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U.S. Securities and Exchange Commission

United States of America
Before the
Securities and Exchange Commission

Securities Exchange Act of 1934
Release No. 45653 / March 27, 2002

Accounting and Auditing Enforcement
Release No. 1533 / March 27, 2002

Administrative Proceeding
File No. 3-10741

In the Matter of


The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Kimberly-Clark Corporation ("Kimberly-Clark") and John W. Donehower ("Donehower") (collectively, the "Respondents") to determine whether Kimberly-Clark violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, and whether Donehower was a cause of those violations.


In anticipation of the institution of these administrative proceedings, the Respondents have submitted Offers of Settlement for the purpose of disposing of the issues raised in these proceedings. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, the Respondents, without admitting or denying the findings set forth herein, except that they admit to the jurisdiction of the Commission over them and over the subject matter of these proceedings, consent to the entry of the findings and to the issuance of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease-and-Desist Order ("Order").


On the basis of this Order and the Respondents' Offers of Settlement, the Commission finds the following:1

A. Respondents

  1. Kimberly-Clark is a Delaware corporation headquartered in Irving, Texas. It manufactures tissue paper and other consumer products. Kimberly-Clark's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades on the New York, Chicago and Pacific stock exchanges under the ticker symbol "KMB."

  2. John W. Donehower, age 55, was, at all relevant times, Kimberly-Clark's Chief Financial Officer and signed the company's filings with the Commission. Donehower is not a Certified Public Accountant.

B. Facts

1. Summary

These proceedings arise from inaccurate annual financial statements filed by Kimberly-Clark with the Commission for the years ended December 31, 1995, through December 31, 1998, and quarterly financial statements from March 31, 1996, through the quarter ended March 31, 1999. These issues arose in connection with a $1.44 billion charge for restructuring and other unusual charges ("restructuring charge") that Kimberly-Clark recorded after its merger with Scott Paper Company ("Scott") in December 1995. Kimberly-Clark materially overstated this restructuring charge by accruing $354 million of merger-related expenses (about 25% of the $1.44 billion charge) that did not constitute restructuring liabilities under Generally Accepted Accounting Principles ("GAAP").

Between 1996 and 1998, the company also failed to account for certain of the liabilities associated with this restructuring charge in accordance with GAAP. Specifically, during this time period, Kimberly-Clark did not record changes in estimates for the individual programs on its income statement.2 Instead, in certain cases Kimberly-Clark reallocated changes in estimates to the numerous merger and integration programs and transferred any excess amounts to a restructuring reserve sub-account. During certain quarters the company reduced this restructuring reserve sub-account resulting in an increase in Kimberly-Clark's reported earnings.

In 1999, after discussions with the Commission's Division of Corporation Finance, Kimberly-Clark voluntarily restated its financial statements for these matters.3

2. Background — Kimberly-Clark's $1.44 Billion Charge

Kimberly-Clark manufactures and sells products such as "Kleenex" tissues and "Huggies" disposable diapers. On July 16, 1995, Kimberly-Clark entered into an agreement to merge with Scott, another consumer products company engaged in the manufacture and sale of products such as Scott bathroom tissue and paper towels. The merger, completed on December 12, 1995, and valued at about $9.4 billion, created the world's largest manufacturer of tissue products with annual sales of $13 billion.

Prior to the merger, Kimberly-Clark had operating facilities in 27 countries and sold its products worldwide; Scott had manufacturing operations in 22 countries and also had worldwide customers. Kimberly-Clark's dual goals after the merger were to: (1) conduct the combined business operations immediately thereafter as a single company; and (2) establish an organization that was the right size and configuration.

As a result, Kimberly-Clark initially determined that it would dispose of up to 12 mills and cut about 10 percent of its workforce. Consequently, Kimberly-Clark determined that it would be necessary to record a restructuring charge related to the merger with Scott. To establish the amount of the charge, Kimberly-Clark's business units documented desired restructuring programs using "program sheets" that contained a narrative of the planned activities, listed a cost estimate, described the timing of associated expenditures and discussed the expected merger synergies.

Ultimately, Kimberly-Clark's business units submitted cost estimates that totaled $1.502 billion. Donehower exercised his judgment to reduce this amount by $62.6 million, and Kimberly-Clark recorded a $1.44 billion one-time charge during the fourth quarter ended December 31, 1995.

3. Kimberly-Clark Overstated the Original 1995 Charge

Kimberly-Clark filed its 1995 Form 10-K on March 26, 1996. Donehower signed this Form 10-K as Senior Vice President and Chief Financial Officer. Kimberly-Clark expensed approximately $324 million as severance benefits. Approximately $111 million of this amount related to 2,700 employees that Kimberly-Clark notified about their pending termination by December 31, 1995. Kimberly-Clark improperly relied on Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("FAS 5") to accrue approximately $213 million in additional severance costs in connection with a number of employees, many of whom for regulatory reasons could not be notified about their terminations until 1996.

Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3"), required Kimberly-Clark to notify relevant groups of employees of benefit arrangements for terminated employees. Such notification was required before Kimberly-Clark could accrue a liability and record an expense for the related costs. Because the relevant groups of employees had not been notified prior to year-end 1995, Kimberly-Clark improperly expensed approximately $213 million during the fourth quarter of 1995.

During this quarter, Kimberly-Clark incorrectly relied on FAS 5 and expensed certain merger-related expenses as part of the $1.44 billion charge that related to: (1) equipment start-up costs; (2) mill idle time; (3) asset reinstallations; (4) employee relocations; (5) temporary labor and duplicate expenses; (6) transition costs; and (7) other miscellaneous costs providing a future benefit. EITF 94-3 did not permit the accrual of costs to "exit" an activity if the exit cost could be associated with or could benefit activities that would be continued, and, specifically prohibited the accrual of such costs until an obligation existed to pay cash or otherwise sacrifice an enterprise's assets. This additional accrual of approximately $141 million did not qualify as exit costs under EITF 94-3.

4. Kimberly-Clark's Restructuring Reserve Sub-Account

Between 1996 and 1999, Kimberly-Clark's management evaluated the adequacy of the company's restructuring accrual on a quarterly basis to determine whether the company could complete all the programs encompassing its 1995 restructuring plan for the original estimated amount of $1.44 billion. Donehower coordinated this evaluation process with the help of the company's business units and accounting personnel.

On a quarterly basis, Kimberly-Clark's business units calculated whether their original cost estimates encompassing the $1.44 billion charge were still appropriate. In some cases the business unit managers determined that their respective units would need to spend more money for certain programs than they had originally estimated. In other cases, the managers determined their respective units would spend less. Additionally, these managers sometimes identified costs for "new programs" that had not been specifically identified as of December 31, 1995. These managers then forwarded their new cost estimates to Kimberly-Clark's accounting staff to consider their cost reallocation requests and requests for new merger-related programs.

Using a single plan approach, Kimberly-Clark reallocated funds amongst some of the 360 original programs and, in certain instances, allocated amounts to new merger-related programs. If the reallocation requests did not balance, then the difference was added to, or subtracted from, Kimberly-Clark's restructuring reserve sub-account. In certain instances, Kimberly-Clark reallocated accruals to new programs or cost increases to existing programs directly from this restructuring reserve sub-account. Because these amounts were recorded in the restructuring reserve sub-account, Kimberly-Clark's changes in estimates to the restructuring liability were not immediately reflected in the company's income statement, as required by GAAP.

Examples of how Kimberly-Clark accounted for the restructuring reserve sub-account are as follows:

a. Winslow

This Scott tissue facility, located in Winslow, Maine, was marked for disposal at some point during October or November 1995. Consequently, management developed a program for the plant disposal, for which $12.6 million of estimated closing costs were accrued at December 31, 1995. In early 1996, Kimberly-Clark's management determined that Winslow would not be sold but would probably be expanded. Nonetheless, Kimberly-Clark did not release the $12.6 million accrual to earnings. Instead, Kimberly-Clark returned the $12.6 million to its restructuring reserve sub-account and deferred income statement recognition.

b. Gennep

Kimberly-Clark concluded that as a result of the merger it would have excess tissue manufacturing capacity in Europe. As a result, Kimberly-Clark expensed $111.5 million in connection with estimated costs to sell or close a former Scott facility located in Gennep, Netherlands. Approximately $54.8 million of the $111.5 million related to goodwill for the Gennep operations. However, in January 1996, Kimberly-Clark discovered that part of this goodwill appeared to relate to certain brands that Kimberly-Clark would continue to manufacture. Based upon preliminary information, Kimberly-Clark's management determined that potentially $20 million of this goodwill related to brands with excess earning capacity that should not have been written-off. Kimberly-Clark continued to treat the $54.8 million as part of the restructuring accrual until year-end 1996 at which time the $54.8 million was reallocated to the restructuring reserve sub-account instead of being returned to earnings.

c. Hull

The restructuring charge included $102.4 million related to the closure of the Hull, Ontario facility owned by Scott Paper Limited (ASPL@). SPL operated Scott's operations in Canada, and Kimberly-Clark acquired a 50.1 percent interest in SPL in the merger. Kimberly-Clark recorded the $102.4 million charge on the assumption that it would acquire the remaining 49.9 percent interest in SPL and then close the Hull facility. In April 1996, Kimberly-Clark's management announced that it could not reach an agreement with Canadian regulatory authorities regarding divestitures. Consequently, Kimberly-Clark decided to sell its 50.1 percent interest instead of acquiring the remaining 49.9 percent. As a result, management determined that it did not need the $102.4 million accrual because it anticipated a gain on the sale of its 50.1 percent SPL interest and, accordingly, no loss would be realized on Hull. Kimberly-Clark treated the $102.4 million as an amount that it could reallocate towards other qualifying programs. Consequently, Kimberly-Clark transferred the $102.4 million to its restructuring reserve sub-account.

d. Accounts Receivable Adjustments

Before the Kimberly-Clark/Scott merger became final, Kimberly-Clark discovered that Scott salesmen had offered substantial sales incentive programs that had not yet been processed. To cover the costs of these sales incentive programs, $45 million was included as a program in the restructuring plan as of December 31, 1995. Scott's accountants and independent auditor had assured Kimberly-Clark that the original accrual, excluding the $45 million, was sufficient. Antitrust considerations prevented Kimberly-Clark from performing a thorough due diligence of Scott's sales practices prior to the merger. Later in 1996, Kimberly-Clark discovered that the amounts actually claimed under Scott's sales incentive programs were $69 million more than expected. And in 1997, amounts actually claimed by customers were about $30 million more than expected. Rather than charge this $99 million as expenses in those years, Kimberly-Clark increased the amount of this program and charged the $99 million to the restructuring reserve sub-account. Under GAAP, Kimberly-Clark was required to increase its bad debt expense in the period Kimberly-Clark determined the amounts were uncollectible.

e. New Programs

As discussed above, Kimberly-Clark also created a limited number of new merger-related programs that were not specifically identified at the time of recording the original $1.44 billion charge. For example, in 1996 Kimberly-Clark created programs for "end user pricing contracts" and "Scott inventory write-downs." The end user pricing contracts program, for $55 million, consisted of unfavorable contracts that were the result of negotiations prior to the merger by the Scott sales force at unrealistic list prices and with limited controls. Kimberly-Clark charged the losses related to these contracts against the restructuring reserve sub-account instead of recording them as a current period expense as required by GAAP. Kimberly-Clark also recorded a $13.3 million inventory write-down for excessive Scott inventory levels. This amount was also improperly charged against the restructuring reserve sub-account.

5. Kimberly-Clark Released Amounts to Earnings

On a quarterly basis, Kimberly-Clark's business units sent status reports to accounting personnel showing where each program stood versus the planned expenditures. Donehower reviewed these reports and decided how much to keep in the restructuring reserve sub-account and how much to return to earnings. In making this decision, Donehower considered the percent of completion of each program, the time left to complete the program, and the degree of certainty concerning the cost estimate. Donehower also considered the fact that he reduced the original business unit cost estimates by $62.6 million, that certain programs had cost overruns and that new programs were needed. Although Donehower considered these factors, the process he used to determine the appropriate level of the remaining accrual was inconsistent with GAAP because it resulted in Kimberly-Clark's maintaining an accrual for merger-related contingencies on its books.

6. Kimberly-Clark Failed to Comply with GAAP

Accounting Principles Board Opinion No. 20, "Accounting Changes" ("APB 20"), paragraph 31, required Kimberly-Clark to record changes in estimates in "(a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both." APB 20, paragraph 38, required Kimberly-Clark to consider materiality "in relation to both the effects of each change separately and the combined effect of all changes." FAS 5 permits the accrual of a liability if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated.

Kimberly-Clark's methodology for determining the amount released to earnings and its maintenance of a balance in the restructuring reserve sub-account, did not comply with GAAP. For all of the examples previously discussed (i.e., Winslow, Gennep, Hull, etc.), Kimberly-Clark should have followed APB 20, and recorded the changes in estimates in income in the period in which they became known. FAS 5 also did not permit Kimberly-Clark to maintain a balance in the restructuring reserve sub-account on its books.

In addition, Kimberly-Clark's accounting methodology increased the amount of its reported earnings. For example, in 1996, Kimberly-Clark increased its earnings by $65 million, or 3.2 percent, from reductions in the restructuring reserve sub-account. Kimberly-Clark also charged against the restructuring reserve sub-account $69 million, or 3.2 percent of reported pretax income, related to uncollectible Scott accounts receivable balances, and another $95 million, or 4.6 percent of reported pretax income, in new program costs. In the aggregate, Kimberly-Clark's pretax income was increased by approximately 11.0 percent in 1996. Kimberly-Clark's earnings were increased, to a lesser extent in subsequent fiscal years, in a similar manner.

Kimberly-Clark recorded the releases to earnings as a reduction of its "cost of sales," rather than separately classifying the amounts released as a separate line item on its income statement.4 As a result, investors were not informed that a certain portion of Kimberly-Clark's earnings resulted from releases from the restructuring plan. These releases into earnings were $65 million, or 3.2 percent of operating profit in 1996; $58 million, or 4.4 percent of operating profit in 1997; and $10.3 million, or 0.6 percent of operating profit in 1998.

C. Legal Analysis

1. Kimberly-Clark Violated the Reporting Provisions of the Exchange Act

Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Rules 13a-1 and 13a-13, respectively, require issuers to file annual and quarterly reports.

Kimberly-Clark violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder by materially overstating the original 1995 charge and by understating expenses in subsequent periods. Kimberly-Clark also violated these provisions by accounting for the restructuring liability in a manner that was not in conformity with GAAP. Specifically, Kimberly-Clark created and maintained a restructuring reserve sub-account on its books, improperly charged certain expenses against the account, and until March 12,1999, failed to disclose, as a result its earnings had increased.5

2. Donehower Was a Cause of Kimberly-Clark's Violations

Donehower, as Kimberly-Clark's principal financial officer, signed all relevant annual and quarterly reports. He knew or should have known that Kimberly-Clark improperly maintained a restructuring reserve sub-account on its books and made releases from that account that did not comply with GAAP. As a result, Donehower was a cause of Kimberly-Clark's violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.



On the basis of this Order and the Offers of Settlement submitted by the Respondents, the Commission finds that:

  1. Kimberly-Clark violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; and
  2. Donehower was a cause of violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.


In view of the foregoing, the Commission has determined that it is in the public interest to accept the Respondents' Offers of Settlement. Accordingly, IT IS HEREBY ORDERED, effective immediately, that

  1. Kimberly-Clark, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; and
  2. Donehower, pursuant to Section 21C of the Exchange Act, cease and desist from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz


1 The findings herein are made pursuant to Kimberly-Clark's and Donehower's Offers of Settlement and are not binding on any other person or entity in these or any other proceedings.

2 Overall there were about 360 individual programs which Kimberly-Clark treated as a single plan. Individual program costs ranged from less than $10,000 to more than $100 million. Each program varied in scope from those with a single planned action and single charge to more comprehensive programs (e.g., plant closings), which involved multiple write-downs and accruals.

3 As a result, in the restatement of the $1.44 billion charge, for 1996, Kimberly-Clark's quarterly earnings per share were reduced by 25 percent, 20 percent, 28 percent and 31 percent for each quarter respectively. For 1996, Kimberly-Clark's annual earnings per share were reduced by 26 percent. For the first quarter of 1997, Kimberly-Clark's quarterly earnings per share were reduced by 11 percent. For 1997, Kimberly-Clark's annual earnings per share as restated decreased by 10 percent. For 1998, Kimberly-Clark's annual earnings per share were reduced by less than 1 percent. Finally, for the first quarter of 1999, Kimberly-Clark's quarterly earnings per share were reduced by 4 percent. The net cumulative impact of the restatement of the $1.44 billion charge was to decrease Kimberly-Clark's pretax earnings over the entire period from 1995 through the first quarter of 1999 by $20.3 million, or 0.4 percent of Kimberly-Clark's total pretax earnings of $5.5 billion over the same period. On a per share basis, Kimberly-Clark's earnings per share for the same period were unchanged by the restatement of the $1.44 billion charge.

4 If Kimberly-Clark had classified the releases to earnings as "other income," the amount would have exceeded five percent of that line item on the company's income statement in all relevant quarters except the third quarter of 1997 when Kimberly-Clark released no reserves and the third quarter of 1998 when it released only $2.4 million.

5 Kimberly-Clark disclosed in its Form 8-K, filed on March 12, 1999, the total amount released to earnings for the years ended 1996, 1997 and 1998.



Modified: 03/27/2002