kc_10q-2q09.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 June 30, 2009

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


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

Commission file number 1-225

KIMBERLY-CLARK CORPORATION
(Exact name of registrant as specified in its charter)

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

P. O. Box 619100
Dallas, Texas
75261-9100
(Address of principal executive offices)
(Zip Code)

(972) 281-1200
(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 July 31, 2009, there were 414,492,692 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
  
Six Months Ended
  
   
June 30
  
June 30
  
(Millions of dollars, except per share amounts)
  
2009
  
2008
  
2009
  
2008
  
                           
Net Sales
  
$
4,727
  
$
5,006
  
$
9,220
  
$
9,819
  
Cost of products sold
    
3,154
    
3,522
    
6,193
    
6,879
  
                           
Gross Profit
    
1,573
    
1,484
    
3,027
    
2,940
  
Marketing, research and general expenses
    
923
    
827
    
1,672
    
1,626
  
Other (income) and expense, net
    
41
    
7
    
118
    
-
  
                           
Operating Profit
    
609
    
650
    
1,237
    
1,314
  
Interest income
    
6
    
8
    
14
    
16
  
Interest expense
    
(71
)
  
(74
)
  
(144
)
  
(148
)
                           
Income Before Income Taxes, Equity Interests and Extraordinary Loss
    
544
    
584
    
1,107
    
1,182
  
Provision for income taxes
    
(158
)
  
(174
)
  
(322
)
  
(339
)
                           
Income Before Equity Interests and Extraordinary Loss
    
386
    
410
    
785
    
843
  
Share of net income of equity companies
    
44
    
49
    
76
    
92
  
Extraordinary loss, net of income taxes
    
-
    
(8
)
  
-
    
(8
)
                           
Net Income
    
430
    
451
    
861
    
927
  
Net income attributable to noncontrolling interests
    
(27
)
  
(34
)
  
(51
)
  
(69
)
                           
Net Income Attributable to Kimberly-Clark Corporation
  
$
403
  
$
417
  
$
810
  
$
858
  
                           
Per Share Basis:
                          
                           
Basic
                          
Before extraordinary loss
  
$
.97
  
$
1.01
  
$
1.95
  
$
2.06
  
Extraordinary loss
    
-
    
(.02
)
  
-
    
(.02
)
Net Income Attributable to Kimberly-Clark Corporation
  
$
.97
  
$
.99
  
$
1.95
  
$
2.04
  
                           
Diluted
                          
Before extraordinary loss
  
$
.97
  
$
1.01
  
$
1.95
  
$
2.05
  
Extraordinary loss
    
-
    
(.02
)
  
-
    
(.02
)
Net Income Attributable to Kimberly-Clark Corporation
  
$
.97
  
$
.99
  
$
1.95
  
$
2.03
  
                           
Cash Dividends Declared
  
$
.60
  
$
.58
  
$
1.20
  
$
1.16
  

See Notes to Consolidated Financial Statements.

 
 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)

 
June 30,
  
December 31,
(Millions of dollars)
2009
  
2008
             
ASSETS
            
             
Current Assets
            
Cash and cash equivalents
$
591
  
$
364
  
Accounts receivable, net
  
2,331
    
2,492
  
Inventories
  
2,058
    
2,493
  
Other current assets
  
484
    
464
  
Total Current Assets
  
5,464
    
5,813
  
             
Property
  
16,331
    
15,723
  
Less accumulated depreciation
  
8,523
    
8,056
  
Net Property
  
7,808
    
7,667
  
             
Investments in Equity Companies
  
369
    
324
  
             
Goodwill
  
2,981
    
2,743
  
             
Long-Term Notes Receivable
  
605
    
603
  
             
Other Assets
  
919
    
939
  
 
$
18,146
  
$
18,089
  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
             
Current Liabilities
            
Debt payable within one year
$
373
  
$
1,083
  
Accounts payable
  
1,512
    
1,603
  
Accrued expenses
  
2,000
    
1,723
  
Other current liabilities
  
421
    
343
  
Total Current Liabilities
  
4,306
    
4,752
  
             
Long-Term Debt
  
5,490
    
4,882
  
Noncurrent Employee Benefits
  
1,962
    
2,593
  
Long-Term Income Taxes Payable
  
151
    
189
  
Deferred Income Taxes
  
209
    
193
  
Other Liabilities
  
205
    
187
  
Redeemable Preferred and Common Securities of
    Subsidiaries
  
1,046
    
1,032
  
             
Stockholders’ Equity
            
Kimberly-Clark Corporation
  
4,496
    
3,878
  
Noncontrolling Interests
  
281
    
383
  
Total Stockholders’ Equity
  
4,777
    
4,261
  
             
 
$
18,146
  
$
18,089
  

See Notes to Consolidated Financial Statements.

 
- 3 -
 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(Unaudited)

   
Six Months
  
   
Ended June 30
  
(Millions of dollars)
  
2009
  
2008
  
               
Operating Activities
              
Net income
  
$
861
  
$
927
  
Extraordinary loss, net of income taxes
    
-
    
8
  
Depreciation and amortization
    
367
    
400
  
Stock-based compensation
    
28
    
25
  
Decrease (increase) in operating working capital
    
886
    
(193
)
Deferred income taxes
    
(63
)
  
50
  
Net losses on asset dispositions
    
21
    
17
  
Equity companies’ earnings in excess of dividends paid
    
(51
)
  
(53
)
Postretirement benefits
    
(354
)
  
(4
)
Other
    
(6
)
  
20
  
               
Cash Provided by Operations
    
1,689
    
1,197
  
               
Investing Activities
              
Capital spending
    
(396
)
  
(434
)
Acquisition of businesses, net of cash acquired
    
(165
)
  
(76
)
Proceeds from sales of investments
    
19
    
39
  
Proceeds from dispositions of property
    
2
    
1
  
Net (increase) decrease in time deposits
    
(40
)
  
44
  
Investments in marketable securities
    
-
    
(9
)
Other
    
(16
)
  
(1
)
               
Cash Used for Investing
    
(596
)
  
(436
)
               
Financing Activities
              
Cash dividends paid
    
(488
)
  
(468
)
Net (decrease) increase in short-term debt
    
(86
)
  
213
  
Proceeds from issuance of long-term debt
    
2
    
34
  
Repayments of long-term debt
    
(32
)
  
(35
)
Cash paid on redeemable preferred securities of subsidiary
    
(26
)
  
(20
)
Shares purchased from noncontrolling interests
    
(278
)
  
-
  
Proceeds from exercise of stock options
    
23
    
67
  
Acquisitions of common stock for the treasury
    
(6
)
  
(437
)
Other
    
2
    
(33
)
               
Cash Used for Financing
    
(889
)
  
(679
)
               
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
23
    
(9
)
Increase in Cash and Cash Equivalents
    
227
    
73
  
Cash and Cash Equivalents, beginning of year
    
364
    
473
  
               
Cash and Cash Equivalents, end of period
  
$
591
  
$
546
  

See Notes to Consolidated Financial Statements.

 
- 4 -
 

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)

   
Three Months
Ended June 30
    
Six Months
Ended June 30
  
(Millions of dollars)
  
2009
    
2008
    
2009
    
2008
  
                         
Net Income
  
$
430
    
$
451
    
$
861
    
$
927
  
                                 
Other Comprehensive Income, Net of Tax:
                                
Unrealized currency translation adjustments
    
646
      
39
      
285
      
330
  
Employee postretirement benefits
    
145
      
6
      
177
      
-
  
Other
    
(9
)
    
10
      
(15
)
    
(12
)
Total Other Comprehensive Income, Net of Tax
    
782
      
55
      
447
      
318
  
                                 
Comprehensive Income
    
1,212
      
506
      
1,308
      
1,245
  
Comprehensive income attributable to noncontrolling interests
    
62
      
19
      
53
      
40
  
                                 
Comprehensive Income Attributable to Kimberly-Clark Corporation
  
$
1,150
    
$
487
    
$
1,255
    
$
1,205
  

See Notes to Consolidated Financial Statements.

 
- 5 -
 

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 (“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.


New Accounting Standards

Effective January 1, 2009, the Corporation adopted FASB Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, as required.  The FSP specifies that certain share-based payment awards that are entitled to nonforfeitable dividends or dividend equivalents 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 between common stockholders and participating securities.

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

   
As Previously Reported
    
As Recast
  
   
Basic
    
Diluted
    
Basic
    
Diluted
  
                         
2008:
                        
First Quarter
  
$
1.05
    
$
1.04
    
$
1.05
    
$
1.04
  
Second Quarter
    
1.00
      
0.99
      
0.99
      
0.99
  
Six Months
    
2.05
      
2.04
      
2.04
      
2.03
  
Third Quarter
    
1.00
      
0.99
      
0.99
      
0.99
  
Fourth Quarter
    
1.01
      
1.01
      
1.01
      
1.01
  
Full Year
    
4.06
      
4.04
      
4.04
      
4.03
  
                                 
2007
    
4.13
      
4.09
      
4.11
      
4.08
  
                                 
2006
    
3.27
      
3.25
      
3.26
      
3.24
  


 
- 6 -
 

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:

  
•
  
how investment allocation decisions are made,
  
•
  
major categories of plan assets,
  
•
  
inputs and valuation techniques used to measure fair value,
  
•
  
the effect of fair value measurements using significant unobservable inputs on year-to-year changes in plan assets, and
  
•
  
significant concentrations of risk within plan assets.

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”, which can 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 a VIE that provides it with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right 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.


 
- 7 -
 

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.

 
 
Note 2.  Fair Value Measurements

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:

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.

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.

       
Fair Value
Measurements
  
(Millions of dollars)
  
June 30,
2009
  
 
Level 1
  
Level 2
  
               
Assets
              
Company-owned life insurance (“COLI”)
  
$  40
  
$   -
  
$  40
  
Available-for-sale securities
  
11
  
11
  
-
  
Derivatives
  
75
  
-
  
75
  
               
   Total
  
$126
  
$11
  
$115
  
               
Liabilities
              
Derivatives
  
$150
  
$   -
  
$150
  

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.

 
- 8 -
 

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.

Fair Value Disclosures

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.

             
   
Carrying
    
Estimated
  
(Millions of dollars)
  
Amount
    
Fair Value
  
 Assets
            
Cash and cash equivalents(a)
  
$
591
    
$
591
  
Time deposits(b)
    
166
      
166
  
Long-term notes receivable(c)
    
605
      
575
  
                 
Liabilities and Redeemable Preferred and Common Securities of Subsidiaries
                
                 
Short-term debt(d)
    
330
      
330
  
Long-term monetization loans(c)
    
616
      
611
  
Other long-term debt(e)
    
4,917
      
5,290
  
Redeemable preferred and common securities of subsidiaries(f)
    
1,046
      
1,115
  

 
(a)
Cash equivalents are comprised of certificates of deposit, time deposits and other interest-bearing investments with original maturity dates of 90 days or less, all of which are recorded at cost, which approximates fair value.

 
(b)
Time deposits are comprised of deposits with original maturities of more than 90 days but less than one year, all of which are recorded at cost, which approximates fair value.

 
(c)
Long-term notes receivable represent held-to-maturity securities, which arose from the sale of nonstrategic timberlands and related assets.  The notes, which are backed by irrevocable standby letters of credit issued by money center banks, are held by two consolidated financing entities. The financing entities have outstanding long-term monetization loans secured by the notes.  The maturity dates of the two loans were extended in June 2009.  This extension had no effect on the primary beneficiary determination.  The Corporation remains the primary beneficiary and continues to consolidate the financing entities.

 
- 9 -
 

Note 2.  (Continued)

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

 
Description
  
Face Value
  
Carrying
Amount
  
 
Maturity
  
 
Interest Rate(1)(2)
Note 1
  
$397
  
$391
  
09/30/2014
  
LIBOR minus 15 bps
Note 2
  
220
  
214
  
07/07/2011
  
LIBOR minus 12.5 bps
Loan 1
  
397
  
396
  
09/30/2010
  
LIBOR plus 127 bps
Loan 2
  
220
  
220
  
07/01/2010
  
LIBOR plus 110 bps

(1)  Payable quarterly
(2)  3-month LIBOR

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.

 
(d)
Short-term debt is comprised of U.S. commercial paper with original maturities up to 90 days and other similar short-term debt issued by non-U.S. subsidiaries, all of which are recorded at cost, which approximates fair value.

 
(e)
Other long-term debt includes the current portion ($43 million) of these debt instruments.

 
(f)
The Redeemable Preferred Securities are not traded in active markets.  Accordingly, their fair values were calculated using a pricing model that compares the stated spread to the fair value spread to determine the price at which each of the financial instruments should trade.  The model uses the following inputs to calculate fair values: current benchmark rate, fair value spread, stated spread, maturity date and interest payment dates.  The fair values of the Redeemable Common Securities were based on an independent third-party appraisal.


Note 3.  Organization Optimization Initiative

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.

 
- 10 -
 

Note 3.  (Continued)

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

(Millions of dollars)
    
Three Months
Ended June 30
2009
  
Personal Care
  
$
41
  
Consumer Tissue
    
42
  
K-C Professional & Other
    
14
  
Health Care
    
6
  
Corporate & Other
    
7
  
  Total
  
$
110
  

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:

 
Three Months
 
Ended June 30
(Millions of dollars)
2009
Cost of products sold
$
27
  
Marketing, research and general expenses
  
83
  
Provision for income taxes
  
(32
)
Net Charges
$
78
  

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


Note 4.  Inventories

The following schedule presents inventories by major class:

       
   
June 30, 2009
  
December 31, 2008
  
 
Summary of Inventories (Millions of dollars)
  
LIFO
    
Non-
LIFO
    
Total
    
LIFO
    
Non-
LIFO
    
Total
    
                                       
At the lower of cost determined on the
                                                  
FIFO or weighted-average cost methods
                                                  
or market:
                                                  
Raw materials
  
 $
122
    
$
261
    
$
383
    
$
150
    
$
367
    
$
517
    
Work in process
    
183
      
119
      
302
      
246
      
133
      
379
    
Finished goods
    
549
      
737
      
1,286
      
758
      
832
      
1,590
    
Supplies and other
    
-
      
278
      
278
      
-
      
262
      
262
    
     
854
      
1,395
      
2,249
      
1,154
      
1,594
      
2,748
    
                                                   
Excess of FIFO or weighted-average
                                                  
cost over LIFO cost
    
(191
)
    
-
      
(191
)
    
(255
)
    
-
      
(255
)
  
                                                   
Total
  
$
663
    
$
1,395
    
$
2,058
    
$
899
    
$
1,594
    
$
2,493
    


 
- 11 -
 

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:

 
Defined
  
Other Postretirement
 
Benefit Plans
  
Benefit Plans
 
Three Months Ended June 30
(Millions of dollars)
2009
  
2008
  
2009
  
2008
  
                         
Service cost
$
17
  
$
19
  
$
3
  
$
4
  
Interest cost
  
77
    
83
    
11
    
12
  
Expected return on plan assets
  
(67
)
  
(95
)
  
-
    
-
  
Recognized net actuarial loss (gain)
  
25
    
15
    
-
    
(1
)
Curtailment
  
21
    
-
    
-
    
-
  
Other
  
-
    
3
    
1
    
1
  
Net periodic benefit cost
$
73
  
$
25
  
$
15
  
$
16
  


 
Defined
  
Other Postretirement
 
Benefit Plans
  
Benefit Plans
 
Six Months Ended June 30
(Millions of dollars)
2009
  
2008
  
2009
  
2008
  
                         
Service cost
$
33
  
$
39
  
$
6
  
$
7
  
Interest cost
  
154
    
165
    
24
    
25
  
Expected return on plan assets
  
(132
)
  
(189
)
  
-
    
-
  
Recognized net actuarial loss
  
68
    
29
    
-
    
-
  
Curtailment
  
21
    
-
    
-
    
-
  
Other
  
1
    
7
    
2
    
2
  
Net periodic benefit cost
$
145
  
$
51
  
$
32
  
$
34
  


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.

 
- 12 -
 

Note 5.  (Continued)

In April 2009, the Corporation took action with respect to its U.S. defined benefit pension and supplemental benefit plans to provide that no future compensation and benefit service will be accrued under these plans, other than for certain employees subject to collective bargaining agreements, for plan years after December 31, 2009 (“DB Pension Freeze”).  In addition, the Corporation took action with respect to its Incentive Investment Plan (a 401(k) plan), Retirement Contribution Plan and Retirement Contribution Excess Benefit Program to discontinue all contributions to these plans for future plan years (other than for certain employees subject to collective bargaining agreements).  These changes will not affect benefits earned by participants prior to January 1, 2010.

Also in April, the Corporation announced that it intends to adopt, effective January 1, 2010, a new 401(k) profit sharing plan, and amend its supplemental plan, to provide for a matching contribution of 100 percent of a U.S. employee’s contributions to the plans, to a yearly maximum of four percent of eligible compensation, as well as a discretionary profit sharing contribution, in which contributions will be based on the Corporation’s profit performance.  Except for certain employees subject to collective bargaining agreements, U.S. participants’ investment balances in the Corporation’s existing 401(k) plan and Retirement Contribution Plan will be transferred to the new 401(k) plan.
 
The U.S. DB Pension Freeze resulted in a pension curtailment charge under SFAS 88 aggregating $21 million in the second quarter of 2009 due to the write-off of applicable unamortized prior service costs.  As a result of the curtailment, plan assets and projected benefit obligations were required to be remeasured as of the curtailment date.  The remeasurement decreased the projected benefit obligations by approximately $320 million.  In addition, pursuant to the requirements of SFAS No. 87, Employers’ Accounting for Pensions, the average remaining life expectancy of inactive participants rather than the average remaining service lives of active employees must be used in the amortization of actuarial gains and losses.  This change in amortization life reduced pension expense in second quarter 2009 by approximately $19 million.


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:

   
Average Common Shares Outstanding
  
   
Three Months
  
Six Months
  
   
Ended June 30
  
Ended June 30
  
(Millions of shares)
  
2009
  
2008
  
2009
  
2008
  
                   
Average shares outstanding
  
414.1
  
417.7
  
413.9
  
418.9
  
Participating securities
  
1.5
  
1.8
  
1.7
  
1.7
  
Basic
  
415.6
  
419.5
  
415.6
  
420.6
  
Dilutive effect of stock options
  
.1
  
1.3
  
.1
  
1.4
  
Dilutive effect of restricted share and restricted share unit awards
  
.2
  
.2
  
.2
  
.2
  
Diluted
  
415.9
  
421.0
  
415.9
  
422.2
  

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.

 
- 13 -
 

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:

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

 
·
Reported net income includes 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 are accounted for as equity transactions.  If the controlling interest loses control and deconsolidates a subsidiary, full gain or loss on the transition is recognized.

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:

 
·
Noncontrolling interests, which are not redeemable at the option of the noncontrolling interests, were reclassified from the mezzanine to equity, separate from the parent’s stockholders’ equity, in the consolidated balance sheet.  Common securities, redeemable at the option of the noncontrolling interest, carried at redemption value of approximately $35 million are classified in a line item combined with redeemable preferred securities of subsidiary in the consolidated balance sheet.

 
·
Consolidated net income was recast to include net income attributable to both controlling and noncontrolling interests.

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.

 
- 14 -
 

Note 7.  (Continued)


         
Stockholders’ Equity
Attributable to
        
(Millions of dollars)
  
Comprehensive
Income
    
The
Corporation
    
Noncontrolling
Interests
    
Redeemable
Securities of
Subsidiaries
  
 
Balance at December 31, 2008
          
$
3,878
    
$
383
    
$
1,032
  
                         
Purchase of subsidiary shares
                                
from noncontrolling interests
            
(170
)
    
(108
)
    
-
  
                                 
Comprehensive Income:
                                
Net income
  
$
861
      
810
      
23
      
28
  
                                 
Other comprehensive income,
net of tax:
                                
Unrealized translation
    
285
      
299
      
(14
)
    
-
  
Employee postretirement
benefits
    
177
      
161
      
16
      
-
  
Other
    
(15
)
    
(15
)
    
-
      
-
  
Total Comprehensive Income
  
$
1,308
                          
                                 
Stock-based awards and other
            
30
      
-
      
12
  
Dividends declared
            
(497
)
    
(18
)
    
-
  
Return on redeemable preferred
securities and noncontrollinginterests
            
-
      
(1
)
    
(26
)
                                 
Balance at June 30, 2009
          
$
4,496
    
$
281
    
$
1,046
  

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.

 
- 15 -
 

Note 7.  (Continued)

         
Stockholders’ Equity
Attributable to
        
(Millions of dollars)
  
Comprehensive
Income
    
The
Corporation
    
Noncontrolling
Interests
    
Redeemable
Securities of
Subsidiaries
  
 
Balance at December 31, 2007
          
$
5,224
    
$
463
    
$
1,026
  
                         
Purchase of subsidiary shares from noncontrolling interest
            
-
      
(30
)
    
(2
)
                                 
Comprehensive Income:
                                
Net income
  
$
927
      
858
      
41
      
28
  
                                 
Other comprehensive income,
net of tax:
                                
Unrealized translation
    
330
      
354
      
(23
)
    
(1
)
Employee postretirement
benefits
    
-
      
5
      
(5
)
    
-
  
Other
    
(12
)
    
(12
)
    
-
      
-
  
Total Comprehensive Income
  
$
1,245
                          
                                 
Stock-based awards and other
            
90
      
-
      
1
  
Shares repurchased
            
(430
)
    
-
      
-
  
Dividends declared
            
(486
)
    
(39
)
    
-
  
Return on redeemable preferred
securities and noncontrolling interests
            
-
      
(1
)
    
(20
)
                                 
Balance at June 30, 2008
          
$
5,603
    
$
406
    
$
1,032
  

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.

   
Six Months
Ended June 30
  
(Millions of dollars)
  
2009
    
2008
  
             
Net Income attributable to Kimberly-Clark Corporation
  
$
810
    
$
858
  
                 
Decrease in Kimberly-Clark Corporation’s additional paid-in capital for purchase of
                
remaining shares in its Andean subsidiary(a)
    
(133
)
    
- 
  
                 
Change from net income attributable to Kimberly-Clark Corporation and transfers
                
to noncontrolling interests
  
$
677
    
$
858
  

(a)
During the first quarter of 2009, the Corporation acquired the remaining approximate 31 percent interest in its Andean region subsidiary, Colombiana Kimberly Colpapel S.A., for $289 million.  In accordance with SFAS 160, the acquisition was recorded as an equity transaction that reduced noncontrolling interests, accumulated other comprehensive income and additional paid-in capital classified in stockholders’ equity by approximately $278 million and increased investments in equity companies by approximately $11 million. 

 
- 16 -
 

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.

Foreign Currency Exchange Risk Management

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.

 
- 17 -
 

Note 8.  (Continued)

Foreign Currency Translation Risk Management

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 Management

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.

Commodity Price Risk Management

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.

Management of Certain Equity Investments in the Corporation’s Defined Benefit Pension Plans

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.


 
- 18 -
 

Note 8.  (Continued)

Effect of Derivative Instruments on Results of Operations and Other Comprehensive Income

Fair Value Hedges

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.

Cash Flow Hedges

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.

Credit-risk-related Contingent Features

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.

Quantitative Information about the Corporation’s Use of Derivative Instruments

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”).

 
- 19 -
 

Note 8.  (Continued)

The Effect of Derivative Instruments on the Consolidated Income Statement
for the Three Months Ended June 30, 2009 and 2008 – (Millions of dollars)
  
 
Foreign exchange contracts
  
Income Statement Classification
  
Gain or (Loss)
Recognized in Income
  
       
2009
    
2008
  
Fair Value Hedges
  
Other income and (expense), net
  
$
1
    
$
(4
)
                     
Undesignated Hedging Instruments
  
Other income and (expense), net(a)
  
$
(3
)
  
$
(23
)

   
Amount of Gain or
(Loss) Recognized
In OCI
    
Income Statement Classification of Gain or (Loss) Reclassified from OCI
  
Gain or (Loss) Reclassified from OCI into Income
  
   
2009
    
2008
        
2009
    
2008
  
Cash Flow Hedges
                                    
                                     
Interest rate contracts
  
$
19
    
$
12
    
Interest Expense
  
$
1
    
$
-
  
Foreign exchange
   contracts
    
(35
)
    
(7
)
  
Cost of products sold
    
2
      
(12
)
Commodity contract
    
2
      
5
    
Cost of products sold
    
(11
)
    
2
  
                                     
Total
  
$
(14
)
  
$
10
        
$
(8
)
  
$
(10
)
                                     
Net Investment Hedges
                                    
Foreign exchange
   contracts
  
$
(5
)
  
$
(3
)
      
$
-
    
$
-
  

The Effect of Derivative Instruments on the Consolidated Income Statement
for the Six Months Ended June 30, 2009 and 2008 – (Millions of dollars)
  
 
Foreign exchange contracts
  
Income Statement Classification
  
Gain or (Loss)
Recognized in Income
  
       
2009
    
2008
  
Fair Value Hedges
  
Other income and (expense), net
  
$
(14
)
  
$
(3
)
                     
Undesignated Hedging Instruments
  
Other income and (expense), net(a)
  
$
(79
)
  
$
5
  


 
- 20 -
 

Note 8.  (Continued)

   
Amount of Gain or
(Loss) Recognized
In OCI
    
Income Statement Classification of Gain or (Loss) Reclassified from OCI
  
Gain or (Loss) Reclassified from OCI into Income
  
   
2009
    
2008
        
2009
    
2008
  
Cash Flow Hedges
                                    
                                     
Interest rate contracts
  
$
26
    
$
3
    
Interest Expense
  
$
1
    
$
1
  
Foreign exchange
   contracts
    
(17
)
    
(29
)
  
Cost of products sold
    
21
      
(23
)
Commodity contract
    
(20
)
    
8
    
Cost of products sold
    
(23
)
    
-
  
                                     
Total
  
$
(11
)
  
$
(18
)
      
$
(1
)
  
$
(22
)
                                     
Net Investment Hedges
                                    
Foreign exchange
   contracts
  
$
(13
)
  
$
(5
)
      
$
-
    
$
-
  

                 (a)
The majority of the gains and (losses) on these instruments arise from derivatives entered into with third parties by the In-House Bank.  As previously noted, the In-House Bank also records gains and (losses) 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.

Fair Values of Derivative Instruments
  
 
Asset Derivatives
  
 
(Millions of dollars)
June 30,
2009
  
June 30,
2008
  
 
Balance
      
Balance
      
 
Sheet
  
Fair
  
Sheet