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Rating Action:

MOODY'S CONFIRMS Aa2 LONG TERM AND PRIME-1 SHORT TERM RATINGS OF KIMBERLY-CLARK CORPORATION AND THE Aa2 LONG TERM RATINGS OF SCOTT PAPER COMPANY; CHANGES OUTLOOK TO NEGATIVE FROM STABLE.

18 Jul 2003
MOODY'S CONFIRMS Aa2 LONG TERM AND PRIME-1 SHORT TERM RATINGS OF KIMBERLY-CLARK CORPORATION AND THE Aa2 LONG TERM RATINGS OF SCOTT PAPER COMPANY; CHANGES OUTLOOK TO NEGATIVE FROM STABLE.

Approximately $4 Billion of Debt Securities Affected

New York, July 18, 2003 -- Moody's Investors Service today confirmed the Aa2 senior unsecured long term and Prime-1 short term ratings for Kimberly-Clark Corporation, and the Aa2 senior unsecured long term rating for Scott Paper Company, but changed the outlook to negative from stable.

The outlook change to negative is prompted by the decline in Kimberly-Clark's credit metrics for the twelve month period ending 3/31/03, which reflects the weaker operating results registered during the fourth quarter of 2002 and the first quarter of 2003. In addition, the company made two $100 million voluntary contributions to its underfunded U.S. pension plans first in December and then again in March, which reduced the amount of cash flow available for debt reduction. As a result, the Retained Cash Flow to Debt + Preferred Stock Ratio dropped from 45.2% at FYE 2001 to 44.8% at FYE 2002 and then to 40.0% for the LTM period ending 3/31/03.

Despite achieving modest volume gains across all product categories during these two quarters the company continued to suffer from weak top-line growth which is primarily attributed to the heavy promotional activity in the diaper and training pant segment due to heated competition from Proctor & Gamble in addition to the intense competitive pricing environment that exists across the consumer packaged goods industry . Although the protracted diaper war with P&G appears to have ended sometime during the second quarter, the company expects its second quarter operating results to be similar to those achieved during the first quarter; as a result, leverage ratios on a LTM basis as of 6/30/03 will deteriorate further unless there is a significant reduction in debt levels. Moody's notes that the company undertook several cost reduction initiatives at the beginning of the year with the objective of generating total cost savings of $175 to $200 million for the year; $40 million of such cost reductions were realized during the first quarter. The company also anticipates launching several new products during the second half of the year that could generate some revenue growth and additional operating cash flow.

Kimberly-Clark does not intend to make any additional voluntary contributions to its pension plans this year; however, the company's operating results will continue to be negatively impacted by the projected $140 million increase in pension expense that is expected to total $170 million for the year. The increase in pension expense is a direct accounting result of the company's underfunded pension plans that also forced the company to increase its minimum pension liability, which is included in noncurrent employee benefit and other obligations on the balance sheet, to an amount in excess of $1.0 billion at FYE 2002. Like many companies Kimberly-Clark's funding policy with regard to its qualified defined benefit plans in North America and the United Kingdom is to contribute assets to fully fund the accumulated benefit obligation ("ABO") and, if there is any shortfall, to fully cover that deficit over a reasonable amount of time. While Kimberly-Clark has the financial wherewithal to make larger contributions to close the current deficit more quickly, its practice is to fund only those amounts that can generate useable tax credits for the company during any given year. Moody's considers underfunded pension liabilities as "debt-like" and includes the pension benefit obligation ("PBO) amount when calculating adjusted debt cash flow ratios (which also include capitalized operating leases). When including the tax adjusted underfunded PBO amount the company's Retained Cash Flow to Adjusted Debt + Preferred Stock Ratio shows a more pronounced decline from 33.4% at FYE 2001 to 30.9% at FYE 2002 and then to 27.8% at 3/31/03 (adjusted for $100 million contribution made in March).

In the face of relatively flat revenues and earnings over the last two years, Kimberly-Clark's financial policy of utilizing excess cash flow to buy back 2% of shares and fund annual increases in the dividend has remained unchanged, which has resulted in a $1.0 billion increase in Total Debt (Debt + Preferred Stock) over the last several years. The combination of the recent $100 million pension contributions, continued share repurchases, and higher dividend pay-out ratio, coupled with the recent lower level of operating earnings, have contributed to the current weakened credit metrics. At this stage it is too early to determine what impact the recent surge in equity values may have on the company's underfunded pension plans and minimum pension liability for FYE 2003 or the correlated amount of pension expense to be incurred in 2004. However, Moody's believes that additional contributions consistent with the past few years will likely have to be made over the next couple of years before the current underfunded pension issue is resolved. In the interim, these contributions along with share repurchases and dividend payments will continue to impinge on the amount of cash flow available to reduce debt unless there is a change in the company's financial policy or a resurgence in operating results and a return to 20%+ operating margins, which is unlikely to happen in today's more competitive pricing environment over the near term. Over the intermediate term, a continued slide in the above cash flow ratios leading to further debt creep could result in a modest downgrade.

Kimberly-Clark's ratings reflect its strong market share positions in non-cyclical paper-related products, its solid track record of new product innovations and cash flow stability. While the company has historically spent relatively less on brand building through advertising, its well-integrated supply chain allows it to maintain strong shelf presence in stores with good quality of service to retailers and a competitive cost structure. The company also benefits from the roll-out of tissue machines using a patented technology that uses less fiber and thus helps to reduce raw materials costs. The ratings also reflect a lack of product category diversity relative to other large consumer products companies and a concentration of sales in the mature North American markets although the company has continued to expand its presence overseas over the last several years.

Based in Irving, Texas, Kimberly-Clark is a leading global manufacturer of tissue, personal care and health care products.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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