of this
standard and does not expect it to have a material effect on the Corporation's
consolidated financial position, results of operations or cash flows.
In 1998, AcSEC issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement, which
becomes effective in 1999, requires that certain costs of developing or
obtaining software for internal use be capitalized. The Corporation presently
capitalizes most of the required costs, and consequently does not expect the
statement to have a material effect on the Corporation's consolidated
financial position, results of operations or cash flows.
NOTE 2. BUSINESS IMPROVEMENT AND OTHER PROGRAMS
The Corporation has undertaken a number of actions in recent years to
address ongoing business competitiveness by improving its operating efficiency
and cost structure. These programs began in 1995, at the time of the merger
with Scott Paper Company ("Scott"), and will be completed in 2000. A summary
of these programs beginning with the 1995 program is set forth below.
1995 SCOTT MERGER AND RESTRUCTURING PLAN
- ---------------------------------------------
In connection with the Scott merger, in December 1995, the Corporation
announced a plan to restructure the combined operations and to accomplish
other business improvement objectives (the "1995 Plan"). The 1995 Plan
includes (i) the cost of plant rationalizations and employee terminations to
eliminate duplicate facilities and excess capacity; (ii) disposition of
facilities to comply with the merger-related decrees of the U.S. Justice
Department and the European Commission; (iii) costs of terminating leases,
contracts and other long-term agreements; (iv) the direct costs of the merger,
including fees of investment bankers, outside legal counsel and accountants;
(v) impaired asset charges; and (vi) accelerated depreciation charges on
assets that were to be disposed of but which were not to be immediately
removed from operations.
The original estimated pretax cost of the 1995 Plan was $1,440.0 million.
It was ultimately accomplished at a pretax cost of $1,305.0 million, which was
charged against earnings for the four years ended December 31, 1998, as
summarized below:
Amounts Charged to Earnings
-------------------------------------------------------
(Millions of dollars) 1995 1996 1997 1998 Total
----------------------- ------ ------ ------ ------ --------
Workforce reduction . . . . . . . . . . . $109.0 $ 74.4 $32.5 $(3.5) $ 212.4
Write-downs of property, plant and
equipment and other assets. . . . . . . 285.1 (8.0) (3.6) - 273.5
Contract settlements, lease terminations
and other costs . . . . . . . . . . . . 111.1 298.8 30.7 .2 440.8
Merger fees and expenses. . . . . . . . . 83.4 2.2 .5 - 86.1
Asset impairments . . . . . . . . . . . . 225.7 (80.6) - - 145.1
Accelerated depreciation. . . . . . . . . - 143.1 4.0 - 147.1
------ ------- ------ ------ --------
Total pretax charge . . . . . . . . . . $814.3 $429.9 $64.1 $(3.3) $1,305.0
====== ======= ====== ====== ========
Income statement classification:
Cost of products sold . . . . . . . . . $ - $154.2 $15.1 $ 1.7 $ 171.0
Restructuring and other unusual charges 814.3 275.7 49.0 (5.0) 1,134.0
------ ------- ------ ------ --------
Total pretax charge . . . . . . . . . . $814.3 $429.9 $64.1 $(3.3) $1,305.0
====== ======= ====== ====== ========
NOTE 2. (Continued)
The effects of the 1995 Plan were included in operating profit by
business segment and geography as follows:
Year Ended December 31
-------------------------------
(Millions of dollars) 1996 1997 1998
- ----------------------- ------ ------ ------
By Business Segment:
Tissue. . . . . . . . . . . . . . . . $329.4 $60.5 $ .7
Personal Care . . . . . . . . . . . . 77.0 1.9 .9
Health Care . . . . . . . . . . . . . .7 (.3) (.8)
Unallocated . . . . . . . . . . . . . 22.8 2.0 (4.1)
------ ------ ------
Total pretax charge . . . . . . . . $429.9 $64.1 $(3.3)
====== ====== ======
By Geography:
North America . . . . . . . . . . . . $228.5 $11.5 $(2.9)
Outside North America . . . . . . . . 178.6 50.6 3.7
Unallocated . . . . . . . . . . . . . 22.8 2.0 (4.1)
------ ------ ------
Total pretax charge . . . . . . . . $429.9 $64.1 $(3.3)
====== ====== ======
The effects of the 1995 Plan decreased (increased) operating profit, net
income and net income per share as follows:
Year Ended December 31
-----------------------------
(Millions of dollars, except per share amounts) 1995 1996 1997 1998
- ------------------------------------------------ -----------------------------
Operating profit . . . . . . . . . . . . . . . . . . $814.3 $429.9 $64.1 $(3.3)
Net income . . . . . . . . . . . . . . . . . . . . . 596.9 328.6 51.3 (.9)
Basic net income per share . . . . . . . . . . . . . 1.07 .58 .09 -
The principal components of the 1995 Plan were as follows:
- - Workforce reduction comprises severance payments and termination
benefits for approximately 4,200 duplicate staff and sales positions
and workforce reductions in operations that were disposed of. These
costs were charged to earnings in the period in which such employee
severances and benefits were appropriately communicated.
- - Write-downs of property, plant and equipment and other assets comprise
write-downs of certain assets that became obsolete as a result of the
merger, or which were no longer to be used, and the net book value of
less efficient and duplicate machinery and equipment not needed in the
combined restructured manufacturing operations.
- - Contract settlements and lease terminations represent the estimated
costs of terminating long-term leases for Scott's Wilmington, Delaware
and Boca Raton, Florida office facilities, sales distributor
contracts and an operating lease for a deinking facility related
to a Scott tissue mill.
- - Merger fees and expenses are comprised of the costs of investment
bankers advising on the Scott merger, outside legal counsel engaged
with respect to the merger and independent auditors for work on the
joint proxy statement/prospectus and due diligence work concerning
the merger. These costs were recorded at the time liabilities arose
for these obligations.
NOTE 2. (Continued)
- - Asset impairments are for facilities or operations whose future cash
flows were estimated to be insufficient to cover their carrying amounts.
The most significant items are a Scott tissue facility in the U.S., one
in Canada and a Scott pulp facility in Spain. The U.S. facility was
written down to its estimated fair value, based on the Corporation's
assessment of expected pretax future cash flows discounted at a rate
commensurate with the risk involved. The pulp facility had estimated
negative future cash flows (undiscounted), and consequently the mill
was written down. The Canadian facility was impaired and planned to be
sold, but, as explained in the "Modifications to the 1995 Plan" section,
the mill was not sold, but rather the Corporation's ownership in the
entity which owned the mill was sold at a gain.
- - Accelerated depreciation has been recorded on facilities and other
depreciable assets that were to be disposed of as part of the 1995 Plan
but which were not immediately removed from operations. These
assets were depreciated down to fair value by charges to cost of
products sold over the remaining period of time that they remained
in use.
- - The 1995 Plan also contemplated disposals to comply with consent decrees
of the U.S. Justice Department and the European Commission. These
agreements required the sale of the Scott Baby Fresh baby wipes and
Scotties facial tissue operations in the U.S. and the Kleenex Velvet
bathroom tissue business in the United Kingdom and Ireland. Under the
agreements, Scott's baby wipes mill in Dover, Delaware and a
Kimberly-Clark tissue mill in Europe were to be sold, as well as up
to two of four other tissue mills located in the U.S. During the second
and third quarter of 1996, the regulatory disposals were accomplished,
and the resulting net pretax gains were recorded in other income.
Modifications to the 1995 Plan
- ----------------------------------
Certain aspects of the Corporation's original plans for integrating the
organizations and accomplishing the objectives of the 1995 Plan were modified.
These modifications were charged to earnings in the period in which they
became known. The most significant modifications are described below:
- - Plans to eliminate duplicate facilities, excess assets and certain other
assets were revised due to a fundamental change in plans in 1996 with
respect to disposal of a Canadian tissue facility owned by Scott
Paper Limited ("SPL"), a 50.1 percent-owned subsidiary. Prior to the
merger with Scott, the Corporation entered into an agreement with the
Canadian Bureau of Competition Policy (the "Bureau") in which the
Corporation agreed not to manage SPL and to hold SPL separate until
agreement was reached on required divestitures in Canada. The Corporation
had originally planned to acquire the outstanding minority interest in
SPL and subsequently eliminate excess Canadian tissue-making capacity.
After the merger, the Corporation was advised by the Bureau that it would
have to dispose of additional SPL brands and associated facilities. During
the time the Corporation was assessing the impact of the additional
divestitures, the market price of SPL's publicly held shares
increased substantially in anticipation of the Corporation's potential
bid to acquire the remaining SPL shares. As a consequence of this
increased cost and the unfavorable impact of the divestitures required to
merge the Corporation's Canadian operations, management decided to sell
its interest in SPL. Because the SPL sale was expected to result in a gain,
$83.6 million primarily related to the reserve for asset impairments was
no longer needed and was reversed to earnings in 1996.
- - In 1996, estimated deductions to be taken by certain Scott customers for
1995 promotional rebates and cooperative advertising in the consumer
business, and accrued costs for unprofitable contract business in the
away-from-home business were determined to be underestimated. In addition,
NOTE 2. (Continued)
during 1996, management decided to approve certain promotional allowances
claimed by certain Scott customers in the away-from-home business. These
changes in estimates, which are shown as "other costs" on the
foregoing summary, resulted in $122.4 million and $12.9 million
being charged to earnings in 1996 and 1997, respectively, at the time such
changes in estimates became known.
- - In the first quarter of 1996, the European Commission required the
Corporation to sell its tissue mill in Prudhoe, England, and certain
consumer tissue businesses in the United Kingdom and Ireland. These
disposals were completed in the third quarter of 1996. During the time
the Prudhoe facility and related businesses were being marketed, management
conducted more in-depth studies and evaluations of a number of the
European facilities it had originally planned to close or divest. As a
result, management decided to restructure certain European operations.
Management decided to consolidate the Corporation's feminine care
products production at its Forchheim mill in Germany and close a
feminine care products mill in Veenendaal, Netherlands. In addition,
management restructured its tissue mill in Larkfield, England and downsized
other facilities in Flensburg and Koblenz, Germany and Gennep,
Netherlands. These changes resulted in employee severance costs,
facility integration costs and accelerated depreciation charges, which
were charged to earnings in 1996.
- - In 1996, costs of integrating facilities and operations, primarily in
the U.S., were charged to 1996 earnings as incurred and shown as "other
costs" in the foregoing summary.
Set forth below is a summary of the types and amounts of charges that
were recognized as accrued expenses for the 1995 Plan together with the cash
payments made against such accruals for the three years ended December 31,
1998.
1996
----------------------
Balance Charges Balance
(Millions of dollars) 12/31/95 (Credits) Payments 12/31/96
- ----------------------- -------- --------- -------- --------
Workforce severance . . . . . . . . . . . . . . $ 74.4 $ 74.4 $(113.9) $ 34.9
Asset removal costs . . . . . . . . . . . . . . 9.9 19.9 (16.8) 13.0
Contract settlement and lease termination costs 127.7 (27.9) (34.1) 65.7
Other costs . . . . . . . . . . . . . . . . . . 14.0 118.2 (50.7) 81.5
------ ------- -------- ------
$226.0 $184.6 $(215.5) $195.1
====== ======= ======== ======
1997
----------------------
Balance Charges Balance
(Millions of dollars) 12/31/96 (Credits) Payments 12/31/97
- ----------------------- -------- --------- -------- --------
Workforce severance . . . . . . . . . . . . . . $ 34.9 $ 32.5 $ (59.3) $ 8.1
Asset removal costs . . . . . . . . . . . . . . 13.0 (1.6) (9.5) 1.9
Contract settlement and lease termination costs 65.7 (24.2) (14.4) 27.1
Other costs . . . . . . . . . . . . . . . . . . 81.5 (28.6) (43.8) 9.1
------ ------- -------- -----
$195.1 $(21.9) $(127.0) $46.2
====== ======= ======== =====
NOTE 2. (Continued)
1998
----------------------
Balance Charges Balance
(Millions of dollars) 12/31/97 (Credits) Payments 12/31/98
- ----------------------- -------- --------- -------- --------
Workforce severance . . . . . . . . . . . . . . $ 8.1 $ (3.5) $ (4.6) $ -
Asset removal costs . . . . . . . . . . . . . . 1.9 - (1.9) -
Contract settlement and lease termination costs 27.1 (6.1) (5.7) 15.3
Other costs . . . . . . . . . . . . . . . . . . 9.1 (1.4) (7.0) .7
----- ------- ------- -----
$46.2 $(11.0) $(19.2) $16.0
===== ======= ======= =====
1997 PLAN
- ----------
On November 21, 1997, the Corporation announced a restructuring plan (the
"1997 Plan"). The plan includes the sale, closure or downsizing of 17
manufacturing facilities worldwide and a workforce reduction of approximately
4,800 employees. The estimated pretax cost of the 1997 Plan was $679.5
million. The Corporation recorded $414.2 million of such cost in 1997. In
1998, the Corporation recorded $250.8 million of such cost at the time the
costs became accruable under appropriate accounting principles, including
accelerated depreciation charged to cost of products sold on assets that were
to be disposed of but which remained or will remain in use until disposed of
in 1999 and 2000. The remaining $14.5 million of the cost of the 1997 Plan
will be recorded as accelerated depreciation expense over the remaining useful
lives of such assets.
The charges under the 1997 Plan for the two years ended are summarized
below:
Amounts Charged
to Earnings
-------------------
(Millions of dollars) 1997 1998
- ----------------------- ------ ------
Workforce related . . . . . . . . . . . . . . . . . . . . . . $ 35.4 $ 53.2
Write-downs of property, plant and equipment and other assets 93.6 56.2
Contract settlements, lease terminations and other costs. . . 64.2 31.3
Asset impairments . . . . . . . . . . . . . . . . . . . . . . 187.4 31.3
Accelerated depreciation. . . . . . . . . . . . . . . . . . . 33.6 78.8
------ ------
Total pretax charge . . . . . . . . . . . . . . . . . . . $414.2 $250.8
====== ======
Income statement classification:
Cost of products sold . . . . . . . . . . . . . . . . . . . $113.7 $134.0
Restructuring and other unusual charges . . . . . . . . . . 300.5 116.8
------ ------
Total pretax charge . . . . . . . . . . . . . . . . . . . $414.2 $250.8
====== ======
NOTE 2. (Continued)
The costs of the 1997 Plan were included in operating profit by business
segment and geography as follows:
Year Ended
December 31
------------------
1997 1998
------ ------
By Business Segment
Tissue. . . . . . . . . . . . . . . . . . . . . . . . . . $324.4 $149.3
Personal Care . . . . . . . . . . . . . . . . . . . . . . 72.8 87.6
Health Care and Other . . . . . . . . . . . . . . . . . . 8.7 13.2
Unallocated . . . . . . . . . . . . . . . . . . . . . . . 8.3 .7
------ ------
Total pretax charge. . . . . . . . . . .. . . . . . . . . $414.2 $250.8
====== ======
By Geography:
North America . . . . . . . . . . . . . . . . . . . . . . $181.5 $160.9
Outside North America . . . . . . . . . . . . . . . . . . 224.4 89.2
Unallocated . . . . . . . . . . . . . . . . . . . . . . . 8.3 .7
------ ------
Total pretax charge . . . . . . . . . . . . . . . . . . . $414.2 $250.8
====== ======
Charges under the 1997 Plan reduced operating profit, net income and net
income per share as follows:
Year Ended
December 31
------------------
(Millions of dollars, except per share amounts) 1997 1998
- ----------------------------------------------------- ------ ------
Operating profit . . . . . . . . . . . . . . . . . . . . . $414.2 $250.8
Net income . . . . . . . . . . . . . . . . . . . . . . . . 315.0 178.9
Basic net income per share . . . . . . . . . . . . . . . . .57 .33
The principal components of the 1997 Plan were as follows:
- - The sale, closure or downsizing of 17 manufacturing facilities
worldwide, 12 of which have been closed or downsized through December 31,
1998. These actions will result in the consolidation of the Corporation's
manufacturing operations into fewer, larger and more efficient facilities
and eliminate excess production capacity of high-cost tissue manufacturing
capacity in North America and Europe. Five facilities are expected
to be disposed of by the third quarter of 1999, the largest of which
is a tissue manufacturing facility in Gennep, Netherlands, which was
closed in March 1999.
- - A workforce reduction of approximately 4,800 employees. Through
December 31, 1998, a total workforce reduction of 3,700 has been realized.
These costs were charged to earnings in the period in which such
employee severances and benefits were appropriately communicated.
Approximately 1,100 additional employees are expected to be notified of
their termination benefits in 1999 and 2000, and the associated costs will
be charged to earnings at that time.
- - The write-down of property, plant and equipment and other assets not
used in the restructured manufacturing operations, the elimination of
excess manufacturing capacity, and the write-down of certain inventories
in restructured operations and other assets.
NOTE 2. (Continued)
- - The elimination of certain of the Corporation's facilities and capacity
which became excessive as a result of the combination of the Corporation's
health care operations with those of Tecnol Medical Products, Inc.
("Tecnol").
- - Contract terminations and other costs.
- - Recording accelerated depreciation on facilities and other depreciable
assets that were to be disposed of as part of the 1997 Plan but which were
not immediately removed from operations. Such facilities and other
depreciable assets were or are being depreciated down to fair value by
charges to cost of products sold over the remaining period of time
that they remained or will remain in use.
Modifications to the 1997 Plan
- ----------------------------------
Certain aspects of the 1997 Plan have been modified, the most significant
of which are described below:
- - In addition to the original 17 facilities in 1998, management committed
to a plan to close a tissue manufacturing facility in order to continue
to align capacity with demand. The facility, the name of which has not
yet been announced publicly, will be closed by the end of 2000. Based on
this disposal plan, the facility became an impaired asset because its
cash flows from use and disposal were insufficient to cover the
carrying amount of the asset. Consequently, a charge to earnings of $26.8
million was recorded in the fourth quarter of 1998.
- - Also in 1998, management established reserves by charges to 1998
earnings to cover other qualifying programs that had either been
underestimated in 1997 or were extensions of such programs, the largest
item being a $12.1 million charge for the write-down of European
feminine care equipment removed from service.
Set forth below is a summary of the types and amounts of charges that
were recognized as accrued expenses for the 1997 Plan together with cash
payments made against such accruals for the two years ended
December 31, 1998.
Charges Balance Charges Balance
(Millions of dollars) in 1997 Payments 12/31/97 in 1998 Payments 12/31/98
- ----------------------- ------- -------- -------- ------- -------- --------
Workforce severance . . . . . $35.4 $(3.3) $32.1 $53.2 $(42.6) $ 42.7
Asset removal costs . . . . . 17.2 - 17.2 .3 (4.8) 12.7
Environmental costs and lease
contract terminations . . . 32.3 (0.2) 32.1 23.2 (15.1) 40.2
Other costs . . . . . . . . . 14.7 (5.5) 9.2 7.8 (1.6) 15.4
----- ------ ----- ----- ------- ------
$99.6 $(9.0) $90.6 $84.5 $(64.1) $111.0
===== ====== ===== ===== ======= ======
1998 PLANS
- -----------
1998 Facilities Charge
- ------------------------
In the fourth quarter of 1998, the Corporation announced a facilities
consolidation plan to, among other things, further align tissue manufacturing
capacity with demand in Europe, close a diaper manufacturing facility in
Canada, shut down and dispose of a tissue machine in Thailand and write down
NOTE 2. (Continued)
certain excess feminine care production equipment in North America. Of the
$124.0 million aggregate cost of the facilities consolidation plan (the "1998
Facilities Charge"), $49.1 million was recorded in 1998. The remaining $74.9
million of total costs of the plan, primarily related to a tissue
manufacturing facility in the United Kingdom, which will remain in use until
its expected shutdown in October 2000, will be recorded as accelerated
depreciation expense and employee severance costs in 1999 and 2000.
Included in the 1998 Facilities Charge was $2.8 million for accelerated
depreciation related to the 1999 closure of a diaper facility in Canada.
Related employee severance costs of $11.1 million also were recorded as part
of the 1998 Facilities Charge for approximately 450 employees who were
notified prior to December 31, 1998 of the Corporation's plans to terminate
their employment. Asset write-downs to estimated fair value and inventory
losses associated with the diaper facility shutdown and capacity alignment
totaling $35.2 million also were included in the 1998 Facilities Charge.
The 1998 Facilities Charge, which was charged to cost of products sold,
reduced 1998 operating profit $49.1 million, and net income $34.1 million, or
$.06 per share. Approximately 70 percent of the pretax charge relates to the
Personal Care segment and 30 percent relates to the Tissue segment. The
employee severance costs and other cash costs of closures and consolidations
of $18.8 million are included in other accrued expenses at December 31, 1998.
Write-down of Certain Intangible and Other Assets
- -------------------------------------------------------
- - During the third quarter of 1998, the Corporation completed an
impairment review of its intangible assets, such as trademarks and
goodwill. Impairment is deemed to exist whenever the undiscounted estimated
future cash flows are less than the carrying amount of such intangible
assets. Impairment losses are measured by the difference between the asset
carrying amount and the present value of the estimated future cash flows.
As a result of the review, the carrying amounts of trademarks and
unamortized goodwill of certain European businesses were determined to
be impaired and were written down. These write-downs, which were charged
to general expense, reduced 1998 operating profit $70.2 million and
net income $57.1 million, or $.10 per share.
- - During the third quarter of 1998, the Corporation completed a technology
review of its personal computers ("PCs") which demonstrated that
(i) PCs have reduced economic lives as a consequence of rapid technological
improvements, (ii) more sophisticated software applications require more
powerful PCs, and (iii) most of the Corporation's PCs acquired prior
to 1997 were technologically obsolete. Consequently, the Corporation
concluded that its previous practice of capitalizing the costs of PCs
and depreciating them over five years should be modified. Accordingly, the
Corporation began depreciating the cost of all newly acquired PCs over two
years. In recognition of the change in estimated useful lives, PC assets
with a remaining net book value of $16.6 million became subject to
accelerated depreciation charges of $2.1 million, $8.3 million and $6.2
million in 1998, 1999 and 2000, respectively. The effect of accelerated
depreciation for 1998, together with $8.8 million of charges for
write-downs of other assets and a loss on a pulp contract, reduced
1998 operating profit $11.0 million and net income $7.6 million, or
$.01 per share. Of the $11.0 million, $6.8 million was charged to cost
of products sold and $4.2 million was charged to general expense.
- - Approximately 91 percent of the write-down of certain intangible and
other assets and accelerated depreciation on PCs described above relates
to the Personal Care segment and 9 percent relates to the Tissue
segment.
NOTE 2. (Continued)
OTHER INFORMATION
During 1997 and 1998, in accordance with SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
depreciation expense was suspended on facilities included in the 1997 Plan
that were held for disposal. Depreciation for these facilities would have
been $7.5 million in 1998 and $3.3 million in 1997.
In addition, during 1997 and 1998, in accordance with SFAS 121,
depreciation was suspended on certain pulp producing facilities and the
depreciable property of SPL that were held for disposal or disposed of.
Depreciation for these facilities would have been $23.8 million in 1998 and
$47.3 million in 1997. The lower amount of suspended depreciation in 1998
versus 1997 was a result of the sale of a noncore pulp and newsprint facility
located in Coosa Pines, Alabama ("Coosa") in March 1997, the sale of SPL in
June 1997 and the reclassification of the New Glasgow, Nova Scotia and the
Terrace Bay, Ontario pulp manufacturing facilities from assets held for sale
to property during 1998.
NOTE 3. INCOME TAXES
An analysis of the provision for income taxes follows:
Year Ended December 31
------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------- ------ ------ ------
Current income taxes:
United States . . . . . . . . . . . . . . . . . . . . . . . . $402.0 $423.9 $481.2
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.8 96.7 68.8
Other countries . . . . . . . . . . . . . . . . . . . . . . . 79.8 104.6 118.3
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 508.6 625.2 668.3
------- ------- -------
Deferred income taxes:
United States . . . . . . . . . . . . . . . . . . . . . . . . 39.8 (29.3) (45.4)
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (49.5) (23.9)
Other countries . . . . . . . . . . . . . . . . . . . . . . . (38.3) (14.7) (23.0)
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 (93.5) (92.3)
------- ------- -------
Total provision for income taxes. . . . . . . . . . . . . . . . 515.6 531.7 576.0
Less income taxes related to:
Extraordinary gains . . . . . . . . . . . . . . . . . . . . . - 38.4 -
Cumulative effect of accounting change. . . . . . . . . . . . (6.6) - -
------- ------- -------
Total provision excluding income taxes related to extraordinary
gains and cumulative effect of accounting change. . . . . . . $522.2 $493.3 $576.0
======= ======= =======
Income before income taxes is classified in the Consolidated Income
Statement as follows:
Year Ended December 31
------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------- ------ ------ ------
Income Before Extraordinary Gains and Cumulative Effect of
Accounting Change:
United States. . . . . . . . . . . . . . . . . . . . . $1,455.6 $1,291.6 $1,370.1
Other countries. . . . . . . . . . . . . . . . . . . . 67.7 61.1 137.3
-------- -------- --------
$1,523.3 $1,352.7 $1,507.4
======== ======== ========
Extraordinary Gains:
United States. . . . . . . . . . . . . . . . . . . . . . $ - $ 55.9 $ -
======== ======== ========
Cumulative Effect of Accounting Change:
United States. . . . . . . . . . . . . . . . . . . . . . $ (17.2) $ - $ -
Other countries. . . . . . . . . . . . . . . . . . . . . (.6) - -
---------- -------- --------
$ (17.8) $ - $ -
========== ======== ========
- ------
NOTE 3. (Continued)
Deferred income tax assets (liabilities) are composed of the following:
December 31
-----------------
(Millions of dollars) 1998 1997
- ----------------------- ------ ------
Current deferred income tax assets attributable to:
Advertising and promotion accruals . . . . . . . . . . . . . . . . $ 29.7 $ 37.7
Pension, postretirement and other employee benefits. . . . . . . . 92.0 80.2
Other accrued expenses, including those related to the 1998,
1997 and 1995 Plans. . . . . . . . . . . . . . . . . . . . . . . 210.4 170.9
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.0 40.7
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . (4.8) (1.8)
-------- --------
Net current deferred income tax asset. . . . . . . . . . . . . . . . $ 375.3 $ 327.7
======== ========
Noncurrent deferred income tax assets (liabilities) attributable to:
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . $(931.9) $(868.8)
Income tax loss carryforwards. . . . . . . . . . . . . . . . . . . 337.8 280.4
Other postretirement benefits. . . . . . . . . . . . . . . . . . . 280.2 287.3
Installment sales. . . . . . . . . . . . . . . . . . . . . . . . . (137.9) (137.9)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.7) (2.8)
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . (267.1) (201.2)
-------- --------
Net noncurrent deferred income tax liability . . . . . . . . . . . . $(721.6) $(643.0)
======== ========
Valuation allowances for deferred income tax assets increased by $68.9
million in 1998 and $28.7 million in 1997. Valuation allowances at the end
of 1998 relate to the potentially unusable portion of income tax loss
carryforwards of $909.7 million in jurisdictions outside the United States.
If not utilized against taxable income, $310.8 million of the loss
carryforwards will expire from 1999 through 2008. The remaining $598.9
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
during the carryforward period are reduced or increased.
NOTE 3. (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
excluding income taxes applicable to extraordinary gains and cumulative effect
of an accounting change.
Year Ended December 31
-------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ------------------
(Millions of dollars) AMOUNT PERCENT Amount Percent Amount Percent
- ----------------------- -------------------------------------------------------------------
Income before income taxes:
As restated. . . . . . . . . . . . $1,523.3 $1,352.7 $1,507.4
Add back charges for business
improvement and other programs
and the Mobile pulp mill fees
and severances. . . . . . . . . 420.1 478.3 429.9
-------- -------- ---------
Income before income taxes
excluding the above charges. $1,943.4 $1,831.0 $1,937.3
======== ======== =========
Tax at U.S. statutory rate(a). . . . $ 680.2 35.0 % $ 640.9 35.0 % $678.1 35.0 %
State income taxes, net of federal
tax benefit. . . . . . . . . . . . 30.0 1.5 35.3 1.9 34.9 1.8
Operating losses for which no tax
benefit was recognized, net of
operating losses realized. . . . . 24.4 1.3 22.0 1.2 10.0 .5
Other - net. . . . . . . . . . . . . (96.1) (4.9) (97.2) (5.3) (47.4) (2.4)
-------- --------- --------- ------- ------- -------
638.5 32.9 % 601.0 32.8 % 675.6 34.9 %
========= ======= =======
Tax benefit of the charges for
business improvement and other
programs(b). . . . . . . . . . . . (116.3) (27.7)% (107.7) (22.5)% (99.6) (23.2)%
-------- ========= --------- ======= ------- =======
Provision for income taxes . . . . . $ 522.2 34.3 % $ 493.3 36.5 % $576.0 38.2 %
======== ========= ========= ======= ======= =======
<FN>
(a) Tax at U.S. statutory rate is based on income before income taxes
excluding the charges for business improvement and other programs and
the Mobile pulp mill fees and severances of $420.1 million, $478.3
million and $429.9 million in 1998, 1997 and 1996, respectively. The tax
benefits of such programs are shown elsewhere in the table.
(b) The effective rates for the tax benefits attributable to the charges for
business improvement programs and the Mobile pulp mill fees and severances
are lower than the U.S. statutory rate of 35.0 percent primarily because
no tax benefits were provided for certain costs related to
operations in countries in which the Corporation has income tax loss
carryforwards for which valuation allowances have been provided.
At December 31, 1998, income taxes have not been provided on
approximately $1.6 billion of unremitted earnings of subsidiaries operating
outside the U.S. These earnings, which are considered to be invested
indefinitely, would become subject to income tax if they were remitted as
dividends, were lent to the Corporation or a U.S. affiliate, or if the
Corporation were to sell its stock in the subsidiaries. Determination of the
amount of unrecognized deferred U.S. income tax liability on these unremitted
earnings is not practicable because of the complexities associated with its
hypothetical calculation. Withholding taxes of approximately $130 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 1998.
NOTE 4. POSTRETIREMENT AND OTHER BENEFITS
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. For plans in North America and
the United Kingdom, the funding policy is to contribute assets that, at a
minimum, fully fund the accumulated benefit obligation, subject to regulatory
and tax deductibility limits. The policy for the remaining defined benefit
plans, which are composed primarily of pension or termination pay plans
outside North America and nonqualified U.S. plans providing pension benefits
in excess of limitations imposed by the U.S. income tax code, is to fund them
based on legal requirements, tax considerations, customary business practices
in such countries and investment opportunities.
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. 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 in 1993 or after. 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. Certain other U.S. plans
limit the Corporation's future cost for retiree medical benefits to a defined
annual per capita medical cost.
Summarized financial information about postretirement plans, excluding
defined contribution retirement plans, is presented below.
NOTE 4. (Continued)
Pension Benefits Other Benefits
----------------- ---------------------
Year Ended December 31
-----------------------------------------
(Millions of dollars) 1998 1997 1998 1997
- ----------------------- ------ ------ ------ ------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year. . . . . . $3,623.2 $3,394.7 $ 638.0 $ 631.8
Service cost . . . . . . . . . . . . . . . . . . . 69.2 72.6 11.8 10.7
Interest cost. . . . . . . . . . . . . . . . . . . 247.1 246.7 44.2 44.9
Participants' contributions. . . . . . . . . . . . 8.3 7.6 4.0 4.8
Amendments . . . . . . . . . . . . . . . . . . . . 9.5 20.4 - -
Actuarial loss . . . . . . . . . . . . . . . . . . 171.8 275.9 27.5 12.2
Acquisitions . . . . . . . . . . . . . . . . . . . 1.5 .8 - -
Divestments. . . . . . . . . . . . . . . . . . . . - (96.6) - (1.6)
Curtailments . . . . . . . . . . . . . . . . . . . (8.4) (.1) (2.6) (7.5)
Special termination benefits . . . . . . . . . . . 5.0 1.7 - -
Currency exchange rate effects . . . . . . . . . . (2.3) (59.2) (2.0) (1.2)
Benefit payments . . . . . . . . . . . . . . . . . (257.4) (241.3) (62.3) (56.1)
--------- --------- -------- --------
Benefit obligation at end of year. . . . . . . . . 3,867.5 3,623.2 658.6 638.0
--------- --------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year . . 3,619.9 3,343.2 - -
Actual return on plan assets . . . . . . . . . . . 525.7 502.4 - -
Employer contributions . . . . . . . . . . . . . . 24.5 30.7 58.3 51.3
Participants' contributions. . . . . . . . . . . . 8.3 7.6 4.0 4.8
Currency exchange rate effects . . . . . . . . . . (11.3) (31.6) - -
Benefit payments . . . . . . . . . . . . . . . . . (239.9) (232.4) (62.3) (56.1)
--------- --------- -------- --------
Fair value of plan assets at end of year . . . . . 3,927.2 3,619.9 - -
--------- --------- -------- --------
FUNDED STATUS
Funded status at end of year . . . . . . . . . . . 59.7 (3.3) (658.6) (638.0)
Unrecognized net actuarial loss (gain) . . . . . . 9.5 53.1 (68.0) (98.1)
Unrecognized transition amount . . . . . . . . . . (15.3) (16.8) - -
Unrecognized prior service cost. . . . . . . . . . 64.2 52.7 (17.7) (19.8)
--------- --------- -------- --------
Net amount recognized. . . . . . . . . . . . . . . $ 118.1 $ 85.7 $(744.3) $(755.9)
========= ========= ======== ========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
Prepaid benefit cost . . . . . . . . . . . . . . . $ 228.8 $ 178.9 $ - $ -
Accrued benefit cost . . . . . . . . . . . . . . . (139.6) (122.9) (744.3) (755.9)
Intangible asset . . . . . . . . . . . . . . . . . 6.1 8.3 - -
Accumulated other comprehensive income . . . . . . 22.8 21.4 - -
--------- --------- -------- --------
Net amount recognized. . . . . . . . . . . . . . . $ 118.1 $ 85.7 $(744.3) $(755.9)
========= ========= ======== ========
The above pension benefit information has been presented on an aggregated
basis whereby benefit obligation and plan asset information for plans in which
plan assets exceed accumulated benefit obligations have been combined with
plans where the accumulated benefit obligations exceed plan assets. Summary
disaggregated information about these plans follows:
NOTE 4. (Continued)
Assets Exceed ABO Exceed
ABO Assets
--------------- -----------------
December 31
---------------------------------------
(Millions of dollars) 1998 1997 1998 1997
- ----------------------- ------ ------ ------ ------
Projected benefit obligation . . . . . . . $3,757.1 $3,507.0 $110.4 $116.2
Accumulated benefit obligation (ABO) . . . 3,417.3 3,176.9 100.1 94.9
Fair value of plan assets. . . . . . . . . 3,926.2 3,613.9 1.0 6.0
Pension Benefits Other Benefits
------------------- ----------------
December 31
---------------------------------------
1998 1997 1998 1997
------ ------ ------ ------
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate. . . . . . . . . . . . . . 6.6% 7.1% 6.7% 7.0%
Expected return on plan assets . . . . . 9.3% 9.5% - -
Rate of compensation increase. . . . . . 3.9% 4.3% - -
Initial health care cost trend rate(a) . - - 7.8% 8.6%
<FN>
(a) Assumed to decrease gradually to 6% in 2003 and remain at that level
for certain plans and to zero by 2005 and thereafter for others.
Pension Benefits Other Benefits
--------------------------- -------------------------------
Year Ended December 31
---------------------------------------------------------------
(Millions of dollars) 1998 1997 1996 1998 1997 1996
- ----------------------- ------ ------ ------ ------ ------ ------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost. . . . . . . . . . . . $ 69.2 $ 72.6 $ 86.0 $11.8 $10.7 $12.0
Interest cost . . . . . . . . . . . 247.1 246.7 243.9 44.2 44.9 48.0
Expected return on plan assets. . . (332.3) (297.8) (283.2) - - -
Amortization of prior service cost. 8.5 7.9 5.9 (2.1) - -
Amortization of transition amount . (5.3) (5.3) (5.0) - - -
Recognized net actuarial loss
(gain). . . . . . . . . . . . . . 2.9 2.9 9.7 (5.3) (8.8) (4.4)
Other . . . . . . . . . . . . . . . 5.8 .5 2.8 - - -
-------- -------- -------- ------ ------ ------
Net periodic benefit (income)
cost. . . . . . . . . . . . . . . $ (4.1) $ 27.5 $ 60.1 $48.6 $46.8 $55.6
======== ======== ======== ====== ====== ======
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 . . . . . . . . . $ 4.4 $ 3.7
Effect on postretirement benefit obligation . . . . . . . . . . . . . . . 51.9 45.2
NOTE 4. (Continued)
DEFINED CONTRIBUTION RETIREMENT PLANS
The Corporation's contributions to the defined contribution retirement
plans are based on the age and compensation of covered employees. The
Corporation's contributions, all of which were charged to expense, were $23.8
million, $14.8 million and $8.5 million in 1998, 1997 and 1996, 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
$26.1 million, $24.9 million and $24.1 million in 1998, 1997 and 1996,
respectively.
NOTE 5. EARNINGS PER SHARE
There are no adjustments required to be made to Income Before
Extraordinary Gains and Cumulative Effect of Accounting Change for purposes of
computing basic and diluted earnings per share ("EPS").
A reconciliation of the average number of common shares outstanding used
in the basic and diluted EPS computations is as follows:
Average Common Shares Outstanding
------------------------------------
(Millions) 1998 1997 1996
- ---------- ---- ---- ----
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550.3 555.9 564.0
Dilutive effect of stock options. . . . . . . . . . . . . . . . 2.3 3.1 2.9
Dilutive effect of shares issued for participation share awards .5 .3 .2
----- ----- -----
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553.1 559.3 567.1
===== ===== =====
Options outstanding during the year ended December 31, 1998 to purchase
9.1 million shares of common stock at a weighted average price of $52.74 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 options, which expire in 2004, 2007 and 2008, were still outstanding at
December 31, 1998. There were no securities outstanding at December 31, 1997
and 1996 which were excluded from the diluted EPS computations. The number of
common shares outstanding as of December 31, 1998, 1997 and 1996 was 538.3
million, 556.3 million and 563.4 million, respectively.
NOTE 6. DEBT
The major issues of long-term debt outstanding were:
December 31
-----------------
(Millions of dollars) 1998 1997
- ----------------------- ------ ------
Kimberly-Clark Corporation:
Commercial paper to be refinanced . . . . . . . . . . . . . . . . . . . $ - $ 200.0
6 1/4% Debentures due 2018. . . . . . . . . . . . . . . . . . . . . . . 297.6 -
6 3/8% Debentures due 2028. . . . . . . . . . . . . . . . . . . . . . . 198.2 -
7 7/8% Debentures due 2023. . . . . . . . . . . . . . . . . . . . . . . 199.7 199.7
8 5/8% Notes due 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 199.8 199.8
9% Notes due 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 99.9 99.9
6 7/8% Debentures due 2014. . . . . . . . . . . . . . . . . . . . . . . 99.7 99.7
5% Notes maturing to 2002 . . . . . . . . . . . . . . . . . . . . . . . 36.0 45.0
9 1/2% Sinking Fund Debentures due 2018 . . . . . . . . . . . . . . . . - 50.0
6.2% to 7.55% Industrial Development Revenue Bonds maturing to 2023 . . 79.7 79.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 .2
-------- --------
1,214.3 974.0
Subsidiaries:
7% Debentures due 2023. . . . . . . . . . . . . . . . . . . . . . . . . 194.0 193.8
11.1% Bonds due 2000. . . . . . . . . . . . . . . . . . . . . . . . . . 99.6 99.4
8.3% to 11% Debentures maturing to 2022 . . . . . . . . . . . . . . . . 163.8 156.0
Industrial Development Revenue Bonds at variable rates (average rate
for December 1998 - 4%) due 2015, 2018, 2023 and 2024 . . . . . . . . 286.6 286.6
5 3/4% to 6 3/8% Industrial Development Revenue Bonds maturing
to 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.9 28.3
Bank loans and other financings in various currencies at fixed rates
(weighted-average rate at December 31, 1998 - 10.7%) maturing to 2008 97.9 112.9
Bank loans and other financings in various currencies at variable rates
(weighted-average rate at December 31, 1998 - 8%) maturing to 2015. . 45.6 54.4
-------- --------
2,124.7 1,905.4
Less current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . 56.5 101.5
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,068.2 $1,803.9
======== ========
At December 31, 1997, $200 million of short-term commercial paper was
classified as long-term debt. On January 9, 1998, the Corporation issued $200
million principal amount of 6 3/8% Debentures due January 1, 2028.
Fair value of long-term debt was $2,256.6 million and $1,972.4 million at
December 31, 1998 and 1997, respectively. Scheduled maturities of long-term
debt are $281.8 million in 2000, $232.0 million in 2001, $19.8 million in 2002
and $7.1 million in 2003.
At December 31, 1998, the Corporation had $1.0 billion of revolving
credit facilities with a group of banks. These facilities, which were unused
at December 31, 1998, 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, approximately $600 million expires in
November 1999 and approximately $400 million expires in November 2003.
NOTE 6. (Continued)
Debt payable within one year:
December 31
-----------------------
(Millions of dollars) 1998 1997
- ----------------------- ----- ------
Commercial paper. . . . . . . . . . . . . . . . . . $418.0 $392.6
Current portion of long-term debt . . . . . . . . . 56.5 101.5
Other short-term debt . . . . . . . . . . . . . . . 160.9 169.0
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . $635.4 $663.1
====== ======
At December 31, 1998 and 1997, the weighted-average interest rate for
commercial paper was 5.3 percent and 5.9 percent, respectively.
NOTE 7. RISK MANAGEMENT
As a multinational enterprise, the Corporation is exposed to changes in
foreign currency exchange rates, interest rates and commodity prices. The
Corporation employs a variety of practices to manage these market risks,
including its operating and financing activities and, where deemed
appropriate, the use of derivative financial instruments. The Corporation
uses derivative financial instruments only for risk management purposes and
does not use them for speculation or for trading. All derivative instruments
are either exchange traded or are entered into with major financial
institutions for the purpose of reducing the Corporation's credit risk and the
risk of nonperformance by third parties.
Foreign Currency Risk Management
Foreign currency risk is managed by the use of foreign currency forward,
swap and option contracts. The use of these contracts allows the Corporation
to manage its 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. The
Corporation's most significant foreign currency risk relates to the Mexican
peso. There have been no significant changes in how foreign currency
transactional exposures were managed during 1998, and management does not
foresee or expect any significant changes in such exposures or in the
strategies it employs to manage them in the near future.
Foreign currency losses included in consolidated net income were $32.8
million, $10.2 million and $2.9 million in 1998, 1997 and 1996,
respectively. Included in foreign currency losses were the Corporation's
share of foreign currency gains and losses at the Corporation's Mexican
affiliate, Kimberly-Clark de Mexico, S.A. de C.V. ("KCM"), attributable to
changes in the value of the Mexican peso. The Corporation's share of the peso
currency effects was a charge equal to $.02 per share in 1998 and
insignificant in 1997 and 1996.
Prior to 1997, Mexico's economy was deemed to be non-hyperinflationary,
and because KCM had financed a portion of its operations with U.S. dollar
obligations, KCM experienced foreign currency losses on these obligations as
the value of the peso declined. Beginning in 1997, the Mexican economy was
determined to be hyperinflationary. For accounting purposes, the functional
currency of KCM became the U.S. dollar rather than the Mexican peso.
Accordingly, changes in the value of the peso in 1998 and 1997 did not result
in foreign currency gains or losses attributable to the U.S. dollar
obligations. However, changes in the value of the peso have resulted in gains
or losses attributable to peso-denominated monetary assets held by KCM.
Gains and losses on instruments that hedge firm commitments are deferred
and included in the basis of the underlying hedged items. Premiums paid for
options are amortized ratably over the life of the option. Contracts used to
hedge recorded foreign currency transactions generally mature within
one year and are 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. Notwithstanding the sizable notional
principal amounts involved, 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.
NOTE 7. (Continued)
The following table presents the aggregate notional principal amounts,
carrying values and fair values of the Corporation's foreign currency forward
contracts outstanding at December 31, 1998 and 1997:
DECEMBER 31, 1998 December 31, 1997
---------------------------- --------------------------------
NOTIONAL Notional
PRINCIPAL CARRYING FAIR Principal Carrying Fair
(Millions of dollars) AMOUNTS VALUES VALUES Amounts Values Values
- ----------------------- ------- --------- ------ ------- ------ --------
Forward contracts
Assets. . . . . . . . . . . . $848.0 $ 4.1 $(3.0) $1,094.1 $38.9 $47.3
Liabilities . . . . . . . . . 964.0 (12.1) (4.4) 350.0 (6.4) (6.4)
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: Brazil
(prior to January 1, 1998), Ecuador, Mexico (effective January 1, 1997
through December 31, 1998) and Venezuela.
Translation exposure 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 Management
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 by the Corporation to manage its exposure
to interest rate fluctuations did not change significantly during 1998.
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.
Commodity Price Risk Management
The Corporation is subject to commodity price risk arising from price
movement for purchased pulp, the market price of which is determined by
industry supply and demand. Selling prices of the Corporation's tissue
products are influenced by the market price for pulp. On a worldwide basis,
the Corporation has reduced its internal pulp supply to approximately 70
percent of its virgin fiber needs. Closure of the Mobile pulp mill in
September 1999, as discussed in Note 13 to the Consolidated Financial
Statements, will reduce the percentage of integration of the Corporation's
pulp requirements to approximately 40 percent. The Corporation has announced
its intention to further reduce its level of pulp integration to approximately
20 percent. However, such a reduction in pulp integration could increase the
NOTE 7. (Continued)
Corporation's commodity price risk. Specifically, increases in pulp prices
could adversely affect the Corporation's earnings if selling prices are not
adjusted or if such adjustments significantly trail the increases in pulp
prices. Conversely, if the Corporation does not lower its level of pulp
integration and the market price for pulp declines, thereby possibly causing
selling prices for tissue products to fall, the Corporation's profit margin
could suffer, and if the price of pulp increases, thereby possibly causing the
selling prices of tissue products to rise, the Corporation's profits could
improve. The Corporation has not used derivative instruments in the
management of these risks.
NOTE 8. STOCK COMPENSATION PLANS
Kimberly-Clark Equity Participation Plans provide for awards of
participation shares and stock options to key employees of the Corporation and
its subsidiaries. Upon maturity, participation share awards are paid in cash
or cash and shares of the Corporation's stock 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 or cash and shares
of the Corporation's stock at the maturity of the award. Neither
participation nor dividend shares are shares of common stock.
Data concerning participation and dividend shares follow:
(Thousands of shares) 1998 1997 1996
- ----------------------- ------ ------ ------
Outstanding - Beginning of year . . . . 9,381 7,173 5,994
Awarded . . . . . . . . . . . . . . . . 2,145 1,994 1,954
Dividend shares credited - net. . . . . 883 795 682
Matured . . . . . . . . . . . . . . . . (1,925) (500) (1,312)
Forfeited . . . . . . . . . . . . . . . (435) (81) (145)
------- ------ -------
Outstanding - End of year . . . . . . . 10,049 9,381 7,173
======= ====== =======
Amounts expensed related to participation shares were $23.1 million,
$26.8 million and $17.9 million in 1998, 1997 and 1996, respectively.
The Corporation also has stock option plans under which executives and
key employees may be granted awards. Under these plans, all stock options are
granted at not less than market value, expire 10 years after the date of grant
and become exercisable over three years.
In October 1997, approximately 57,000 employees worldwide were granted
approximately 3.2 million stock options and .2 million stock appreciation
rights under the Corporation's Global Stock Option Plan. Employees were
granted options to purchase a fixed number of shares, ranging from 25 to 125
shares per employee, of common stock at a price equal to the fair market value
of the Corporation's stock at the date of grant. The grants generally become
exercisable after the third anniversary of the grant date and have a term of
seven years.
Data concerning stock option activity follows:
1998 1997 1996
-------------------- ---------------------- -----------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
(Options in thousands) OPTIONS PRICE Options Price Options Price
- ------------------------ ------- --------- ------- ---------- ------- -------------
Outstanding - Beginning of
year . . . . . . . . . . 16,195 $36.73 12,609 $26.61 20,688 $20.57
Granted. . . . . . . . . . 3,076 55.94 6,111 51.12 2,876 39.94
Exercised. . . . . . . . . (1,608) 22.91 (2,401) 20.15 (10,694) 18.49
Canceled or expired. . . . (531) 50.86 (124) 38.61 (261) 27.63
--------- ------- --------
Outstanding - End of year. 17,132(a) 41.04 16,195 36.73 12,609 26.61
========= ======= ========
Exercisable - End of year. 8,429 30.10 7,016 25.57 7,522 22.24
========= ======= ========
NOTE 8. (Continued)
<FN>
(a) Data concerning stock options at December 31, 1998 follows (options in
thousands):
Options Outstanding
----------------------------------------
Options Exercisable
Weighted- ---------------------
Average Remaining Weighted-
Exercise Contractual Average
Exercise Price Range Options Price Life (Years) Options Price
- ---------------------- ------- -------- ------------ ------- -----------
$12.36 - $14.73 . . . . 291 $13.70 2.5 291 $13.70
18.16 - 24.66 . . . . 3,841 23.12 4.9 3,841 23.12
27.11 - 28.34 . . . . 1,755 28.33 3.7 1,755 28.33
39.94 - 55.94 . . . . 11,245 49.85 7.2 2,542 43.74
------ -----
17,132 8,429
====== =====
At December 31, 1998, the number of additional shares of common stock of
the Corporation available for awards under the 1992 Plan was 17.7 million
shares.
Effective January 1, 1999, the Corporation adopted a restricted stock
plan under which key employees may be granted shares of restricted stock (or
awards of restricted stock units). These restricted stock awards will vest
and become unrestricted shares in three to ten years from the date of grant.
No grants have been made and 2.5 million shares of the Corporation's common
stock have been reserved for such grants.
The Corporation has elected to follow APB 25 and related interpretations
in accounting for its stock options. Under APB 25, because the exercise price
of the Corporation's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
However, SFAS 123, Accounting for Stock-Based Compensation, requires
presentation of pro forma net income and earnings per share as if the
Corporation had accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that statement. For
purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the vesting period. Under the fair value method,
the Corporation's net income and net income per share would have been reduced
as follows:
(Millions of dollars, except per share amounts) 1998 1997 1996
- ----------------------------------------------------- ---- ---- ----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $31.0 $22.4 $16.1
Basic and diluted net income per share . . . . . . . . . . . . . .06 .04 .03
The weighted-average fair value of the individual options granted during
1998, 1997 and 1996 is estimated as $13.36, $12.22 and $8.66, respectively, on
the date of grant. The fair values were determined using a Black-Scholes
option-pricing model with the following assumptions:
1998 1997 1996
---- ---- ----
Dividend yield. . . . . . . . . . . . . . . . . . . . . . . . 1.79% 1.88% 2.30%
Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . 17.60% 18.30% 18.30%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . 5.59% 5.98% 5.31%
Expected life . . . . . . . . . . . . . . . . . . . . . . . . 5.8 YEARS 5.4 years 5.8 years
- ------
NOTE 9. COMMITMENTS
LEASES
The future minimum obligations under leases having a noncancelable term
in excess of one year as of December 31, 1998, are as follows:
Operating
(Millions of dollars) Leases
- ----------------------- ----------
Year Ending December 31:
1999 . . . . . . . . . . . . . . . . . . $ 57.1
2000 . . . . . . . . . . . . . . . . . . 43.2
2001 . . . . . . . . . . . . . . . . . . 36.6
2002 . . . . . . . . . . . . . . . . . . 21.6
2003 . . . . . . . . . . . . . . . . . . 15.8
Thereafter . . . . . . . . . . . . . . . 71.6
------
Future minimum obligations . . . . . . . . $245.9
======
Operating lease obligations have been reduced by approximately $15.0
million for rental income from noncancelable sublease agreements.
Consolidated rental expense under operating leases was $156.9 million,
$150.8 million and $147.9 million in 1998, 1997 and 1996, respectively.
RAW MATERIALS
The Corporation has entered into long-term contracts for the purchase of
raw materials, primarily pulp. The minimum purchase commitments extend to
2006. At current prices, the commitments are approximately $282 million, $251
million and $234 million in 1999, 2000 and 2001, respectively. The commitment
beyond the year 2001 is approximately $278 million in total.
Although the Corporation is primarily liable for rental payments on the
above-mentioned leases and, considering the purchase commitments for raw
materials described above, management believes the Corporation's exposure to
losses, if any, under these arrangements is not material.
NOTE 10. STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
STOCKHOLDERS' EQUITY
The Corporation has 20 million shares of authorized preferred stock with
no par value, none of which has been issued.
At December 31, 1998, unremitted net income of equity companies included
in consolidated retained earnings was $797.8 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 rights are intended to protect the
stockholders 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.
NOTE 10. (Continued)
OTHER COMPREHENSIVE INCOME
During 1998, the Corporation adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. The changes
in the components of other comprehensive income (loss) are as follows:
Year Ended December 31
-------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------- ----------------------------
PRE-TAX TAX EXP. NET Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net
(Millions of dollars) AMOUNT (CREDIT) AMOUNT Amount (Credit) Amount Amount (Credit) Amount
- ---------------------- ------ -------- ------ ------ -------- ------- -------- -------- ------
Unrealized translation
adjustments . . . . . . . $ 3.1 $ - $ 3.1 $(296.4) $ - $(296.4) $(16.3) $ - $(16.3)
Minimum pension liability
adjustment. . . . . . . . (1.4) (.6) (.8) (4.5) (1.7) (2.8) 28.1 10.6 17.5
------ ----- ------ -------- ------ -------- ------- -------- -------
Other comprehensive income
(loss). . . . . . . . . . $ 1.7 $(.6) $ 2.3 $(300.9) $(1.7) $(299.2) $ 11.8 $ 10.6 $ 1.2
====== ===== ====== ======== ====== ======== ======= ======== =======
Accumulated balances of other comprehensive income (loss), net of
applicable income taxes:
December 31
-----------------
(Millions of dollars) 1998 1997
- ----------------------- -----------------
Unrealized translation adjustments. . . . . . $(950.1) $(953.2)
Minimum pension liability adjustment. . . . . (14.2) (13.4)
-------- --------
Accumulated other comprehensive income (loss) $(964.3) $(966.6)
======== ========
NOTE 11. EXTRAORDINARY GAINS
In March 1997, the Corporation sold Coosa for approximately $600 million
in cash. Also, in the first quarter of 1997, the Corporation recorded
impairment losses on certain tissue and pulp manufacturing facilities. These
impairment losses totaled $111.5 million before income tax benefits. In June
1997, the Corporation completed the sale of its interest in SPL for
approximately $127 million. Accounting regulations require that certain
transactions following a business combination accounted for as a pooling of
interests, such as the Scott merger, be reported as extraordinary items.
Accordingly, the above described transactions have been aggregated and
reported as extraordinary gains totaling $17.5 million, net of applicable
income taxes of $38.4 million. The high effective income tax rate on the
extraordinary gains is due to income tax loss carryforwards that precluded the
current recognition of the income tax benefit on certain impairment losses and
the tax basis in SPL being substantially lower than the carrying amount of the
investment in the financial statements. The extraordinary gains were equal to
$.03 per share for both basic and diluted EPS.
In accordance with SFAS 121, depreciation was suspended on facilities
that were sold in 1997. The suspension of depreciation during the period that
these facilities were held for disposal and producing product is discussed in
Note 2 to the Consolidated Financial Statements.
NOTE 12. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
ACQUISITIONS
In May 1998, the Corporation acquired a 50 percent equity interest in
Klabin Tissue, S.A., the leading tissue manufacturer in Brazil.
In July 1998, the Corporation purchased a 51 percent ownership interest
in Kimberly Bolivia, S.A., a new joint venture company in Bolivia.
In July 1998, the Corporation purchased an additional 10 percent
ownership interest in its Korean affiliate, YuHan-Kimberly, Limited,
increasing its ownership interest to 70 percent.
In December 1997, the Corporation acquired Tecnol in a purchase
transaction through the exchange of approximately 8.7 million shares of the
Corporation's common stock for all the outstanding shares of Tecnol common
stock. The value of the exchange of stock plus related acquisition costs was
approximately $428 million. In 1997, the Corporation disclosed that the
allocation of the purchase price would result in assigning values to goodwill
and other intangible assets in a range of $320 million to $340 million. The
actual value assigned in 1998 was $336 million.
On December 23, 1998, the Corporation announced that it had signed a
definitive agreement to acquire Ballard Medical Products ("Ballard"), a
leading maker of disposable medical devices for respiratory care,
gastroenterology and cardiology. Under the agreement, Ballard shareholders
will receive $25 for each share of Ballard common stock, payable in shares of
the Corporation's common stock. The transaction, which is valued at
approximately $764 million, remains subject to regulatory clearances and
approval by the Ballard shareholders. The transaction is expected to be
completed by September 30, 1999 and will be accounted for as a purchase.
DISPOSITIONS
In August 1998, the Corporation completed the sale of its subsidiary, K-C
Aviation Inc. ("KCA"), for $250 million in cash. The sale resulted in a
pretax gain of $140.0 million, which is included in other income (expense),
net. The transaction resulted in an after-tax gain of $78.3 million, or $.14
per share.
In December 1997, the Corporation sold its 17 percent interest in
Ssangyong Paper Co., Ltd. ("Ssangyong") of Korea. The sale resulted in a gain
of $.03 per share.
In 1996, to meet regulatory requirements associated with the merger with
Scott, the Corporation sold the former Scott baby wipes business and certain
tissue businesses in the U.S. and the U.K. The regulatory disposals resulted
in a net gain of $.09 per share.
In 1996, the Corporation sold its remaining 20 percent interest in
Midwest Express Airlines, Inc. and recognized a gain of $.04 per share.
NOTE 12. (Continued)
Assets classified as held for sale in the Consolidated Balance Sheet at
December 31, 1998 and 1997 consist of the following facilities:
1998 1997
CARRYING Carrying
(Millions of dollars) AMOUNT Amount Comment
- ----------------------- ------ ------ ----------------------------------
Southeast Timberlands -
See Note 13 . . . . . . . . . $109.5 $ - Disposal - expected to close by
September 30, 1999.
Terrace Bay, Ontario. . . . . . - 169.4 Sale is unlikely to occur within one year.
Reclassified to property, plant and
equipment - Third quarter 1998.
New Glasgow, Nova Scotia. . . . - 105.6 Disposal canceled - Second quarter 1998.
Other . . . . . . . . . . . . . - 5.0 Disposal canceled - Second quarter 1998.
------ ------
$109.5 $280.0
====== ======
Determination of individual results of operations of the above facilities
during the depreciation suspension period is not meaningful because of the
integration of the operations of these facilities into the overall
consolidated operating results. The effect of suspending depreciation while
these facilities were held for disposal is discussed in Note 2 to the
Consolidated Financial Statements.
NOTE 13. CONTINGENCIES AND LEGAL MATTERS
SOUTHEAST TIMBERLANDS TRANSACTION
In 1997, the U.S. Government enacted new environmental air and water
emission rules that required reduced emission levels of certain chemical
compounds from the Corporation's pulp production facilities. These rules
would have required the Corporation to spend more than $250 million to achieve
the new emission levels at its Mobile, Alabama pulp mill. S.D. Warren Company,
a producer of printing and publishing papers, currently purchases
approximately one-third of the pulp mill's output. On May 4, 1998, S.D.
Warren and the Corporation announced an agreement to terminate their pulp
supply contract in September 1999. As a result of the cancellation of the
pulp supply contract and the cost of implementing the new emission rules, on
May 5, 1998, the Corporation announced its intention to dispose of its entire
integrated pulp operation in Mobile, Alabama, including the related sale of
the associated woodlands operations (the "Southeast Timberlands") and the
closure of its pulp production facility. The Corporation also announced its
intention to retain its pulp facility in New Glasgow, Nova Scotia. The effect
on consolidated operating profit from suspending depreciation during the
holding period in accordance with SFAS 121 is disclosed in Note 2 to the
Consolidated Financial Statements. The Corporation will continue to operate
its Mobile tissue mill and has plans to invest approximately $100 million in
the facility over the next several years to install systems that process
recycled fiber and that allow the use of purchased pulp. These actions are
expected to improve the long-term competitiveness of the Mobile tissue
operations by reducing fiber costs and improving the quality of the products
made there. The pulp facility, which has a book value of approximately $150
million, produces pulp from the Southeast Timberlands for use in the tissue
mill. Closure of the pulp mill will result in the elimination of
approximately 450 jobs, and severance costs of $18.0 million for these
employees were charged to cost of products sold in the third quarter of 1998,
at the time they were notified of their termination benefits.
In connection with the pulp mill closure, and as permitted by the terms
of the governing contract, on May 5, 1998, the Corporation gave notice to
Mobile Energy Services Company, L.L.C. ("MESC") of the Corporation's intent to
terminate MESC's long-term contract for power, steam and liquor processing
services with respect to the Mobile pulp mill. The resulting termination
penalty of $24.3 million which is specified in the contract was charged to
cost of products sold in the second quarter of 1998. On January 14, 1999,
MESC and Mobile Energy Services Holdings, Inc. filed an action against the
Corporation claiming unspecified damages in connection with the cancellation
of the contract. This action is not expected to have a material adverse
effect on the Corporation's business or results of operations.
On June 10, 1999, the Corporation announced it had agreed to sell
approximately 460,000 acres of the Southeast Timberlands to Joshua Management,
LLC for approximately $400 million. Because the sale of the Southeast
Timberlands is associated with the planned closure of the pulp mill in
September 1999, the net effect of the transaction, which is expected to be a
net gain, will be recorded at the time of the closing of the sale of the
Southeast Timberlands.
LITIGATION
On May 13, 1997, the State of Florida, acting through its attorney
general, filed a complaint in the Gainesville Division of the United States
District Court for the Northern District of Florida (the "Florida District
Court"), alleging that manufacturers of tissue products for away-from-home
use, including the Corporation and Scott, agreed to fix prices by coordinating
price increases for such products. Following Florida's complaint, an action
by the states of Maryland, New York and West Virginia, as well as
NOTE 13. (Continued)
approximately 45 class action complaints, have been filed in various federal
and state courts around the United States. These actions contain allegations
similar to those made by the State of Florida in its
complaint. The actions in federal courts have been consolidated for pretrial
proceedings in the Florida District Court. Class certification was granted in
the federal proceedings in July 1998 and will be contested in the state cases.
The foregoing actions seek an unspecified amount of actual and treble damages.
The Corporation has answered the complaints in these actions and has denied
the allegations contained therein as well as any liability. Discovery is
proceeding.
The Corporation intends to contest these claims vigorously. Management
does not expect these actions to have a material adverse effect on the
Corporation's business or results of operations.
The Corporation also is subject to routine litigation from time to time,
which, individually or in the aggregate, is not expected to have a material
adverse effect on the Corporation's business or results of operations.
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 statute, 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 or results of operations.
NOTE 14. UNAUDITED QUARTERLY DATA
1998
---------------------------------------------------------------------------------------
Fourth Quarter(a) Third Quarter(b) Second Quarter(c) First Quarter(d)
--------------------- --------------------- ------------------- ---------------------
(Millions of dollars, As As As As
except per share As Previously As Previously As Previously As Previously
amounts) Restated Reported Restated Reported Restated Reported Restated Reported
- ----------------------- -------- -------- -------- -------- -------- -------- -------- --------
Net sales . . . . . . . $ 3,108.2 $ 3,108.2 $3,099.7 $3,099.7 $3,041.3 $3,041.3 $ 3,048.6 $ 3,048.6
Gross profit. . . . . . 1,192.3 1,137.9 1,166.6 1,203.8 1,126.1 1,193.8 1,112.6 1,164.5
Operating profit. . . . 401.7 379.8 396.0 416.6 392.4 435.4 383.2 444.3
Income before
extraordinary gains
and cumulative
effect of accounting
change. . . . . . . . 266.7 239.3 326.8 340.0 262.9 300.1 257.9 297.6
Per share basis:
Basic . . . . . . . .49 .44 .60 .62 .47 .54 .46 .53
Diluted . . . . . . .49 .44 .59 .62 .47 .54 .46 .53
Net income. . . . . . . 266.7 239.3 326.8 340.0 262.9 300.1 246.7(e) 286.4(e)
Per share basis:
Basic . . . . . . . .49 .44 .60 .62 .47 .54 .44(e) .51(e)
Diluted . . . . . . .49 .44 .59 .62 .47 .54 .44(e) .51(e)
Cash dividends declared
per share . . . . . . .25 .25 .25 .25 .25 .25 .25 .25
Market price:
High. . . . . . . . . 54 15/16 54 15/16 49 7/16 49 7/16 52 7/16 52 7/16 59 7/16 59 7/16
Low . . . . . . . . . 39 7/16 39 7/16 35 7/8 35 7/8 44 7/16 44 7/16 46 3/4 46 3/4
Close . . . . . . . . 54 1/2 54 1/2 40 1/2 40 1/2 45 7/8 45 7/8 50 1/8 50 1/8
1997
---------------------------------------------------------------------------------------
Fourth Quarter(f) Third Quarter(g) Second Quarter(h) First Quarter(i)
--------------------- --------------------- ------------------- ---------------------
(Millions of dollars, As As As As
except per share As Previously As Previously As Previously As Previously
amounts) Restated Reported Restated Reported Restated Reported Restated Reported
- ----------------------- -------- -------- -------- -------- -------- -------- -------- --------
Net sales. . . . . . . . $ 3,089.4 $ 3,089.4 $ 3,095.3 $ 3,095.3 $3,124.3 $3,124.3 $ 3,237.6 $ 3,237.6
Gross profit . . . . . . 1,080.6 982.5 1,157.8 1,158.3 1,156.5 1,192.2 1,212.7 1,241.0
Operating profit (loss). 57.6 (202.0) 454.3 466.5 470.8 494.4 485.7 544.3
Income (loss) before
extraordinary gains
and cumulative
effect of accounting
change . . . . . . . . 20.7 (147.0) 307.0 316.0 333.6 350.8 324.1 364.2
Per share basis:
Basic. . . . . . . . .04 (.26) .56 .57 .60 .63 .58 .65
Diluted. . . . . . . .04 (.26) .55 .57 .59 .63 .57 .64
Net income (loss). . . . 20.7 (147.0) 307.0 316.0 346.3 363.5 328.9 369.0
Per share basis:
Basic. . . . . . . . .04 (.26) .56 .57 .62 .65 .59 .66
Diluted. . . . . . . .04 (.26) .55 .57 .62 .65 .58 .65
Cash dividends declared
per share. . . . . . . .24 .24 .24 .24 .24 .24 .24 .24
Market price:
High . . . . . . . . . 53 15/16 53 15/16 55 55 56 7/8 56 7/8 55 3/8 55 3/8
Low. . . . . . . . . . 47 5/16 47 5/16 43 1/4 43 1/4 46 1/8 46 1/8 46 11/16 46 11/16
Close. . . . . . . . . 49 5/16 49 5/16 48 15/16 48 15/16 49 3/4 49 3/4 49 3/4 49 3/4
NOTE 14. (Continued)
(a) Included in the fourth quarter 1998, as restated, are the following items:
Basic and
Diluted
Gross Operating Net Net Income
(Millions, except per share amounts) Profit Profit Income per Share
---------------------------------------- -------- ---------- --------- ----------
1995 Plan . . . . . . . . . . . . . . . . . . . $ - $ (4.2) $ (2.5) $ -
1997 Plan . . . . . . . . . . . . . . . . . . . 19.9 104.8 73.9 .14
1998 Plans . . . . . . . . . . . . . . . . . . 49.9 51.3 35.4 .07
----- ------- ------- ----
Total . . . . . . . . . . . . . . . . . . . . $69.8 $151.9 $106.8 $.21
===== ======= ======= ====
(b) Included in the third quarter 1998, as restated, are the following items:
Basic and
Diluted
Gross Operating Net Net Income
(Millions, except per share amounts) Profit Profit Income per Share
---------------------------------------- -------- ---------- --------- ----------
1995 Plan. . . . . . . . . . . . . . . . . . . . . $ - $ (1.8) $(1.1) $ -
1997 Plan. . . . . . . . . . . . . . . . . . . . . 22.1 23.0 15.1 .03
1998 Plans . . . . . . . . . . . . . . . . . . . . 6.0 79.0 63.4 .12
Mobile pulp mill fees and severances 18.0 18.0 11.0 .02
----- ------- ------ ----
Total. . . . . . . . . . . . . . . . . . . . . . $46.1 $118.2 $88.4 $.17
===== ======= ====== ====
Net income as restated and basic and diluted net income per share, as
restated, includes a gain of $78.3 million and $.14, respectively, related
to the sale of KCA. Basic and diluted net income per share, as restated,
also include a loss of $.01 per share related to the change in the value
of the Mexican peso.
(c) Included in the second quarter 1998, as restated, are the following items:
Basic Diluted
Gross Operating Net Net Income Net Income
(Millions, except per share amounts) Profit Profit Income per Share per Share
---------------------------------------- -------- ---------- --------- ---------- ----------
1995 Plan. . . . . . . . . . . . . . . . . . . . . $ - $(3.3) $(1.8) $ - $ -
1997 Plan. . . . . . . . . . . . . . . . . . . . . 45.3 57.2 47.5 .09 .08
Mobile pulp mill fees and severances 24.3 24.3 14.9 .03 .03
----- ------ ------ ---- -----
Total. . . . . . . . . . . . . . . . . . . . . . $69.6 $78.2 $60.6 $.12 $ .11
===== ====== ====== ==== =====
(d) Included in the first quarter 1998, as restated, are the following items:
Basic and
Diluted
Gross Operating Net Net Income
(Millions, except per share amounts) Profit Profit Income per Share
-------------------------------------- ------ -------- ------- -----------
1995 Plan . . . . . . . . . . . . . . . . . . . . $ 1.7 $ 6.0 $ 4.5 $.01
1997 Plan . . . . . . . . . . . . . . . . . . . . 46.7 65.8 42.4 .08
----- ----- ----- ----
Total . . . . . . . . . . . . . . . . . . . . . $48.4 $71.8 $46.9 $.09
===== ===== ===== ====
Basic and diluted net income per share, as restated, also include a
loss of $.01 per share related to the change in the value of the Mexican peso.
NOTE 14. (Continued)
(e) In the fourth quarter of 1998, the Corporation changed its method of
accounting for the costs of start-up activities effective
January 1, 1998. The first quarter of 1998 has been restated to
reflect the cumulative effect of this change.
(f) Included in the fourth quarter 1997, as restated, are the following items:
Basic and
Diluted
Gross Operating Net Net Income
(Millions, except per share amounts) Profit Profit Income per Share
-------------------------------------- ------ -------- ------- -----------
1995 Plan . . . . . . . . . . . . . . . . . . . $ 2.1 $ 21.2 $ 16.5 $.03
1997 Plan . . . . . . . . . . . . . . . . . . . 113.7 414.2 315.0 .57
------ ------ ------ ----
Total . . . . . . . . . . . . . . . . . . . . $115.8 $435.4 $331.5 $.60
====== ====== ====== ====
Basic and diluted net income per share, as restated, also include a gain
of $.03 per share related to the sale of Ssangyong.
(g) Gross profit, operating profit, net income and basic and diluted net
income per share, as restated, includes $.5 million, $12.2 million,
$9.0 million and $.02, respectively, related to the 1995 Plan.
(h) Gross profit, operating profit and net income, as restated, includes
$9.2 million, $(2.9) million and $1.0 million, respectively, related
to the 1995 Plan.
Also includes a gain recorded by KCM primarily related to the sale of a
portion of its tissue business. The Corporation's share of the
after-tax effect of this gain was $16.3 million, or $.03 per share.
Also includes an extraordinary gain, net of income taxes, of $12.7
million, or $.02 per share, resulting from the sale of the
Corporation's interest in SPL.
(i) Gross profit, operating profit, net income and basic and diluted net
income per share, as restated, includes $3.3 million, $33.6 million,
$24.8 million and $.04, respectively, related to the 1995 Plan.
Also includes an extraordinary gain, net of income taxes, of $4.8
million, or $.01 per share, resulting from the sale of Coosa,
net of impairment losses on certain other facilities.
NOTE 15. SUPPLEMENTAL DATA (Millions of dollars)
SUPPLEMENTAL BALANCE SHEET DATA
December 31
--------------------
Summary of Accounts Receivable and Inventories 1998 1997
- --------------------------------------------------- --------------------
Accounts Receivable:
From customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,396.0 $1,439.7
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136.5 226.5
Less allowance for doubtful accounts and sales discounts . . . . . . . . (67.3) (59.9)
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,465.2 $1,606.3
========= =========
Inventories by Major Class:
At the lower of cost on the First-In, First-Out (FIFO) method or market:
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 355.4 $ 372.4
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . . . 164.2 228.5
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751.3 749.9
Supplies and other . . . . . . . . . . . . . . . . . . . . . . . . . . 195.5 174.5
--------- ---------
1,466.4 1,525.3
Excess of FIFO cost over Last-In, First-Out (LIFO) cost. . . . . . . . . (182.6) (205.8)
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,283.8 $1,319.5
========= =========
Total inventories include $490.2 million and $526.6 million of
inventories valued on the LIFO method at December 31, 1998 and 1997,
respectively.
December 31
------------------
Summary of Accrued Expenses 1998 1997
- ------------------------------ ------------------
Accruals for the 1998 and 1997 Plans. . . . . . . . . . . . . . . . . . $ 127.0 $ 136.8
Accrued advertising and promotion expense . . . . . . . . . . . . . . . 272.6 262.8
Accrued salaries and wages. . . . . . . . . . . . . . . . . . . . . . . 251.7 310.9
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 767.8 604.1
-------- --------
Total accrued expenses. . . . . . . . . . . . . . . . . . . . . . $1,419.1 $1,314.6
======== ========
NOTE 15. (Continued)
SUPPLEMENTAL CASH FLOW STATEMENT DATA
Summary of Cash Flow Effects of Decrease (Increase) in Year Ended December 31
----------------------------
Operating Working Capital(a) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.5 $ 13.4 $ 34.2
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.4) (43.7) 15.9
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 (13.6) 21.6
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (98.1) (93.9) (55.6)
Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.9 32.8 54.2
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (116.3) (294.7) (352.5)
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 130.8 (151.9) 149.0
Currency rate changes. . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 (36.8) (.4)
-------- -------- --------
Decrease (Increase) in operating working capital $ 63.6 $(588.4) $(133.6)
======== ======== ========
(a) Excludes the effects of acquisitions, dispositions and the Unusual
Items discussed in Note 2 to the Consolidated Financial Statements.
Year Ended December 31
----------------------------
Other Cash Flow Data 1998 1997 1996
- ----------------------- ----------------------------
Reconciliation of changes in cash and cash equivalents:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . $ 90.8 $ 83.2 $ 221.6
Increase (Decrease). . . . . . . . . . . . . . . . . . . . . . . . . 53.2 7.6 (138.4)
------ ------- --------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . $144.0 $ 90.8 $ 83.2
====== ======= =======
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192.1 $173.6 $ 219.8
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . 368.6 557.3 503.0
Increase (Decrease) in cash and cash equivalents due to
exchange rate changes. . . . . . . . . . . . . . . . . . . . . . . . 2.4 (17.4) -
Year Ended December 31
----------------------------
Interest Expense 1998 1997 1996
- ----------------- ----------------------------
Gross interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . $211.1 $181.8 $200.6
Capitalized interest on major construction projects . . . . . . . . . . . . (12.4) (17.0) (13.9)
------- ------- -------
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $198.7 $164.8 $186.7
====== ======= =======
NOTE 16. BUSINESS SEGMENT AND GEOGRAPHIC DATA INFORMATION
In the fourth quarter of 1998, the Corporation adopted SFAS 131. This
rule requires companies to report information about their business segments on
the basis of how they are managed rather than on the basis of the products
they sell. Business segments under SFAS 131 are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and assess performance. The Corporation's operating decision maker
is its chief executive officer. The Corporation is organized into three
global business segments, each of which is headed by a group president who
reports to the chief executive officer. Each of these three group presidents
is responsible for development of global strategies to expand the
Corporation's worldwide tissue, personal care, and health care and other
businesses. They are responsible for developing and managing global plans for
branding and product positioning, cost reductions, technology and research and
development programs, and capacity and capital investment. Each business
segment is managed separately in view of the substantially different product
lines each manufactures and markets.
The Corporation's reportable business segments are Tissue, Personal Care,
and Health Care and Other. Significant changes from prior segment reporting
include the reclassification of wet wipes from Personal Care and premium
business and correspondence papers and related products from Newsprint, Paper
and Other to Tissue; and professional health care and nonwoven fabrics from
Personal Care to Health Care and Other. Prior year information about the
Corporation's reportable business segments has been reclassified to the
current year basis of presentation.
- - The Tissue segment manufactures and markets facial and bathroom tissue,
and paper towels and wipers for household and away-from-home use; wet
wipes; printing, premium business and correspondence papers; and related
products.
- - The Personal Care segment manufactures and markets disposable diapers,
training and youth pants; feminine and incontinence care products; and
related products.
- - The Health Care and Other segment manufactures and markets health care
products such as surgical packs and gowns, sterilization wraps and
disposable face masks; specialty and technical papers and related
products; and other products.
Information concerning consolidated operations by business segment and
geographic area, as well as data for equity companies, is presented in the
tables below and on the following pages:
NOTE 16. (Continued)
CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT
Net Sales Operating Profit
--------------------------------- ------------------------------
(Millions of dollars) 1998 1997 1996 1998(a) 1997(a) 1996(a)
- --------------------------------------------------------------------------------------------
Tissue. . . . . . . . . $ 6,706.2 $ 7,182.7 $ 8,183.6 $ 911.4 $ 693.9 $ 952.1
Personal Care . . . . . 4,577.8 4,493.8 4,091.8 581.7 731.4 589.7
Health Care and Other . 1,047.1 908.0 926.7 178.1 151.9 137.3
---------- ---------- ---------- --------- --------- ---------
Combined. . . . . . . . 12,331.1 12,584.5 13,202.1 1,671.2 1,577.2 1,679.1
Intersegment sales. . . (33.3) (37.9) (53.0) - - -
Unallocated items - net - - - (97.9) (108.8) (120.3)
---------- ---------- ---------- --------- --------- ---------
Consolidated. . . . . . $12,297.8 $12,546.6 $13,149.1 $1,573.3 $1,468.4 $1,558.8
========== ========== ========== ========= ========= =========
Assets Depreciation Capital Spending
--------------------------- ---------------------- ----------------------
(Millions of dollars) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Tissue . . . . . $ 5,861.0 $ 5,873.2 $ 6,991.5 $340.9 $302.5 $485.2 $345.4 $563.2 $655.2
Personal Care. . 3,131.8 3,147.0 3,049.7 219.7 198.2 189.6 290.3 326.4 190.3
Health Care
and Other. . . 967.8 1,024.6 555.4 32.7 26.0 25.0 31.5 45.4 35.3
--------- --------- --------- ------ ------ ------ ------ ------ ------
Combined . . . . 9,960.6 10,044.8 10,596.6 593.3 526.7 699.8 667.2 935.0 880.8
Unallocated(b)
and
intersegment
assets . . . . 1,727.2 1,372.3 1,223.8 1.2 1.8 4.3 2.3 9.3 2.9
--------- --------- --------- ------ ------ ------ ------ ------ ------
Consolidated . . $11,687.8 $11,417.1 $11,820.4 $594.5 $528.5 $704.1 $669.5 $944.3 $883.7
========= ========= ========= ====== ====== ====== ====== ====== ======
(a) Included in Business Segment operating profit are the following unusual
items:
1998
--------------------------------------------------------------------
Personal Health Care
(Millions of dollars) Tissue Care and Other Unallocated Total
----------------------- ------ -------- ---------- ----------- -----
1995 Plan. . . . . . . . . . . . . . $ .7 $ .9 $ (.8) $(4.1) $ (3.3)
1997 Plan. . . . . . . . . . . . . . 149.3 87.6 13.2 .7 250.8
1998 Plans . . . . . . . . . . . . . 22.1 108.1 .1 - 130.3
Mobile pulp mill fees and severances 42.3 - - - 42.3
------ ------ ----- ----- ------
Total. . . . . . . . . . . . . . . $214.4 $196.6 $12.5 $(3.4) $420.1
====== ====== ===== ===== ======
1997
--------------------------------------------------------------------
Personal Health Care
(Millions of dollars) Tissue Care and Other Unallocated Total
----------------------- ------ -------- ---------- ----------- -----
1995 Plan . . . . . . . . . . . . . $ 60.5 $ 1.9 $(.3) $ 2.0 $ 64.1
1997 Plan . . . . . . . . . . . . . 324.4 72.8 8.7 8.3 414.2
------ ----- ----- ----- ------
Total . . . . . . . . . . . . . . $384.9 $74.7 $8.4 $10.3 $478.3
====== ===== ==== ===== ======
1996
--------------------------------------------------------------------
Personal Health Care
(Millions of dollars) Tissue Care and Other Unallocated Total
----------------------- ------ -------- ---------- ----------- -----
1995 Plan . . . . . . . . . . . . . $329.4 $77.0 $ .7 $22.8 $429.9
====== ===== ===== ===== ======
(b) Assets include investments in equity companies of $813.1 million,
$567.7 million and $551.1 million in 1998, 1997 and 1996,
respectively.
NOTE 16. (Continued)
CONSOLIDATED OPERATIONS BY GEOGRAPHIC AREA
Net Sales Operating Profit
---------------------------------- -------------------------------
(Millions of dollars) 1998 1997 1996 1998(a) 1997(a) 1996(a)
- --------------------------- ---------------------------------- -------------------------------
United States . . . . . . . . . $ 8,018.2 $ 7,878.7 $ 8,142.5 $1,409.3 $1,350.5 $1,256.8
Canada. . . . . . . . . . . . . 785.1 1,052.5 1,311.0 112.7 151.9 180.4
Intergeographic items(b). . . . (409.1) (397.3) (451.7) - - -
---------- ---------- ---------- --------- --------- ---------
North America . . . . . . . . . 8,394.2 8,533.9 9,001.8 1,522.0 1,502.4 1,437.2
Europe. . . . . . . . . . . . . 2,471.2 2,548.1 2,881.8 (39.7) (63.6) 46.8
Asia, Latin America and Africa. 1,688.4 1,772.2 1,603.5 188.9 138.4 195.1
---------- ---------- ---------- --------- --------- ---------
Combined. . . . . . . . . . . . 12,553.8 12,854.2 13,487.1 1,671.2 1,577.2 1,679.1
Intergeographic items . . . . . (256.0) (307.6) (338.0) - - -
Unallocated items - net . . . . - - - (97.9) (108.8) (120.3)
---------- ---------- ---------- --------- --------- ---------
Consolidated. . . . . . . . . . $12,297.8 $12,546.6 $13,149.1 $1,573.3 $1,468.4 $1,558.8
========== ========== ========== ========= ========= =========
Assets
----------------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------- ----------------------------------
United States . . . . . . . . . $ 5,822.5 $ 5,913.3 $ 5,766.0
Canada. . . . . . . . . . . . . 470.0 547.5 825.6
Intergeographic items . . . . . (52.6) (65.4) (50.2)
---------- ---------- ----------
North America . . . . . . . . . 6,239.9 6,395.4 6,541.4
Europe. . . . . . . . . . . . . 2,133.2 2,279.9 2,581.6
Asia, Latin America and Africa. 1,700.4 1,512.1 1,604.7
---------- ---------- ----------
Combined. . . . . . . . . . . . 10,073.5 10,187.4 10,727.7
Intergeographic items . . . . . (112.9) (142.6) (131.1)
Unallocated items - net(c). . . 1,727.2 1,372.3 1,223.8
---------- ---------- ----------
Consolidated. . . . . . . . . . $11,687.8 $11,417.1 $11,820.4
========== ========== ==========
(a) Included in geographic operating profit are the following unusual
items:
1998
------------------------------------------------------------------------
Asia,
Latin America
(Millions of dollars) U.S. Canada Europe and Africa Unallocated Total
----------------------- -------- ------ ------ -------------- ----------- ------
1995 Plan . . . . . . . . . . $ (2.1) $ (.8) $ 4.8 $(1.1) $(4.1) $ (3.3)
1997 Plan . . . . . . . . . . 155.7 5.2 83.8 5.4 .7 250.8
1998 Plans. . . . . . . . . . 60.3 (12.3) 74.2 8.1 - 130.3
Mobile pulp mill fees
and severances. . . . . . . 42.3 - - - - 42.3
------ ------- ------ ----- ------ ------
Total . . . . . . . . . . $256.2 $ (7.9) $162.8 $12.4 $(3.4) $420.1
====== ======= ====== ===== ====== ======
1997
------------------------------------------------------------------------
Asia,
Latin America
(Millions of dollars) U.S. Canada Europe and Africa Unallocated Total
----------------------- -------- ------ ------ -------------- ----------- ------
1995 Plan . . . . . . . . . . $ 13.1 $(1.6) $ 49.3 $ 1.3 $ 2.0 $ 64.1
1997 Plan . . . . . . . . . . 177.2 4.3 155.5 68.9 8.3 414.2
------ ----- ------ ----- ----- ------
Total . . . . . . . . . . . $190.3 $ 2.7 $204.8 $70.2 $10.3 $478.3
====== ===== ====== ===== ===== ======
NOTE 16. (Continued)
1996
------------------------------------------------------------------------
Asia,
Latin America
(Millions of dollars) U.S. Canada Europe and Africa Unallocated Total
----------------------- -------- ------ ------ -------------- ----------- ------
1995 Plan . . . . . . . . . . . $270.5 $(42.0) $173.6 $ 5.0 $22.8 $429.9
====== ===== ====== ===== ===== ======
(b) Net sales include $255.9 million, $246.0 million and $284.8 million by
operations in Canada to the U.S. in 1998, 1997 and 1996,
respectively.
(c) Assets include investments in equity companies of $813.1 million,
$567.7 million and $551.1 million in 1998, 1997 and 1996,
respectively.
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, 1998
Latin America(a). . . . . . . . . . $1,606.8 $574.4 $388.2 $245.5 $113.5
Asia, Australia and Middle East . . 666.9 236.6 83.3 49.1 23.6
------- ------ ------ ------ ------
Total . . . . . . . . . . . . . $2,273.7 $811.0 $471.5 $294.6 $137.1
======= ====== ======= ====== ======
For the year ended:
December 31, 1997
Latin America(b). . . . . . . . . . $1,464.3 $528.6 $382.5 $283.1 $130.8
Asia, Australia and Middle East . . 698.1 253.6 93.6 55.0 26.5
------- ------ ------ ------ ------
Total . . . . . . . . . . . . . $2,162.4 $782.2 $476.1 $338.1 $157.3
======= ====== ====== ====== ======
For the year ended:
December 31, 1996
Latin America(c). . . . . . . . . . $1,380.5 $512.9 $344.3 $291.5 $133.1
North America, Asia, Australia and
Middle East(d) . . . . . . . . . 725.7 253.0 83.8 42.8 19.3
------- ------ ------ ------ ------
Total . . . . . . . . . . . . . $2,106.2 $765.9 $428.1 $334.3 $152.4
======= ====== ====== ====== ======
(a) Net income and Kimberly-Clark's share of net income include a loss of
$19.8 million and $9.2 million, respectively, related to the change in
the value of the Mexican peso. In May 1998, the Corporation acquired
50 percent of Klabin Tissue, S.A., the leading tissue
manufacturer in Brazil.
(b) Kimberly-Clark's share of net income includes a gain of $16.3 million,
primarily related to the sale of a portion of the tissue business
of KCM. Additionally, operating profit, net income and Kimberly-Clark's
share of net income includes $6.7 million, $4.4 million and $2.2
million, respectively, related to the 1997 Charge.
(c) Kimberly-Clark's share of net income includes a charge of $5.5
million, recorded by KCM for restructuring costs related to its merger
with Scott's former Mexican affiliate.
(d) In June 1996, the Corporation acquired 49.9 percent of Hogla, Ltd.,
and formed a consumer products joint venture in Israel.
NOTE 16. (Continued)
Non- Non- Stock-
Current Current Current Current holders'
(Millions of dollars) Assets Assets Liabilities Liabilities Equity
- ----------------------- -------------------------------------------------------------
December 31, 1998
Latin America . . . . . . . . . $ 785.5 $1,170.7 $575.0 $154.0 $1,227.2
Asia, Australia and Middle East 239.2 359.1 129.5 173.8 295.1
-------- -------- ------ ------ --------
Total . . . . . . . . . . . $1,024.7 $1,529.8 $704.5 $327.8 $1,522.3
======== ======== ====== ====== ========
December 31, 1997
Latin America . . . . . . . . . $ 752.8 $ 624.6 $336.0 $278.4 $ 763.0
Asia, Australia and Middle East 226.8 386.9 128.0 185.5 300.2
-------- -------- ------ ------ --------
Total . . . . . . . . . . . $ 979.6 $1,011.5 $464.0 $463.9 $1,063.2
======== ======== ====== ====== ========
December 31, 1996
Latin America . . . . . . . . . $ 661.3 $ 606.3 $321.0 $267.5 $ 679.2
Asia, Australia and Middle East 272.5 463.8 168.9 225.3 342.0
-------- -------- ------ ------ --------
Total . . . . . . . . . . . $ 933.8 $1,070.1 $489.9 $492.8 $1,021.2
======== ======== ====== ====== ========
Equity companies are principally engaged in operations in the Tissue and
Personal Care businesses.
KCM is partially owned by the public and its stock is publicly traded in
Mexico. At December 31, 1998, the Corporation's investment in this equity
company was $369.3 million, and the estimated fair value was $1.7 billion
based on the market price of publicly traded shares.
NOTE 17. RESTATEMENT
Subsequent to the issuance of the Corporation's 1998 financial statements
and the filing of its 1998 Form 10-K with the Securities and Exchange
Commission (the "SEC"), and following extensive discussions with
representatives of the SEC's Division of Corporation Finance concerning its
review of the Corporation's financial statements, Kimberly-Clark concluded
that it would restate its 1995, 1996, 1997, 1998 and first quarter 1999
financial statements and related disclosures to reflect, among other
things, the following changes.
- - Certain merger related costs originally recorded in 1995 at the time of
the Scott merger have been recorded as costs of subsequent periods when
they were incurred.
- - Certain employee severance costs originally recorded in 1995 in
connection with the Scott merger have been recorded as costs of
subsequent periods when such employee severances and benefits
were appropriately communicated.
- - The effects of changes in estimates to restructuring and other unusual
charges and facility closure charges have been recorded in the periods
when estimates for individual programs included in the applicable plan
changed. In prior presentations, on an aggregate basis, the changes
in estimates were either reallocated to other components of each such
plan or were returned to earnings at the time aggregate amounts were
identified as being in excess of the then current estimate to
complete each plan.
- - Certain assets that were to be disposed of but which were not
immediately removed from operations have been depreciated on an
accelerated basis over their remaining useful life. In prior
presentations, these assets had been written down to estimated fair value
as of the date such assets were expected to be removed from service,
assuming continuation of normal depreciation until the estimated
date of removal.
- - An energy contract termination penalty has been recorded in the second
quarter of 1998 and employee severance costs have been recorded in the
third quarter of 1998 in connection with the planned closure of the
Corporation's pulp mill in Mobile, Alabama. The Corporation had
originally intended to record these charges in the third quarter of 1999
when the entire integrated pulp operation is to be disposed of,
including the related sale of the Southeast Timberlands, with a net gain
resulting from the overall transaction. The Corporation continues to
expect a net gain on the overall transaction.
As a result of the foregoing and other factors, the Corporation's 1996,
1997 and 1998 financial statements have been restated from amounts previously
reported. In addition, a prior period adjustment of $474.0 million, related
to restated 1995 operating results, increased retained earnings at December
31, 1995. The principal effects of these items on the accompanying financial
statements are set forth below:
NOTE 17. (Continued)
Consolidated Income Statements
For the Years Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
As As As
(Millions of dollars, As Previously As Previously As Previously
except per share amounts) Restated Reported Restated Reported Restated Reported
- ---------------------------- ---------- ---------- --------- ---------- --------- ----------
NET SALES . . . . . . . . . . . . . . . . . . . $12,297.8 $12,297.8 $12,546.6 $12,546.6 $13,149.1 $13,149.1
Cost of products sold . . . . . . . . . . . 7,700.2 7,597.8 7,939.0 7,972.6 8,460.6 8,241.4
---------- ---------- ---------- ---------- ---------- ----------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 4,597.6 4,700.0 4,607.6 4,574.0 4,688.5 4,907.7
Advertising, promotion and selling expenses 1,937.4 1,937.4 1,937.2 1,937.2 2,029.7 2,029.7
Research expense. . . . . . . . . . . . . . 224.8 224.8 211.8 211.8 207.9 207.9
General expense . . . . . . . . . . . . . . 717.0 726.9 623.9 623.9 603.0 603.0
Goodwill amortization . . . . . . . . . . . 33.3 33.3 16.8 16.8 13.4 13.4
Restructuring and other unusual charges . . 111.8 101.5 349.5 481.1 275.7 -
---------- ---------- ---------- ---------- ---------- ----------
OPERATING PROFIT. . . . . . . . . . . . . . . . 1,573.3 1,676.1 1,468.4 1,303.2 1,558.8 2,053.7
Interest income . . . . . . . . . . . . . . 24.3 24.3 31.4 31.4 28.1 28.1
Interest expense. . . . . . . . . . . . . . (198.7) (198.7) (164.8) (164.8) (186.7) (186.7)
Other income (expense), net . . . . . . . . 124.4 124.4 17.7 17.7 107.2 107.2
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . 1,523.3 1,626.1 1,352.7 1,187.5 1,507.4 2,002.3
Provision for income taxes. . . . . . . . . 522.2 561.9 493.3 433.1 576.0 700.8
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE EQUITY INTERESTS. . . . . . . . . 1,001.1 1,064.2 859.4 754.4 931.4 1,301.5
Share of net income of equity companies . . 137.1 137.1 157.3 157.3 152.4 152.4
Minority owners' share of subsidiaries' net
income. . . . . . . . . . . . . . . . . . (23.9) (24.3) (31.3) (27.7) (48.4) (50.1)
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY GAINS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. . . . 1,114.3 1,177.0 985.4 884.0 1,035.4 1,403.8
Extraordinary gains, net of income taxes. . - - 17.5 17.5 - -
Cumulative effect of accounting change,
net of income taxes . . . . . . . . . . . (11.2) (11.2) - - - -
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . $ 1,103.1 $ 1,165.8 $ 1,002.9 $ 901.5 $ 1,035.4 $ 1,403.8
========== ========== ========== ========== ========== ==========
PER SHARE BASIS
BASIC
Income before extraordinary gains and
cumulative effect of accounting change. . $ 2.02 $ 2.14 $ 1.77 $ 1.59 $ 1.84 $ 2.49
========== ========== ========== ========== ========== ==========
Net income. . . . . . . . . . . . . . . . . $ 2.00 $ 2.12 $ 1.80 $ 1.62 $ 1.84 $ 2.49
========== ========== ========== ========== ========== ==========
DILUTED
Income before extraordinary gains and
cumulative effect of accounting change. . $ 2.01 $ 2.13 $ 1.76 $ 1.58 $ 1.83 $ 2.48
========== ========== ========== ========== ========== ==========
Net income. . . . . . . . . . . . . . . . . $ 1.99 $ 2.11 $ 1.79 $ 1.61 $ 1.83 $ 2.48
========== ========== ========== ========== ========== ==========
NOTE 17. (Continued)
Consolidated Balance Sheets
-------------------------------------------------
As of Dec. 31, 1998 As of Dec. 31, 1997
----------------------- -----------------------
As As
As Previously As Previously
(Millions of dollars) Restated Reported Restated Reported
- ----------------------- -------- ---------- -------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . $ 144.0 $ 144.0 $ 90.8 $ 90.8
Accounts receivable . . . . . . . . . . . 1,465.2 1,465.2 1,606.3 1,606.3
Inventories . . . . . . . . . . . . . . . 1,283.8 1,283.8 1,319.5 1,319.5
Other current assets. . . . . . . . . . . 492.8 473.9 458.5 472.4
--------- --------- --------- ---------
TOTAL CURRENT ASSETS. . . . . . . . . . 3,385.8 3,366.9 3,475.1 3,489.0
PROPERTY. . . . . . . . . . . . . . . . . . 10,560.0 10,547.7 9,692.7 9,756.2
Less accumulated depreciation . . . . . . 4,561.9 4,702.7 3,932.3 4,155.6
--------- --------- --------- ---------
NET PROPERTY. . . . . . . . . . . . . . 5,998.1 5,845.0 5,760.4 5,600.6
INVESTMENTS IN EQUITY COMPANIES . . . . . . 813.1 813.1 567.7 567.7
ASSETS HELD FOR SALE. . . . . . . . . . . . 109.5 109.5 280.0 280.0
GOODWILL, DEFERRED CHARGES AND OTHER ASSETS 1,381.3 1,375.8 1,333.9 1,328.7
--------- --------- --------- ---------
$11,687.8 $11,510.3 $11,417.1 $11,266.0
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt payable within one year. . . . . . . . $ 635.4 $ 635.4 $ 663.1 $ 663.1
Accounts payable. . . . . . . . . . . . . . 1,003.2 1,003.2 1,049.4 1,049.4
Accrued expenses. . . . . . . . . . . . . . 1,419.1 1,453.7 1,314.6 1,445.6
Other current liabilities . . . . . . . . . 706.4 698.4 548.2 540.2
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES . . . . . . . . 3,764.1 3,790.7 3,575.3 3,698.3
LONG-TERM DEBT. . . . . . . . . . . . . . . . 2,068.2 2,068.2 1,803.9 1,803.9
NONCURRENT EMPLOYEE BENEFIT AND OTHER
OBLIGATIONS . . . . . . . . . . . . . . . . 899.9 899.9 887.1 887.1
DEFERRED INCOME TAXES . . . . . . . . . . . . 721.6 666.3 643.0 580.8
MINORITY OWNERS' INTERESTS IN SUBSIDIARIES. . 202.5 198.0 167.5 162.6
PREFERRED STOCK . . . . . . . . . . . . . . . - - - -
COMMON STOCK. . . . . . . . . . . . . . . . . 710.8 710.8 710.8 710.8
ADDITIONAL PAID-IN CAPITAL. . . . . . . . . . 86.3 86.3 113.3 113.3
COMMON STOCK HELD IN TREASURY . . . . . . . . (1,454.7) (1,454.7) (617.1) (617.1)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (964.3) (964.3) (966.6) (966.6)
RETAINED EARNINGS . . . . . . . . . . . . . . 5,653.4 5,509.1 5,099.9 4,892.9
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . 4,031.5 3,887.2 4,340.3 4,133.3
---------- ---------- ---------- ----------
$11,687.8 $11,510.3 $11,417.1 $11,266.0
========== ========== ========== ==========
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, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 17, the accompanying consolidated financial
statements have been restated.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Dallas, Texas
January 25, 1999 (July 23, 1999, as to Note 17)
AUDIT COMMITTEE CHAIRMAN'S LETTER
Kimberly-Clark Corporation and Subsidiaries
The members of the Audit Committee are selected by the board of
directors. The committee consists of six outside directors and met three
times during 1998.
The Audit Committee oversees the financial reporting process on behalf of
the board of directors. As part of that responsibility, the committee
recommends to the board of directors, subject to stockholder approval, the
selection of the Corporation's independent public accountants. The Audit
Committee discusses the overall scope and specific plans for annual audits
with the Corporation's internal auditors and Deloitte & Touche LLP. The
committee also discusses the Corporation's annual consolidated financial
statements and the adequacy of its internal controls. The committee meets
regularly with the internal auditors and Deloitte & Touche LLP, without
management present, to discuss the results of their audits, their evaluations
of the Corporation's internal controls, and the overall quality of the
Corporation's financial reporting. The meetings also are designed to
facilitate any private communication with the committee desired by the
internal auditors or independent public accountants.
/s/ Paul J. Collins
- ----------------------
Paul J. Collins
Paul J. Collins
Chairman, Audit Committee
January 25, 1999
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 has also adopted a code of conduct that, among other
things, contains policies for conducting business affairs in a lawful and
ethical manner in each country 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, the
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, 1998, 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, 1998, 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/ Wayne R. Sanders /s/ John W. Donehower
- --------------------------------- ---------------------------
Wayne R. Sanders John W. Donehower
Wayne R. Sanders John W. Donehower
Chairman of the Board Senior Vice President and
and Chief Executive Officer Chief Financial Officer
January 25, 1999
INDEPENDENT AUDITORS' REPORT
KIMBERLY-CLARK CORPORATION:
We have audited the consolidated financial statements of Kimberly-Clark
Corporation as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon
dated January 25, 1999, July 23, 1999, as to Note 17 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
restatement described in Note 17); such consolidated financial statements and
report are included in your Annual Report on Form 10-K/A for the year ended
December 31, 1998. Our audits also included the consolidated financial
statement schedule of Kimberly-Clark Corporation, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, the
consolidated financial statement schedule listed in Item 14, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
- ---------------------------
DELOITTE & TOUCHE LLP
Dallas, Texas
January 25, 1999 (July 23, 1999, as to Note 17)
SCHEDULE II Kimberly-Clark Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Millions of dollars)
ADDITIONS DEDUCTIONS
-------------------------- --------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND OTHER AND DISCOUNTS AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(A) ALLOWED PERIOD
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Allowances deducted from
assets to which they apply
Allowances for doubtful
accounts . . . . . . . . . . $ 37.8 $ 21.5 $3.1 $ 10.9(b) $51.5
Allowances for sales
discounts. . . . . . . . . . 22.1 182.5 .2 189.0(c) 15.8
DECEMBER 31, 1997
Allowances deducted from
assets to which they apply
Allowances for doubtful
accounts . . . . . . . . . . $ 33.0 $ 12.3 $2.2 $ 9.7(b) $37.8
Allowances for sales
discounts. . . . . . . . . . 13.3 174.5 7.8 173.5(c) 22.1
DECEMBER 31, 1996
Allowances deducted from
assets to which they apply
Allowances for doubtful
accounts . . . . . . . . . . $ 54.0 $ 13.1 $ .1 $ 34.2(b) $33.0
Allowances for sales
discounts. . . . . . . . . . 30.7 181.4 (.4) 198.4(c) 13.3
(a) Includes bad debt recoveries and the effects of changes in foreign
currency exchange rates. 1997 includes the balances of Tecnol
Medical Products, Inc. acquired in December 1997.
(b) Primarily uncollectible receivables written off.
(c) Sales discounts allowed.
SCHEDULE II - RESTATED Kimberly-Clark Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Millions of dollars)
ADDITIONS DEDUCTIONS
--------------------- ------------------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND OTHER AND AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECLASSIFICATIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
1998 AND 1997 CHARGES
DECEMBER 31, 1998
Contra assets deducted from
assets to which they apply
Inventory . . . . . . . $ 23.8 $4.1 $- $17.0 $10.9
Other Assets. . . . . . 12.1 .2 - 11.8 .5
DECEMBER 31, 1997
Contra assets deducted from
assets to which they apply
Inventory. . . . . . . $- $28.8 $- $5.0 $23.8
Other Assets . . . . . - 15.1 - 3.0 12.1
SCHEDULE II - RESTATED Kimberly-Clark Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Millions of dollars)
ADDITIONS DEDUCTIONS
------------------------- -----------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND OTHER AND AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECLASSIFICATIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
1995 RESTRUCTURING AND OTHER
UNUSUAL CHARGES
DECEMBER 31, 1998
Contra assets deducted from
assets to which they apply
Inventory. . . . . . . . $.6 $ - $ - $ .6 $ -
DECEMBER 31, 1997
Contra assets deducted from
assets to which they apply
Accounts receivable . . . $ .6 $ - $ - $ .6 $ -
Inventory . . . . . . . . 14.1 (3.1) - 10.4 .6
Assets held for sale. . . - - - - -
Other assets. . . . . . . .5 (0.5) - - -
DECEMBER 31, 1996
Contra assets deducted from
assets to which they apply
Accounts receivable. . . . $ 41.5 $ (1.5) $- $39.4 $ .6
Inventory. . . . . . . . . 49.6 (14.5) - 21.0 14.1
Assets held for sale . . . 60.2 (59.1) - 1.1 -
Other assets . . . . . . . 28.6 (10.9) - 17.2 .5
Property, plant and
equipment. . . . . . . . 77.3 (2.6) - 74.7 -
SCHEDULE II - RESTATED Kimberly-Clark Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Millions of dollars)
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(A) PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Deferred Taxes
Valuation Allowance. . . $203.0 $63.4 $ - $ (5.5) $271.9
DECEMBER 31, 1997
Deferred Taxes
Valuation Allowance. . . $174.3 $72.4 $ - $ 43.7 $203.0
DECEMBER 31, 1996
Deferred Taxes
Valuation Allowance. . . $189.0 $57.0 $ - $71.7(b) $174.3
(a) Includes the net currency effects of translating valuation allowances
at current rates under SFAS No. 52 of $15.6 million in 1998, $(26.0)
million in 1997 and $(16.7) million in 1996. Included in this column are
also expired income tax loss carryforwards of $15.8 million in 1998,
$16.9 million in 1997 and $18.6 million in 1996. Also see note (b).
These items offset deferred tax assets resulting in no effect on
the consolidated balance sheet.
(b) Includes $(44.1) million of valuation allowances for a German Holding
Company that was no longer required as net operating losses were
eliminated from the deferred tax asset balance. This entry had
no effect on the consolidated balance sheet.