Edgar Filing: KIMBERLY CLARK CORP

kc_10q-3q08.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from.............to.....................

Commission file number 1-225

KIMBERLY-CLARK CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	39-0394230
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

P. O. Box 619100

Dallas, Texas

75261-9100

(Address of principal executive offices)

(Zip Code)

(972) 281-1200

(Registrant’s telephone number, including area code)

No change

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

Yes ¨ No x

As of October 31, 2008, there were 413,759,859 shares of the Corporation’s common stock outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
(Millions of dollars, except per share amounts)	2008			2007			2008			2007

Net Sales	$	4,998.2		$	4,620.6		$	14,817.1		$	13,507.9
Cost of products sold		3,535.0			3,177.1			10,413.7			9,266.1

Gross Profit		1,463.2			1,443.5			4,403.4			4,241.8
Marketing, research and general expenses		849.0			783.7			2,474.7			2,313.9
Other (income) and expense, net		4.7			(22.9	)		5.0			(19.6	)

Operating Profit		609.5			682.7			1,923.7			1,947.5
Nonoperating expense		-			(6.5	)		-			(81.6	)
Interest income		14.9			9.3			30.6			23.3
Interest expense		(75.5	)		(78.6	)		(223.0	)		(181.4	)

Income Before Income Taxes,
Equity Interests and Extraordinary Loss		548.9			606.9			1,731.3			1,707.8
Provision for income taxes		(154.5	)		(167.5	)		(493.7	)		(391.1	)

Income Before Equity Interests
and Extraordinary Loss		394.4			439.4			1,237.6			1,316.7
Share of net income of equity companies		52.7			39.1			144.5			126.9
Minority owners’ share of subsidiaries’ net
income		(34.0	)		(25.4	)		(103.7	)		(76.7	)
Extraordinary loss, net of income taxes		-			-			(7.7	)		-

Net Income	$	413.1		$	453.1		$	1,270.7		$	1,366.9

Per Share Basis:

Net Income
Basic
Before extraordinary loss	$	1.00		$	1.05		$	3.06		$	3.05
Extraordinary loss		-			-			(.02	)		-
Net Income	$	1.00		$	1.05		$	3.04		$	3.05

Diluted
Before extraordinary loss	$	.99		$	1.04		$	3.05		$	3.03
Extraordinary loss		-			-			(.02	)		-
Net Income	$	.99		$	1.04		$	3.03		$	3.03

Cash Dividends Declared	$	.58		$	.53		$	1.74		$	1.59

See Notes to Consolidated Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

	September 30,		December 31,
(Millions of dollars)	2008		2007

ASSETS

Current Assets
Cash and cash equivalents	$	524.1	$	472.7
Accounts receivable, net		2,478.1		2,560.6
Inventories		2,569.8		2,443.8
Other current assets		470.8		619.5
Total Current Assets		6,042.8		6,096.6

Property		16,138.1		16,243.0
Less accumulated depreciation		8,289.4		8,149.0
Net Property		7,848.7		8,094.0

Investments in Equity Companies		418.2		390.0

Goodwill		2,907.0		2,942.4

Long-Term Notes Receivable		602.2		-

Other Assets		882.3		916.7
	$	18,701.2	$	18,439.7


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Debt payable within one year	$	1,870.9	$	1,097.9
Accounts payable		1,742.6		1,768.3
Accrued expenses		1,684.8		1,782.8
Other current liabilities		357.2		279.6
Total Current Liabilities		5,655.5		4,928.6

Long-Term Debt		4,369.5		4,393.9
Noncurrent Employee Benefits		1,493.8		1,558.5
Long-Term Income Taxes Payable		159.9		288.3
Deferred Income Taxes		414.3		369.7
Other Liabilities		200.8		188.3
Minority Owners’ Interests in Subsidiaries		401.4		484.1
Redeemable Preferred Securities of Subsidiary		1,011.0		1,004.6
Stockholders’ Equity		4,995.0		5,223.7
	$	18,701.2	$	18,439.7

See Notes to Consolidated Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(Unaudited)

	Nine Months
	Ended September 30
(Millions of dollars)	2008			2007

Operating Activities
Net income	$	1,270.7		$	1,366.9
Extraordinary loss, net of income taxes		7.7			-
Depreciation and amortization		595.5			626.4
Stock-based compensation		38.4			48.6
Increase in operating working capital		(180.3	)		(295.8	)
Deferred income tax provision		15.7			(67.0	)
Net losses on asset dispositions		35.0			28.3
Equity companies’ earnings in excess of dividends paid		(70.7	)		(62.9	)
Minority owners’ share of subsidiaries’ net income		103.7			76.7
Postretirement benefits		3.6			6.4
Other		18.5			16.0

Cash Provided by Operations		1,837.8			1,743.6

Investing Activities
Capital spending		(652.4	)		(776.8	)
Acquisition of businesses, net of cash acquired		(97.9	)		(15.7	)
Proceeds from sales of investments		40.6			34.1
Proceeds from dispositions of property		3.4			70.9
Net decrease in time deposits		76.3			1.6
Investments in marketable securities		(8.7	)		(4.0	)
Other		3.2			(26.5	)

Cash Used for Investing		(635.5	)		(716.4	)

Financing Activities
Cash dividends paid		(709.4	)		(707.7	)
Net increase in short-term debt		161.6			361.3
Proceeds from issuance of long-term debt		46.5			2,117.4
Repayments of long-term debt		(70.3	)		(337.5	)
Cash paid on redeemable preferred securities of subsidiary		(33.5	)		-
Proceeds from exercise of stock options		103.9			284.9
Acquisitions of common stock for the treasury		(573.2	)		(2,543.7	)
Other		(48.0	)		(29.4	)

Cash Used for Financing		(1,122.4	)		(854.7	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		(28.5	)		6.3
Increase in Cash and Cash Equivalents		51.4			178.8
Cash and Cash Equivalents, beginning of year		472.7			360.8

Cash and Cash Equivalents, end of period	$	524.1		$	539.6

See Notes to Consolidated Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Accounting Policies

Basis of Presentation

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

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007.

New Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 allows entities to choose, at specified election dates, to measure financial instruments (financial assets and liabilities) at fair value (the “Fair Value Option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the Fair Value Option is elected for an instrument, SFAS 159 specifies that all subsequent changes in fair value for that instrument be reported in earnings. SFAS 159 was effective as of the beginning of the first fiscal year that began after November 15, 2007. The Corporation has not applied the Fair Value Option to any of its existing financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires the acquirer in a business combination to:

recognize 100 percent of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100 percent of the target entity,

fair-value contingent consideration arrangements at the acquisition date,

expense transaction costs as incurred rather than being considered part of the fair value of an acquirer’s interest,

fair-value certain pre-acquisition contingencies, such as environmental or legal issues,

limit accrual of the costs for a restructuring plan to pre-acquisition date restructuring obligations, and

capitalize the value of acquired research and development as an indefinite-lived intangible asset, subject to impairment accounting, rather than being expensed at the acquisition date.

SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption is prospective, and early adoption is not permitted. Adoption of SFAS 141(R) is not expected to have a material effect on the Corporation’s financial statements.

Note 1. (Continued)

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 clarifies the classification of noncontrolling interests (i.e., minority owners’ interests in subsidiaries) in consolidated balance sheets and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests.

Under SFAS 160:

Noncontrolling interests are reported as an element of consolidated equity, thereby eliminating the current practice of classifying minority owners’ interests within a mezzanine section of the balance sheet.

The current practice of reporting minority owners’ share of subsidiaries’ net income will change. Reported net income will include the total income of all consolidated subsidiaries, with separate disclosure on the face of the income statement of the split of net income between the controlling and noncontrolling interests.

Increases and decreases in the noncontrolling ownership interest amount will be accounted for as equity transactions. If the controlling interest loses control and deconsolidates a subsidiary, full gain or loss on the transition will be recognized.

SFAS 160 is effective for fiscal years, and interim periods within fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. Adoption is prospective, except for the following provisions, which are required to be adopted retrospectively:

Noncontrolling interests are required to be reclassified from the mezzanine to equity, separate from the parent’s shareholders’ equity, in the consolidated balance sheet.

Consolidated net income must be recast to include net income attributable to both controlling and noncontrolling interests.

Except for the reclassification of minority owners’ interests into equity and the inclusion of all of the income of less than 100 percent owned subsidiaries in reported net income, adoption of SFAS 160 is not expected to have a material effect on the Corporation’s financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows.

SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Since SFAS 161 only requires additional disclosures, it will not have a material impact on the Corporation’s financial statements.

In June 2008, the FASB issued Staff Position No. EITF 03-6-1 (“FSP”), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP specifies that certain share-based payment awards are participating securities, which must be included in the computation of basic and diluted earnings per share under the two-class method prescribed in SFAS No. 128, Earnings per Share. Under the two-class method, earnings per share is computed by allocating net income of an entity to both common shareholders and participating securities.

Note 1. (Continued)

The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The FSP requires that earnings per share presented for prior periods be retrospectively restated. Adoption of the FSP is not expected to have a material effect on the Corporation’s financial statements.

In October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in the determination of the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. The FSP is applicable to the Corporation’s required disclosures in its annual financial statements of the fair values of certain notes receivable held by two consolidated financing entities, discussed in Note 2 below. Adoption of the FSP is not expected to have a material effect on the Corporation’s financial statements.

Note 2. Monetization Financing Entities

The Corporation has minority voting interests in two financing entities (the “Financing Entities”) used to monetize long-term notes (the “Notes”) received from the sale of certain nonstrategic timberlands and related assets to nonaffiliated buyers. The Notes have an aggregate face value of $617 million and are backed by irrevocable standby letters of credit issued by money center banks. The Notes and certain other assets were transferred to the Financing Entities in 1999 and 2000. A nonaffiliated financial institution (the “Third Party”) has made substantive capital investments in each of the Financing Entities and has majority voting control over them. The Third Party also made monetization loans aggregating $617 million to the Corporation, which were assumed by the Financing Entities at the time they acquired the Notes. These monetization loans are secured by the Notes. The Corporation also contributed to the Financing Entities intercompany notes receivable aggregating $662 million and intercompany preferred stock of $50 million, which serve as secondary collateral for the monetization loans.

In 2003 upon adoption of FIN 46(R), Consolidation of Variable Interest Entities, (“FIN 46(R)”), the Corporation determined that the Third Party was the primary beneficiary of the Financing Entities as a result of the interest rate variability allocated to it in accordance with FIN 46(R).

On June 30, 2008, the maturity dates of the lending arrangements with the Third Party were extended. FASB Staff Position FIN 46(R)-6, Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R), (“FSP 46(R)”), which was issued in 2006, requires that certain interest rate variability no longer be considered in determining the primary beneficiary of variable interest entities. As required by FIN 46(R) in connection with the extensions, the Corporation reconsidered the primary beneficiary determination and concluded, after excluding the interest rate variability as required by FSP 46(R), that it was now the primary beneficiary.

Because the Corporation became the primary beneficiary of the Financing Entities on June 30, 2008, it began consolidating them. In accordance with FIN 46(R), the assets and liabilities of the Financing Entities were recorded at fair value as of June 30, 2008. Because the fair value of the monetization loans exceeded the fair value of the Notes, the Corporation recorded an after-tax extraordinary charge of $7.7 million on its Consolidated Income Statement for the period ended June 30, 2008, as required by FIN 46(R). In accordance with FIN 46(R), prior period financial statements have not been adjusted to reflect the consolidation of the Financing Entities.

Note 2. (Continued)

Interest income on the Notes and interest expense on the monetization loans were reported on the Corporation’s Consolidated Income Statement. The Notes and monetization loans are being adjusted from their June 30, 2008 fair values to their face values through their respective maturity dates with the adjustment included in interest income and interest expense, respectively.

The following summarizes the terms of the Notes and the monetization loans as of September 30, 2008:

Description	Face Value	Carrying Amount	Maturity	Interest Rate (a) (b)
Note 1	$397 million	$390.2 million	September 30, 2014	LIBOR minus 15 bps
Note 2	220 million	212.0 million	July 7, 2011	LIBOR minus 12.5 bps
Loan 1	397 million	393.1 million	September 30, 2009	LIBOR plus 75 bps
Loan 2	220 million	219.8 million	July 1, 2009	LIBOR plus 75 bps

(a) Payable quarterly

(b) 3 month LIBOR

Note 3. Fair Value Measurements

Effective January 1, 2008, the Corporation adopted SFAS 157, for its financial assets and liabilities, as required. In February 2008, the FASB issued FASB Staff Position No. 157-2 which deferred the effective date of SFAS 157 for nonfinancial assets and liabilities except for those recognized or disclosed on a recurring basis. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:

Level 1 – Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are significant to the valuation and are unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Note 3. (Continued)

Set forth below are the financial assets and liabilities measured at fair value as of September 30, 2008, together with the inputs used to develop those fair value measurements. The Corporation has no financial assets or liabilities for which fair value was measured on a recurring basis using Level 3 inputs.

		Fair Value Measurements
(Millions of dollars)	September 30, 2008	Level 1	Level 2

Assets
Company-owned life insurance (“COLI”)	$ 44.5	$ -	$ 44.5
Available-for-sale securities	13.9	13.9	-
Derivatives	47.0	-	47.0

Total	$ 105.4	$ 13.9	$ 91.5

Liabilities
Derivatives	$ 40.9	$ -	$ 40.9

The COLI policies are a source of funding primarily for the Corporation’s nonqualified employee benefits and are included in other assets. Available-for-sale securities are included in other assets. The derivative assets and liabilities are included in other current assets, other assets, accrued expenses and other liabilities, as appropriate.

Level 1 Fair Values - The fair values of available-for-sale securities are based on quoted market prices in active markets for identical assets.

Level 2 Fair Values - The fair value of the COLI policies is derived from investments in a mix of money market, fixed income and equity funds managed by unrelated fund managers. The fair values of derivatives used to manage interest rate risk and commodity price risk are based on LIBOR rates and the interest rate swap curves and NYMEX price quotations, respectively. The fair value of hedging instruments used to manage foreign currency risk is based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates.

Note 4. Strategic Cost Reduction Plan

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

The strategic cost reductions commenced in the third quarter of 2005 and will be completed by December 31, 2008. Based on current estimates, the strategic cost reductions are expected to result in cumulative charges of approximately $880 to $900 million before tax ($610 - $620 million after tax) over that three and one-half year period.

By the end of 2008, it is anticipated there will be a net workforce reduction of about 10 percent, or approximately 6,000 employees. Since the inception of the strategic cost reductions, a net workforce reduction of approximately 5,300 has occurred. Charges have been recorded related to strategic cost reduction initiatives for all affected facilities. To date, 14 facilities have been disposed of and three additional facilities have been closed and are being marketed for sale. Two other facilities will be closed prior to December 31, 2008. In addition, streamlining at four facilities has been completed.

Note 4. (Continued)

The following pretax charges were incurred in connection with the strategic cost reductions:

		Three Months				Nine Months
		Ended September 30				Ended September 30
(Millions of dollars)		2008		2007		2008		2007

Noncash charges	$	5.7	$	9.0	$	17.4	$	53.6
Charges (credits) for workforce reductions		.7		4.6		13.4		(1.4	)
Other cash charges		9.2		6.9		19.7		22.2
Charges for special pension and other benefits		.5		2.3		3.9		6.8

Total pretax charges	$	16.1	$	22.8	$	54.4	$	81.2

The following table summarizes the noncash charges:

		Three Months					Nine Months
		Ended September 30					Ended September 30
(Millions of dollars)		2008		2007			2008		2007

Incremental depreciation	$	4.0	$	11.8		$	12.0	$	61.5
Asset write-offs		1.7		1.4			3.7		6.1
Net (gain) loss on asset dispositions		-		(4.2	)		1.7		(14.0	)

Total noncash charges	$	5.7	$	9.0		$	17.4	$	53.6

The following table summarizes the cash charges recorded and reconciles such charges to accrued expenses at September 30:

(Millions of dollars)	2008			2007

Accrued expenses – beginning of the year	$	53.8		$	111.2
Charges (credits) for workforce reductions		13.4			(1.4	)
Other cash charges		19.7			22.2
Cash payments		(57.2	)		(85.3	)
Currency		(.3	)		1.9

Accrued expenses at September 30	$	29.4		$	48.6

Termination benefits related to workforce reductions were accrued in accordance with the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), SFAS No. 112, Employers’ Accounting for Postemployment Benefits, and SFAS No. 88, Employers’ Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and for Termination

Note 4. (Continued)

Benefits, as appropriate. Retention bonuses related to workforce reductions were accrued in accordance with SFAS 146. The majority of the termination benefits and retention bonuses will be paid within 12 months of accrual. The termination benefits were provided under: a special-benefit arrangement for affected employees in the U.S.; standard benefit practices in the United Kingdom; applicable union agreements; or local statutory requirements, as appropriate. Incremental depreciation was based on changes in useful lives and estimated residual values of assets that are continuing to be used, but will be removed from service before the end of their originally assumed service period.

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

	Three Months						Nine Months
	Ended September 30						Ended September 30
(Millions of dollars)	2008			2007			2008			2007

Cost of products sold	$	11.0		$	18.9		$	31.5		$	71.4
Marketing, research and general expenses		5.0			7.8			21.2			23.0
Other (income) and expense, net		.1			(3.9	)		1.7			(13.2	)

Pretax charges		16.1			22.8			54.4			81.2
Provision for income taxes		(4.7	)		(2.5	)		(17.9	)		(36.0	)
Minority owners’ share of subsidiaries’
net income		(.1	)		-			(.1	)		(.1	)

Total after tax charges	$	11.3		$	20.3		$	36.4		$	45.1

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

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

	2008
(Millions of dollars)	North America		Europe		Other		Total

Incremental depreciation	$	.9	$	3.1	$	-	$	4.0
Asset write-offs		.7		.9		.1		1.7
Charges for workforce reductions and special
pension and other benefits		.8		.4		-		1.2
Loss on asset disposals and other charges		7.8		.7		.7		9.2

Total charges	$	10.2	$	5.1	$	.8	$	16.1

Note 4. (Continued)

	2007
(Millions of dollars)	North America		Europe			Other			Total

Incremental depreciation	$	8.4	$	3.4		$	-		$	11.8
Asset write-offs		1.3		-			.1			1.4
Charges for workforce reductions and special pension
and other benefits		1.9		3.8			1.2			6.9
Loss (gain) on asset disposals and other charges		5.4		(2.6	)		(.1	)		2.7

Total charges	$	17.0	$	4.6		$	1.2		$	22.8

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

	2008
(Millions of dollars)	North America		Europe		Other		Total

Incremental depreciation	$	4.0	$	8.0	$	-	$	12.0
Asset write-offs		2.6		1.0		.1		3.7
Charges for workforce reductions and special
pension and other benefits		10.0		6.9		.4		17.3
Loss on asset disposals and other charges		15.7		4.5		1.2		21.4

Total charges	$	32.3	$	20.4	$	1.7	$	54.4

	2007
(Millions of dollars)	North America		Europe			Other			Total

Incremental depreciation	$	37.8	$	23.1		$	.6		$	61.5
Asset write-offs		4.3		1.2			.6			6.1
Charges (credits) for workforce reductions and
special pension and other benefits		13.5		(13.2	)		5.1			5.4
Loss (gain) on asset disposals and other charges		13.3		(4.8	)		(.3	)		8.2

Total charges	$	68.9	$	6.3		$	6.0		$	81.2

Note 5. Inventories

The following schedule presents inventories by major class:

	September 30,				December 31,
(Millions of dollars)	2008				2007

At lower of cost on the First-In, First-Out (FIFO) method or market:
Raw materials		$	511.7			$	476.3
Work in process			413.0				357.3
Finished goods			1,639.0				1,564.1
Supplies and other			273.0				261.0
			2,836.7				2,658.7
Excess of FIFO cost over Last-In, First-Out (LIFO) cost			(266.9	)			(214.9	)

Total		$	2,569.8			$	2,443.8

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

FIFO cost of total inventories on the LIFO method was $1,217.7 million and $1,203.0 million at September 30, 2008 and December 31, 2007, respectively.

Note 6. Synthetic Fuel Partnerships

The Corporation had minority interests in two synthetic fuel partnerships. The production of synthetic fuel resulted in pretax losses that were reported as nonoperating expense on the Corporation’s Consolidated Income Statement. Synthetic fuel produced by the partnerships was eligible for synthetic fuel tax credits through the end of 2007 at which time the law giving rise to the tax benefit expired. The partnerships will be dissolved during 2008 at no cost to the Corporation. In addition, in 2007 there were tax deductions for the nonoperating losses, which reduced the Corporation’s income tax expense. The effects of those losses and benefits for 2007 are shown in the following table:

	Periods Ended September 30, 2007
(Millions of dollars)	Three Months					Nine Months

Nonoperating expense			$	(6.5	)			$	(81.6	)
Tax credits	$	6.1				$	75.6
Tax benefit of nonoperating expense		1.6		7.7			26.3		101.9
Net synthetic fuel benefit			$	1.2				$	20.3

Per share basis – diluted			$	-				$	.04

Note 7. Employee Postretirement Benefits

The table below presents the interim period disclosure required by SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits:

	Defined						Other Postretirement
	Benefit Plans						Benefit Plans
	Three Months Ended September 30
(Millions of dollars)	2008			2007			2008		2007

Service cost	$	18.5		$	20.9		$	3.4	$	3.4
Interest cost		82.1			78.9			13.3		13.0
Expected return on plan assets		(93.7	)		(93.5	)		-		-
Recognized net actuarial loss		14.1			19.2			.2		1.3
Other		2.1			4.2			.7		.7

Net periodic benefit cost	$	23.1		$	29.7		$	17.6	$	18.4

	Defined						Other Postretirement
	Benefit Plans						Benefit Plans
	Nine Months Ended September 30
(Millions of dollars)	2008			2007			2008		2007

Service cost	$	57.1		$	62.5		$	10.0	$	10.0
Interest cost		246.9			235.5			38.7		38.0
Expected return on plan assets		(282.4	)		(278.4	)		-		-
Recognized net actuarial loss		42.6			57.1			.5		3.9
Other		9.4			12.0			2.2		2.3

Net periodic benefit cost	$	73.6		$	88.7		$	51.4	$	54.2

The Corporation made cash contributions to its pension trusts outside the U.S. as follows:

(Millions of dollars)		2008		2007

Quarter ended March 31	$	36	$	42
Quarter ended June 30		17		17
Quarter ended September 30		14		21

September 30 year-to-date	$	67	$	80

The Corporation currently anticipates contributing about $50 million to its pension trust in the U.S. and $100 million to its pension trusts outside the U.S. for the full year 2008.

Note 8. Earnings Per Share

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

	Average Common Shares Outstanding
	Three Months		Nine Months
	Ended September 30		Ended September 30
(Millions of shares)	2008	2007	2008	2007

Basic	415.1	432.2	417.7	447.8
Dilutive effect of stock options	.9	2.3	1.3	2.5
Dilutive effect of restricted share and restricted
share unit awards	.8	1.3	.7	1.3
Dilutive effect of accelerated share repurchase	-	.2	-	.1
Diluted	416.8	436.0	419.7	451.7

Options outstanding during the three- and nine-month periods ended September 30, 2008 to purchase 16.5 million and 12.0 million shares of common stock, respectively, were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares during the periods.

Options outstanding during the three- and nine-month periods ended September 30, 2007 to purchase 8.3 million and 2.5 million shares of common stock, respectively, were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares during the periods.

The number of common shares outstanding as of September 30, 2008 and 2007 was 414.7 million and 423.7 million, respectively.

Note 9. Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity during the periods except those resulting from investments by and distributions to stockholders.

The following schedule presents the components of comprehensive income:

	Nine Months
	Ended September 30
(Millions of dollars)	2008			2007

Net income	$	1,270.7		$	1,366.9
Unrealized currency translation adjustments		(382.3	)		418.4
Employee postretirement benefits, net of tax		37.0			49.5
Deferred losses on cash flow hedges, net of tax		(5.9	)		(3.8	)
Unrealized holding losses on available-for-sale securities, net of tax		(3.3	)		-

Comprehensive income	$	916.2		$	1,831.0

Note 9. (Continued)

Net unrealized currency gains or losses resulting from the translation of assets and liabilities of non-U.S. subsidiaries, except those in highly inflationary economies, are accumulated in a separate section of stockholders’ equity. For these operations, changes in exchange rates generally do not affect cash flows; therefore, unrealized translation adjustments are recorded in stockholders’ equity rather than income. Upon sale or substantially complete liquidation of any of these subsidiaries, the applicable unrealized translation adjustment would be removed from stockholders’ equity and reported as part of the gain or loss on the sale or liquidation.

Also included are the effects of foreign exchange rate changes on intercompany balances of a long-term investment nature and transactions designated as hedges of net foreign investments.

The net unrealized currency translation adjustments for the nine months ended September 30, 2008 are primarily due to a strengthening of the U.S. dollar versus the Australian dollar, Brazilian real, British pound, and South Korean won.

Note 10. Description of Business Segments

The Corporation is organized into operating segments based on product groupings. These operating segments have been aggregated into four reportable global business segments: Personal Care; Consumer Tissue; K-C Professional & Other; and Health Care. The reportable segments were determined in accordance with how the Corporation’s executive managers develop and execute the Corporation’s global strategies to drive growth and profitability of the Corporation’s worldwide Personal Care, Consumer Tissue, K-C Professional & Other and Health Care operations. These strategies include global plans for branding and product positioning, technology, research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. Segment management is evaluated on several factors, including operating profit. Segment operating profit excludes other income and (expense), net; income and expense not associated with the business segments; and the costs of corporate decisions related to the strategic cost reductions described in Note 4.

The principal sources of revenue in each global business segment are described below.

The Personal Care segment manufactures and markets disposable diapers, training and youth pants and swimpants; baby wipes; feminine and incontinence care products; and related products. Products in this segment are primarily for household use and are sold under a variety of brand names, including Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names.

·	The Consumer Tissue segment manufactures and markets facial and bathroom tissue, paper towels, napkins and related products for household use. Products in this segment are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page and other brand names.

The K-C Professional & Other segment manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers and a range of safety products for the away-from-home marketplace. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, WypAll, Kimtech, Kleenguard and Kimcare brand names.

Note 10. (Continued)

The Health Care segment manufactures and markets disposable health care products such as surgical gowns, drapes, infection control products, sterilization wrap, face masks, exam gloves, respiratory products and other disposable medical products. Products in this segment are sold under the Kimberly-Clark, Ballard and other brand names.

The following schedules present information concerning consolidated operations by business segment:

	Three Months						Nine Months
	Ended September 30						Ended September 30
(Millions of dollars)	2008			2007			2008			2007

NET SALES:

Personal Care	$	2,146.4		$	1,920.8		$	6,357.5		$	5,599.9
Consumer Tissue		1,711.4			1,629.8			5,108.0			4,791.5
K-C Professional & Other		842.8			780.5			2,443.6			2,240.9
Health Care		302.8			292.1			907.0			891.5
Corporate & Other		16.7			10.5			61.5			27.5
Intersegment sales		(21.9	)		(13.1	)		(60.5	)		(43.4	)

Consolidated	$	4,998.2		$	4,620.6		$	14,817.1		$	13,507.9

Note 10. (Continued)

	Three Months						Nine Months
	Ended September 30						Ended September 30
(Millions of dollars)	2008			2007			2008			2007

OPERATING PROFIT (reconciled to income before
income taxes):

Personal Care	$	404.4		$	396.3		$	1,269.0		$	1,136.7
Consumer Tissue		132.9			166.1			418.8			542.1
K-C Professional & Other		119.5			125.1			327.1			353.7
Health Care		21.9			43.4			97.9			151.0
Other income and (expense), net(a)		(4.7	)		22.9			(5.0	)		19.6
Corporate & Other(a) (b)		(64.5	)		(71.1	)		(184.1	)		(255.6	)

Total Operating Profit		609.5			682.7			1,923.7			1,947.5

Nonoperating expense		-			(6.5	)		-			(81.6	)
Interest income		14.9			9.3			30.6			23.3
Interest expense		(75.5	)		(78.6	)		(223.0	)		(181.4	)

Income Before Income Taxes	$	548.9		$	606.9		$	1,731.3		$	1,707.8

Notes:

(a) Other income and (expense), net and Corporate & Other include the following amounts of pretax charges for the strategic cost reductions:

	Three Months						Nine Months
	Ended September 30						Ended September 30
(Millions of dollars)	2008			2007			2008			2007

Other income and (expense), net	$	(.1	)	$	3.9		$	(1.7	)	$	13.2

Corporate & Other		(16.0	)		(26.7	)		(52.7	)		(94.4	)

(b) In 2007, Corporate & Other also includes the related implementation costs of $2.0 million and $25.2 million for the three and nine months ended September 30, respectively.

Note 10. (Continued)

The following table presents the pretax charges for the strategic cost reductions related to activities in the Corporation’s business segments:

	Three Months					Nine Months
	Ended September 30					Ended September 30
(Millions of dollars)	2008		2007			2008		2007

Personal Care	$	6.4	$	16.1		$	21.1	$	66.3
Consumer Tissue		3.1		5.5			10.4		8.5
K-C Professional & Other		1.9		1.7			4.3		8.3
Health Care		4.6		3.4			16.9		11.3
Other (income) and expense, net		.1		(3.9	)		1.7		(13.2	)

Total	$	16.1	$	22.8		$	54.4	$	81.2

Cumulative pretax charges expected to be incurred for the strategic cost reductions of $880 to $900 million by business segment are: Personal Care - $485 to $495 million; Consumer Tissue - $195 to $200 million; K-C Professional & Other - $70 to $72 million; and Health Care - $130 to $133 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This management’s discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of the Corporation’s recent performance, its financial condition and its prospects. The following will be discussed and analyzed:

·	Overview of Third Quarter 2008 Results

·	Results of Operations and Related Information

·	Liquidity and Capital Resources

·	New Accounting Standards

·	Environmental Matters

·	Business Outlook

Overview of Third Quarter 2008 Results

·	Net sales increased 8.2 percent.

·	Operating profit and net income decreased 10.7 percent and 8.8 percent, respectively.

·	Cash provided by operations was $640.9 million, an increase of 12.9 percent over last year.

Results of Operations and Related Information

This section presents a discussion and analysis of the Corporation’s third quarter and first nine months of 2008 net sales, operating profit and other information relevant to an understanding of the results of operations.

Third Quarter of 2008 Compared With Third Quarter of 2007

Analysis of Net Sales

By Business Segment

(Millions of dollars)

Net Sales	2008			2007

Personal Care	$	2,146.4		$	1,920.8
Consumer Tissue		1,711.4			1,629.8
K-C Professional & Other		842.8			780.5
Health Care		302.8			292.1
Corporate & Other		16.7			10.5
Intersegment sales		(21.9	)		(13.1	)

Consolidated	$	4,998.2		$	4,620.6

Commentary:

	Percent Change in Net Sales Versus Prior Year
		Changes Due To
	Total	Volume		Net			Mix/
	Change	Growth		Price		Currency	Other

Consolidated	8.2	(1	)	4		3	2

Personal Care	11.7	4		4		3	1
Consumer Tissue	5.0	(7	)	7		3	2
K-C Professional & Other	8.0	(1	)	4		3	2
Health Care	3.7	5		(2	)	1	-

Personal care net sales in North America improved about 7 percent versus the year-ago quarter, reflecting higher net selling prices of 4 percent, along with sales volume growth and favorable product mix of more than 1 percent each. Price increases were implemented for Depend and Poise incontinence and Kotex feminine care products in the second quarter and for Huggies diapers and Pull-Ups training pants in both the first and third quarters. Sales volumes for Huggies diapers were up slightly, while volumes for the Corporation’s child care, feminine care and incontinence care brands were down low single-digits. Meanwhile, sales volumes rose at a double-digit rate for Huggies baby wipes.

In Europe, personal care net sales rose approximately 2 percent in the quarter. Favorable currency effects increased sales by 9 percent, while net selling prices overall were unchanged. Sales volumes decreased nearly 8 percent, driven primarily by lower sales of Huggies diapers in the Corporation’s four core markets of the U.K., France, Italy and Spain, where promotional activity remained intense.

In developing and emerging markets, personal care net sales climbed almost 20 percent, as the Corporation continued to benefit from strong product and customer programs in rapidly growing markets. Sales volumes increased by more than 9 percent, while net selling prices improved about 4 percent and product mix was better by more than 2 percent. Stronger foreign currencies positively impacted sales comparisons by more than 4 percent. The growth in sales volumes was broad-based, with particular strength throughout Latin America and in South Korea, Russia, Turkey and Vietnam.

In North America, net sales of consumer tissue products decreased 2 percent in the third quarter, as an increase in net selling prices of about

6 percent and improved product mix of 1 percent were more than offset by a 9 percent decline in sales volumes. The improvement in net selling prices was primarily attributable to price increases for bathroom tissue and paper towels implemented during the first and third quarters in the U.S. List prices for facial tissue were raised late in the third quarter. Sales volumes were down mid-single digits in bathroom tissue and facial tissue and double-digits in paper towels, primarily as a result of the Corporation’s focus on improving revenue realization. A portion of the overall volume decline is also due to the Corporation’s decision in late 2007 to shed certain low-margin private label business. Although branded bathroom tissue volumes declined, revenue growth was solid, with particular strength in the mainline Scott 1000 and super premium Cottonelle Ultra brands. Meanwhile, sales of Viva and Scott paper towels have been impacted by high levels of competitive spending and a shift in the category toward lower-priced, private label products.

In Europe, consumer tissue net sales increased about 7 percent compared with the third quarter of 2007. Currency exchange rates strengthened by an average of more than 6 percent, accounting for virtually all of the increase. Sales volumes were down approximately 4 percent, due mainly to lower sales of Andrex and Scottex bathroom tissue and Kleenex facial tissue in response to higher prices and a slowdown in category sales, particularly in the U.K. Net selling prices improved 4 percent, reflecting list price increases across multiple markets, partially offset by competitive promotional activity, while product mix also was better by 1 percent.

Consumer tissue net sales in developing and emerging markets rose approximately 18 percent. Net selling prices and product mix increased

12 percent and 4 percent, respectively, as the Corporation has raised prices in response to higher raw materials costs and improved mix with more differentiated, value-added products. Currency gains also benefited sales by nearly 5 percent. Although sales volumes grew in a number of key markets, including Australia, Russia, Israel and Brazil, volumes declined about 3 percent overall, mainly as a result of the Corporation’s strategies to drive price and mix.

Globally, KCP continued to generate double-digit growth in sales of higher-margin workplace and safety products. In North America, improvements of 3 percent in both price and mix were partially offset by a 4 percent reduction in sales volumes. Sales volumes softened somewhat as a result of slowing economic growth in combination with the Corporation’s strategies to raise prices and enhance the mix of products sold and in comparison to strong growth in the year-ago quarter. In Europe, KCP achieved 20-plus percent net sales growth, as innovative product offerings contributed to a 10 percent rise in sales volumes, net selling prices were about 2 percent higher and favorable currency effects added 9 percent to sales. Across developing and emerging markets, net sales were up 16 percent on sales volume gains of

2 percent, net selling price/mix improvements of 10 percent and currency benefits of 4 percent.

The improvement in sales volumes for health care was paced by double-digit growth in exam gloves, while overall sales volumes for both surgical supplies and medical devices were up at a mid-single digit rate. The price decline was mainly attributable to competitive conditions affecting surgical supplies in North America and Europe.

By Geography

(Millions of dollars)

Net Sales	2008			2007

North America	$	2,664.5		$	2,590.1
Outside North America		2,501.9			2,191.6
Intergeographic sales		(168.2	)		(161.1	)

Consolidated	$	4,998.2		$	4,620.6

Commentary:

·	Net sales in North America increased 2.9 percent primarily due to higher net selling prices for personal care and consumer tissue, and favorable product mix in both of those segments, partially offset by lower consumer tissue sales volumes.

·	Net sales outside North America increased 14.2 percent due to higher sales volumes for personal care and increased net selling prices, favorable product mix and favorable currency for both personal care and consumer tissue.

Analysis of Operating Profit

By Business Segment

(Millions of dollars)

Operating Profit	2008			2007

Personal Care	$	404.4		$	396.3
Consumer Tissue		132.9			166.1
K-C Professional & Other		119.5			125.1
Health Care		21.9			43.4
Other income and (expense), net(a)		(4.7	)		22.9
Corporate & Other(a) (b)		(64.5	)		(71.1	)

Consolidated	$	609.5		$	682.7