Kimberly-Clark - 10-Q quarterly report FY

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

(Unaudited)

See Notes to Consolidated Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

See Notes to Consolidated Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(Unaudited)

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

See Notes to Consolidated Financial Statements.

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  Accounting Policies

The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP 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, 2008.

In accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events, management has evaluated events occurring subsequent to June 30, 2009 through August 7, 2009, the date of filing the Form 10-Q with the Securities and Exchange Commission, to determine if any such events should either be recognized or disclosed in these condensed Consolidated Financial Statements.

In accordance with the FSP, the Corporation’s basic and diluted earnings per share amounts have been recast from amounts previously reported as follows:

Note 1.  (Continued)

Effective June 30, 2009, the Corporation adopted FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.  The required additional disclosures are included in Note 2.

Effective June 30, 2009, the Corporation adopted FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  This FSP amends the other-than-temporary impairment guidance for debt securities to make it more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. Adoption of the FSP did not have a material effect on the Corporation’s financial statements.

 

Effective June 30, 2009, the Corporation adopted FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  This FSP provides guidance for estimating fair values when there is no active market or where the price inputs being used represent distressed sales and identifying circumstances that indicate a transaction is not orderly.  Adoption of the FSP did not have a material effect on the Corporation’s financial statements.

In December 2008, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. The FSP requires disclosure about the fair values of plan assets held in an employer’s defined benefit pension or other postretirement plan, including:

The FSP is effective for fiscal years ending after December 15, 2009.  Since the FSP only requires additional disclosures, it will not have a financial impact on the Corporation’s financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”).  Under current GAAP, a company must consolidate any entity in which it has a “controlling interest”, whichcan be based on a quantitative analysis.  SFAS 167 requires that a company must perform a qualitative analysis when determining whether it must consolidate a variable interest entity (“VIE”).  Under SFAS 167, if the company has an interest in aVIE that provides it with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performanceand the obligation to absorb losses or theright to receive benefits of the VIE that potentially could be significant to the VIE, the company must consolidate the VIE.  SFAS 167 requires ongoing reassessments to determine if a company must consolidate a VIE.  This differs from existing guidance, which requires a company to determine whether to consolidate a VIE only when specific events occur.  SFAS 167 is effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2009, and early adoption is prohibited.  The Corporation is currently evaluating SFAS 167 to determine if it must deconsolidate its monetization financing entities and its Luxembourg-based financing subsidiary.  Deconsolidation, if required, will not have a significant effect on earnings.  The Corporation is also assessing the effect of SFAS 167 on certain of its real estate entities.

Note 1.  (Continued)

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS 162(“SFAS 168”).  The Codification is effective for financial statements issued for interim or annual periods ending after September 15, 2009 and is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.  As of the effective date of SFAS 168, all nongrandfathered non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative.  Adoption of SFAS 168 will not have a financial impact on the Corporation’s financial statements.

The following information is presented in accordance with the requirements of SFAS No. 157, Fair Value Measurements (“SFAS 157”).  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:

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.

Set forth below are the assets and liabilities that are measured on a recurring basis at fair value as of June 30, 2009, together with the inputs used to develop those fair value measurements.  The Corporation has no assets or liabilities for which fair value was measured on a recurring basis using Level 3 inputs.

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.

Note 2.  (Continued)

Level 1 Fair Values - The fair values of available-for-sale securities are based on quoted market prices in active markets for identical assets.  Unrealized losses on these securities aggregating $6 million have been recorded in other comprehensive income until realized.  The unrealized losses have not been recognized in earnings because the Corporation has both the intent and ability to hold the securities for a period of time sufficient to allow for an anticipated recovery of fair value to the cost of such securities.

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 interest rate swap curves and NYMEX price quotations, respectively.  The fair value of hedging instruments used to manage foreign currency risk is based on quotations of spot currency rates and forward points, which are converted into implied forward currency rates.  Additional information on the Corporation’s use of derivative instruments is contained in Note 8.

As of June 30, 2009, the Consolidated Balance Sheet contains the following financial instruments, for which disclosure of fair value is required pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments, as amended by FSP FAS 107-1 and APB 28-1.

Note 2.  (Continued)

The following summarizes the terms of the notes and the monetization loans as of June 30, 2009 (millions of dollars):

The difference between the carrying amount of the notes and their fair value represents an unrealized loss position for which an other-than-temporary impairment has not been recognized in earnings because the Corporation does not have the intent to sell and has both the intent and ability to hold the notes for a period of time sufficient to allow for an anticipated recovery of fair value to the carrying amount of the notes.  Neither the notes nor the monetization loans are traded in active markets.  Accordingly, their fair values were calculated using a floating rate pricing model that compared the stated spread to the fair value spread to determine the price at which each of the financial instruments should trade.  The model used the following inputs to calculate fair values: current LIBOR rate, fair value credit spread, stated spread, maturity date and interest payment dates.

In June 2009, the Corporation announced actions to reduce its worldwide salaried workforce by approximately 1,600 positions by the end of 2009.  These actions are estimated to result in cumulative pretax charges of approximately $140 to $150 million by the end of 2009.  A pretax charge of $110 million ($78 million after-tax) was recorded in the quarter ended June 30, 2009.

Termination benefits related to the staff reductions were accrued in accordance with the requirements of SFAS No. 112, Employer’s Accounting for Postemployment Benefits and SFAS No. 88, Employer’s Accounting for Settlements and Curtailments of Defined Benefits Pension Plans and for Termination Benefits (“SFAS 88”), as appropriate.  Substantially all the benefits under these programs will be paid by the end of 2009.

Note 3.  (Continued)

Costs of these actions are recorded at the business segment and corporate levels as follows:

On a geographic area basis $76 million of the charges were recorded in North America and $34 million in Europe.

The charges are included in the following income statement captions:

At June 30, 2009, no severance payments had been made under this initiative.

Note 4.  Inventories

The following schedule presents inventories by major class:

Note 4.  (Continued)

The Corporation uses the LIFO method of valuing inventory for financial reporting purposes for most U.S. inventories.  Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs.  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.

Note 5.  Employee Postretirement Benefits

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

During the first and second quarters of 2009, the Corporation made cash contributions of approximately $90 million and $405 million, respectively, to its pension trusts.  During the first and second quarters of 2008, the Corporation made cash contributions of approximately $36 million and $17 million, respectively, to its pension trusts.  The Corporation currently anticipates contributing about $530 million for the full year 2009 to its pension trusts.

Note 5.  (Continued)

Note 6.  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 is reconciled to those used in the basic and diluted EPS computations as follows:

Options outstanding during the three- and six-month periods ended June 30, 2009 to purchase 26.3 million and 25.2 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.

Note 6.  (Continued)

Options outstanding during the three- and six-month periods ended June 30, 2008 to purchase 10.1 million and 8.8 million shares of common stock, respectively, were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares during the periods.

The number of common shares outstanding as of June 30, 2009 and 2008 was 414.3 million and 416.2 million, respectively.

Note 7.  Stockholders’ Equity

Effective January 1, 2009, the Corporation adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”), as required.

SFAS 160 changes the classification of noncontrolling interests (formerly, minority owners’ interest 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:

Adoption of SFAS 160 is prospective; however, prior year amounts in the Consolidated Financial Statements have been recast to conform to the following requirements of SFAS 160:

Set forth below is a reconciliation of comprehensive income and stockholders’ equity attributable to

Kimberly-Clark Corporation and noncontrolling interests for the six months ended June 30, 2009 and 2008.  Also reconciled for the same periods are the redeemable preferred and common securities of subsidiaries, which are required to be classified outside of stockholders’ equity.

Note 7.  (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 six months ended June 30, 2009 are primarily due to a weakening of the U.S. dollar versus the Australian dollar, Brazilian real and British pound.

Note 7.  (Continued)

SFAS 160 requires that the purchase of additional ownership in an already controlled subsidiary be treated as an equity transaction with no gain or loss recognized in consolidated net income or comprehensive income.  However, SFAS 160 also requires the presentation of the below schedule displaying the effect of a change in ownership interest between the Corporation and a noncontrolling interest.

Note 8.  Risk Management

As a multinational enterprise, the Corporation is exposed to risks, such as changes in foreign currency exchange rates, interest rates, commodity prices and certain investments in its defined benefit pension plans.  A variety of practices is employed to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments.  On the date the derivative contract is entered into, the Corporation formally designates certain derivatives either as cash flow, fair value or net investment hedges (each discussed below), including how the effectiveness of these hedges will be assessed and measured.  This process links the derivatives to the transactions or financial balances they are hedging.  Changes in the fair value of derivatives not designated as hedging instruments are recorded to earnings when they occur.

The Corporation’s policies allow the use of derivatives for risk management purposes and prohibit their use for speculation.  The Corporation’s policies also prohibit the use of any leveraged derivative instrument.  Foreign currency derivative instruments, interest rate swaps and natural gas hedging contracts are entered into with major financial institutions.

The Corporation has a centralized U.S. dollar functional currency international treasury operation (“In-House Bank”) that manages foreign currency exchange risks by netting exposures on a daily basis of recorded assets and liabilities of its non-U.S. dollar exposures and entering into derivative instruments with third parties whenever the net exposure in any single currency exceeds predetermined limits.  These derivative instruments are not designated as hedging instruments.  Changes in the fair value of these instruments are recorded in earnings when they occur.  The In-House Bank also records the gain or loss on the translation of its non-U.S. dollar denominated monetary assets and liabilities in earnings.  Consequently, the effect on earnings from the use of these non-designated derivatives is substantially neutralized by the recorded transactional gains and losses.  The In-House Bank’s daily notional derivative positions with third parties averaged approximately $1.2 billion in the first six months of 2009 and its average net exposure for the period was $1.0 billion.  The In-House Bank used eight counterparties for its foreign exchange derivative contracts.

The Corporation enters into derivative instruments to hedge a portion of the foreign currency exposures of its non-U.S. operations principally for their forecasted purchases of pulp, which are priced in U.S. dollars.  The derivative instruments used to manage these exposures are designated and qualify as cash flow hedges.  The Corporation also hedges a portion of the foreign currency exposures of its non-U.S. operations for imported intercompany finished goods priced in U.S. dollars and euros through the use of derivative instruments that are designated and qualify as cash flow hedges.  Gains and losses on these cash flow hedges, to the extent effective, are recorded in other comprehensive income net of related income taxes and released to earnings as the related finished goods inventory containing the pulp and imported intercompany finished goods are sold to unaffiliated customers.  As of June 30, 2009, the Corporation had approximately $518 million of outstanding derivative contracts designated as cash flow hedges for the forecasted purchases of pulp and forecasted purchases of intercompany finished goods.

The foreign currency exposure on intercompany loans of a long-term investment nature is hedged with derivative instruments with third parties.  These derivatives are not designated as hedging instruments.  At June 30, 2009, the notional amount of these derivative positions was $314 million.

Note 8.  (Continued)

Translation adjustments result from translating foreign entities’ financial statements into U.S. dollars from their functional currencies.  Translation exposure generally is not hedged.  However, consistent with prior years, a portion of the Corporation’s net investment in its Mexican affiliate has been hedged.  At June 30, 2009, the Corporation had in place net investment hedges of approximately $67 million for a portion of its investment in its Mexican affiliate.  There was no significant ineffectiveness on these hedges as of June 30, 2009.

Interest rate risk is managed using a portfolio of variable- and fixed-rate debt composed of short- and long-term instruments and interest rate swaps.  The objective is to maintain a cost-effective mix that management deems appropriate.  From time to time, the Corporation enters into interest rate swap contracts, which are derivative instruments, to facilitate the maintenance of the desired ratio of variable- and fixed-rate debt.  These derivative instruments are designated and qualify as fair value hedges.  At June 30, 2009, the Corporation had no interest rate swap contracts in place.

From time to time, the Corporation uses derivatives to hedge the anticipated issuance of fixed-rate debt.  These exposures are hedged with forward-starting swaps or “treasury locks” (e.g., a 10-year “treasury lock” hedging the anticipated underlying U.S. Treasury interest rate related to issuance of 10-year debt).  At June 30, 2009, the Corporation had several outstanding forward-starting swaps with an aggregate notional value of $250 million.

The Corporation uses derivative instruments to offset a portion of its exposure to market risk arising from changes in the price of natural gas.  Hedging of this risk is accomplished by entering into forward swap contracts, which are designated as cash flow hedges of specific quantities of natural gas expected to be purchased in future months.

As of June 30, 2009, the Corporation had outstanding commodity forward contracts to hedge forecasted purchases of about 40 percent of the Corporation’s estimated natural gas requirements for the balance of the current year and a lesser percentage for future periods.

When deemed appropriate, certain of the Corporation’s defined benefit pension trusts execute hedging strategies to manage the price risk applicable to equity investments.  These strategies are designed to limit the downside exposure of equity investments by trading off upside potential above an acceptable level.  In June 2009, zero-cost equity collars were established to protect potential losses up to a certain level and to allow realization of potential gains up to a certain level on $1.0 billion of U.S. equity exposure in the Corporation’s U.S. pension trust from June 2 to December 30, 2009.

Note 8.  (Continued)

Derivative instruments that are designated and qualify as fair value hedges are used by the Corporation to manage interest rate risk and certain U.S. dollar denominated intercompany debt of non-U.S. affiliates.  The realized gain or loss on the derivatives that hedge interest rate risk is amortized to interest expense over the life of the related debt.   The fair values of these instruments are recorded as an asset or liability, as appropriate, with the offset recorded in current earnings.  The offset to the change in fair values of the hedged debt instruments also is recorded in current earnings.  Changes in the fair value of derivative instruments that hedge the U.S. dollar denominated intercompany debt are recorded in current earnings as well as the change in fair value of the hedged intercompany debt.

Fair value hedges resulted in no significant ineffectiveness in the three-month period ended June 30, 2009.  For the six-month periods ended June 30, 2009 and 2008, no gain or loss was recognized in earnings as a result of a hedged firm commitment no longer qualifying as a fair value hedge.

For derivative instruments that are designated and qualify as cash flow hedges (e.g., hedging a portion of the currency exposure on the forecasted U.S. dollar denominated purchases of pulp by the Corporation’s non-U.S. subsidiaries), the effective portion of the gain or loss on the derivative instrument is initially recorded in other comprehensive income and reclassified to income in the same period that the hedged exposure affects income.  Changes in the fair values of derivative instruments used to hedge the price of natural gas, to the extent effective, are recorded in other comprehensive income, net of related income taxes, and recognized in income at the time the cost of the natural gas is recognized in income.

The Corporation’s cash flow hedges resulted in no significant ineffectiveness in the six-month period ended June 30, 2009.  For the six-month periods ended June 30, 2009 and 2008, no gains or losses were reclassified into earnings as a result of the discontinuance of cash flow hedges due to the original forecasted transaction no longer being probable of occurring within the time frames specified in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  At June 30, 2009, $24 million of after-tax losses are expected to be reclassified from accumulated other comprehensive income primarily to cost of sales during the next twelve months, consistent with the timing of the underlying hedged transactions.  The maximum maturity of cash flow hedges in place at June 30, 2009 is December 2011.

Certain of the Corporation’s derivative agreements contain credit support provisions that require posting collateral if certain value or ratings thresholds are exceeded.  As of June 30, 2009, the Corporation had posted no collateral under these agreements, which have a contract value of approximately $30 million.

The following tables display the location and fair values of derivative instruments presented in the Corporation’s Consolidated Balance Sheet and the location and amount of gains and losses reported in the Corporation’s Consolidated Income Statement and Statement of Other Comprehensive Income (“OCI”).

Note 8.  (Continued)

Note 8.  (Continued)

Note 8.  (Continued)

Note 9.  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 Corporation’s strategic cost reductions to streamline its manufacturing and administrative operations that commenced in the third quarter of 2005 and were completed by December 31, 2008.

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

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