KMB_2011_3Q10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 incorporation or organization) | | (I.R.S. Employer 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 October 31, 2011, there were 394,097,360 shares of the Corporation’s common stock outstanding.
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Millions of dollars, except per share amounts) | | 2011 | | 2010 | | 2011 | | 2010 |
| | | | | | | | |
Net Sales | | $ | 5,382 |
| | $ | 4,979 |
| | $ | 15,670 |
| | $ | 14,671 |
|
Cost of products sold | | 3,794 |
| | 3,365 |
| | 11,062 |
| | 9,766 |
|
Gross Profit | | 1,588 |
| | 1,614 |
| | 4,608 |
| | 4,905 |
|
Marketing, research and general expenses | | 943 |
| | 909 |
| | 2,804 |
| | 2,719 |
|
Other (income) and expense, net | | (17 | ) | | 7 |
| | (27 | ) | | 112 |
|
Operating Profit | | 662 |
| | 698 |
| | 1,831 |
| | 2,074 |
|
Interest income | | 5 |
| | 5 |
| | 13 |
| | 16 |
|
Interest expense | | (70 | ) | | (59 | ) | | (205 | ) | | (180 | ) |
Income Before Income Taxes and Equity Interests | | 597 |
| | 644 |
| | 1,639 |
| | 1,910 |
|
Provision for income taxes | | (174 | ) | | (195 | ) | | (499 | ) | | (617 | ) |
Income Before Equity Interests | | 423 |
| | 449 |
| | 1,140 |
| | 1,293 |
|
Share of net income of equity companies | | 35 |
| | 40 |
| | 122 |
| | 130 |
|
Net Income | | 458 |
| | 489 |
| | 1,262 |
| | 1,423 |
|
Net income attributable to noncontrolling interests | | (26 | ) | | (20 | ) | | (72 | ) | | (72 | ) |
Net Income Attributable to Kimberly-Clark Corporation | | $ | 432 |
| | $ | 469 |
| | $ | 1,190 |
| | $ | 1,351 |
|
| | | | | | | | |
Per Share Basis: | | | | | | | | |
Net Income Attributable to Kimberly-Clark Corporation | | | | | | | | |
Basic | | $ | 1.10 |
| | $ | 1.14 |
| | $ | 3.00 |
| | $ | 3.27 |
|
Diluted | | 1.09 |
| | 1.14 |
| | 2.98 |
| | 3.25 |
|
Cash Dividends Declared | | $ | .70 |
| | $ | .66 |
| | $ | 2.10 |
| | $ | 1.98 |
|
See Notes to Consolidated Financial Statements.
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
|
| | | | | | | | |
(Millions of dollars) | | September 30 2011 | | December 31 2010 |
| | | | |
ASSETS | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 1,232 |
| | $ | 876 |
|
Accounts receivable, net | | 2,434 |
| | 2,472 |
|
Note receivable | | — |
| | 218 |
|
Inventories | | 2,421 |
| | 2,373 |
|
Other current assets | | 452 |
| | 389 |
|
Total Current Assets | | 6,539 |
| | 6,328 |
|
Property | | 18,193 |
| | 17,877 |
|
Less accumulated depreciation | | 10,146 |
| | 9,521 |
|
Net Property | | 8,047 |
| | 8,356 |
|
Investments in Equity Companies | | 372 |
| | 374 |
|
Goodwill | | 3,321 |
| | 3,403 |
|
Long-Term Notes Receivable | | 394 |
| | 393 |
|
Other Assets | | 957 |
| | 1,010 |
|
| | $ | 19,630 |
| | $ | 19,864 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current Liabilities | | | | |
Debt payable within one year | | $ | 758 |
| | $ | 344 |
|
Redeemable preferred securities of subsidiary | | 506 |
| | 506 |
|
Trade accounts payable | | 2,262 |
| | 2,206 |
|
Accrued expenses | | 1,978 |
| | 1,909 |
|
Other current liabilities | | 312 |
| | 373 |
|
Total Current Liabilities | | 5,816 |
| | 5,338 |
|
Long-Term Debt | | 5,422 |
| | 5,120 |
|
Noncurrent Employee Benefits | | 1,394 |
| | 1,810 |
|
Long-Term Income Taxes Payable | | 254 |
| | 260 |
|
Deferred Income Taxes | | 493 |
| | 369 |
|
Other Liabilities | | 247 |
| | 224 |
|
Redeemable Preferred and Common Securities of Subsidiaries | | 541 |
| | 541 |
|
Stockholders’ Equity | | | | |
Kimberly-Clark Corporation | | 5,179 |
| | 5,917 |
|
Noncontrolling interests | | 284 |
| | 285 |
|
Total Stockholders’ Equity | | 5,463 |
| | 6,202 |
|
| | $ | 19,630 |
| | $ | 19,864 |
|
See Notes to Consolidated Financial Statements.
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30 |
(Millions of dollars) | | 2011 | | 2010 |
| | | | |
Operating Activities | | | | |
Net income | | $ | 1,262 |
| | $ | 1,423 |
|
Depreciation and amortization | | 821 |
| | 607 |
|
Stock-based compensation | | 37 |
| | 41 |
|
Increase in operating working capital | | (155 | ) | | (175 | ) |
Deferred income taxes | | 200 |
| | 20 |
|
Net losses on asset dispositions | | 1 |
| | 19 |
|
Equity companies’ earnings in excess of dividends paid | | (46 | ) | | (63 | ) |
Postretirement benefits | | (331 | ) | | (145 | ) |
Other | | (18 | ) | | 69 |
|
Cash Provided by Operations | | 1,771 |
| | 1,796 |
|
Investing Activities | | | | |
Capital spending | | (656 | ) | | (611 | ) |
Proceeds from maturity of note receivable | | 220 |
| | — |
|
Proceeds from sales of investments | | 21 |
| | 29 |
|
Proceeds from dispositions of property | | 23 |
| | 4 |
|
Investments in time deposits | | (122 | ) | | (114 | ) |
Maturities of time deposits | | 115 |
| | 168 |
|
Other | | 4 |
| | 12 |
|
Cash Used for Investing | | (395 | ) | | (512 | ) |
Financing Activities | | | | |
Cash dividends paid | | (824 | ) | | (796 | ) |
Net increase in short-term debt | | 14 |
| | 146 |
|
Proceeds from issuance of long-term debt | | 799 |
| | 281 |
|
Repayments of long-term debt | | (20 | ) | | (470 | ) |
Cash paid on redeemable preferred securities of subsidiary | | (40 | ) | | (40 | ) |
Proceeds from exercise of stock options | | 294 |
| | 117 |
|
Acquisitions of common stock for the treasury | | (1,246 | ) | | (695 | ) |
Other | | (8 | ) | | (49 | ) |
Cash Used for Financing | | (1,031 | ) | | (1,506 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | | 11 |
| | (43 | ) |
Increase (decrease) in Cash and Cash Equivalents | | 356 |
| | (265 | ) |
Cash and Cash Equivalents, beginning of year | | 876 |
| | 798 |
|
Cash and Cash Equivalents, end of period | | $ | 1,232 |
| | $ | 533 |
|
See Notes to Consolidated Financial Statements.
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Millions of dollars) | | 2011 | | 2010 | | 2011 | | 2010 |
| | | | | | | | |
Net Income | | $ | 458 |
| | $ | 489 |
| | $ | 1,262 |
| | $ | 1,423 |
|
Other Comprehensive Income, Net of Tax: | | | | | | | | |
Unrealized currency translation adjustments | | (664 | ) | | 615 |
| | (224 | ) | | 264 |
|
Employee postretirement benefits | | 45 |
| | (6 | ) | | 45 |
| | 47 |
|
Other | | (8 | ) | | (44 | ) | | (36 | ) | | (37 | ) |
Total Other Comprehensive Income, Net of Tax | | (627 | ) | | 565 |
| | (215 | ) | | 274 |
|
Comprehensive Income | | (169 | ) | | 1,054 |
| | 1,047 |
| | 1,697 |
|
Comprehensive income attributable to noncontrolling interests | | 2 |
| | 36 |
| | 58 |
| | 79 |
|
Comprehensive Income Attributable to Kimberly-Clark Corporation | | $ | (171 | ) | | $ | 1,018 |
| | $ | 989 |
| | $ | 1,618 |
|
See Notes to Consolidated Financial Statements.
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 included in our Annual Report on Form 10-K for the year ended December 31, 2010. The terms “Corporation,” “Kimberly-Clark,” “K-C,” “we,” “our” and “us” refer to Kimberly-Clark Corporation and its consolidated subsidiaries.
Note 2. Fair Value Measurements
The following fair value information is based on 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.
During the three months ended September 30, 2011 and 2010, there were no significant transfers among level 1, 2, or 3 fair value determinations.
Set forth below are the assets and liabilities that are measured on a recurring basis at fair value and the inputs used to develop those fair value measurements.
|
| | | | | | | | | | | | | | | |
| September 30 2011 | | Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 |
| (Millions of dollars) |
Assets | | | | | | | |
Company-owned life insurance (“COLI”) | $ | 43 |
| | $ | — |
| | $ | 43 |
| | $ | — |
|
Available-for-sale securities | 14 |
| | 14 |
| | — |
| | — |
|
Derivatives | 68 |
| | — |
| | 68 |
| | — |
|
Total | $ | 125 |
| | $ | 14 |
| | $ | 111 |
| | $ | — |
|
Liabilities | | | | | | | |
Derivatives | $ | 163 |
| | $ | — |
| | $ | 163 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| December 31 2010 | | Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 |
| | | (Millions of dollars) | | |
Assets | | | | | | | |
Company-owned life insurance (“COLI”) | $ | 46 |
| | $ | — |
| | $ | 46 |
| | $ | — |
|
Available-for-sale securities | 15 |
| | 15 |
| | — |
| | — |
|
Derivatives | 70 |
| | — |
| | 70 |
| | — |
|
Total | $ | 131 |
| | $ | 15 |
| | $ | 116 |
| | $ | — |
|
Liabilities | | | | | | | |
Derivatives | $ | 48 |
| | $ | — |
| | $ | 48 |
| | $ | — |
|
The COLI policies are a source of funding primarily for our nonqualified employee benefits and are included in other assets. Available-for-sale securities are included in other assets. The derivative assets and liabilities are included in other current assets, other assets, accrued expenses and other liabilities, as appropriate.
Level 1 Fair Values - The fair values of certain available-for-sale securities are based on quoted market prices in active markets for identical assets. Unrealized losses on these securities aggregating $4 million at September 30, 2011 and $2 million at December 31, 2010 are recorded in Accumulated Other Comprehensive Income ("AOCI") until realized. The unrealized losses have not been recognized in earnings because we have 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 these 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 our use of derivative instruments is contained in Note 9.
Fair Value Disclosures
The following table includes the fair value of our financial instruments for which disclosure of fair value is required:
|
| | | | | | | | | | | | | | | |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| September 30, 2011 | | December 31, 2010 |
| (Millions of dollars) |
Assets | | | | | | | |
Cash and cash equivalents(a) | $ | 1,232 |
| | $ | 1,232 |
| | $ | 876 |
| | $ | 876 |
|
Time deposits(b) | 85 |
| | 85 |
| | 80 |
| | 80 |
|
Notes receivable(c) | 394 |
| | 371 |
| | 611 |
| | 597 |
|
Liabilities and redeemable preferred and common securities of subsidiaries | | | | | | | |
Short-term debt(d) | 88 |
| | 88 |
| | 79 |
| | 79 |
|
Monetization loan(c) | 397 |
| | 385 |
| | 397 |
| | 397 |
|
Long-term debt(e) | 5,695 |
| | 6,666 |
| | 4,988 |
| | 5,556 |
|
Redeemable preferred and common securities of subsidiaries(f) | 1,047 |
| | 1,117 |
| | 1,047 |
| | 1,127 |
|
| |
(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, included in Other current assets on the Condensed Consolidated Balance Sheet, 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) | Notes receivable represent held-to-maturity securities, which arose from the sale of nonstrategic timberlands and related assets. The notes are backed by irrevocable standby letters of credit issued by money center banks. We collected in cash the $220 million face value of the note receivable that matured on July 7, 2011. The remaining note receivable, with a face value of $397 million, matures in September 2014. At September 30, 2011 a consolidated variable interest entity (“VIE”) has an outstanding long-term monetization loan secured by the remaining note held by this VIE. As of September 30, 2011, the difference between the carrying amount of the remaining note and its fair value represents an unrealized loss position for which an other-than-temporary impairment has not been recognized in earnings because we have both the intent and ability to hold the note for a period of time sufficient to allow for an anticipated recovery of fair value to the carrying amount of the note. Neither the note nor the monetization loan is 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: face value, current LIBOR rate, fair value credit spread, stated spread, maturity date and interest payment dates. |
| |
(d) | Short-term debt is recorded at cost, which approximates fair value. |
| |
(e) | Long-term debt excludes the monetization loan and includes the portion payable within the next twelve months ($670 million at September 30, 2011 and $265 million at December 31, 2010). Fair values were estimated based on quoted prices for financial instruments for which all significant inputs were observable, either directly or indirectly. |
| |
(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 used the following inputs to calculate fair values: face value, current benchmark rate, fair value spread, stated spread, maturity date and interest payment dates. We determined the fair value and carrying amount of the redeemable common securities were $35 million at September 30, 2011 and December 31, 2010 based on various inputs, including an independent third-party appraisal, adjusted for current market conditions. |
Note 3. Pulp and Tissue Restructuring
On January 21, 2011, we initiated a pulp and tissue restructuring plan in order to exit our remaining integrated pulp manufacturing operations and improve the underlying profitability and return on invested capital of our consumer tissue and K-C Professional businesses. The restructuring involves the streamlining, sale or closure of 5 to 6 of our manufacturing facilities around the world. In conjunction with these actions, we have begun to exit certain non-strategic products, primarily non-branded offerings, and transfer some production to lower-cost facilities in order to improve overall profitability and returns. Facilities impacted by the restructuring include our pulp and tissue facility in Everett, Washington and the two facilities in Australia that manufacture pulp and tissue.
The restructuring plan commenced in the first quarter of 2011 and is expected to be completed by December 31, 2012. The restructuring is expected to result in cumulative charges of approximately $400 million to $600 million before tax ($280 million to $420 million after tax) over that period. We anticipate that the charges will fall into the following categories and approximate dollar ranges: workforce reduction costs ($50 million to $100 million); incremental depreciation ($300 million to $400 million); and other associated costs ($50 million to $100 million). Cash costs related to the streamlining of operations, sale or closure, relocation of equipment, severance and other expenses are expected to account for approximately 25 percent to 50 percent of the charges. Noncash charges will consist primarily of incremental depreciation.
As a result of the restructuring, we expect that by 2013 annual net sales will be reduced by $250 million to $300 million and operating profit will increase by at least $75 million. Most of the restructuring will impact the consumer tissue business segment.
The following charges were incurred in connection with the restructuring:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2011 | | September 30, 2011 |
| (Millions of dollars) |
Incremental depreciation | $ | 76 |
| | $ | 192 |
|
Charges for workforce reductions | 11 |
| | 54 |
|
Asset write-offs | 5 |
| | 13 |
|
Other exit costs | 3 |
| | 3 |
|
Cost of products sold | 95 |
| | 262 |
|
Charges for workforce reductions included in Marketing, research and general expenses | — |
| | 5 |
|
Provision for income taxes | (29 | ) | | (85 | ) |
Net charges | $ | 66 |
| | $ | 182 |
|
See Note 10 for additional information on the pulp and tissue restructuring charges by segment.
Pretax charges for the pulp and tissue restructuring relate to activities in the following geographic areas:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2011 |
| North America | | Australia | | Other | | Total |
| (Millions of dollars) |
Incremental depreciation | $ | 53 |
| | $ | 19 |
| | $ | 4 |
| | $ | 76 |
|
Charges for workforce reductions | 10 |
| | — |
| | 1 |
| | 11 |
|
Asset write-offs | 2 |
| | 3 |
| | — |
| | 5 |
|
Other exit costs | 1 |
| | 2 |
| | — |
| | 3 |
|
Total charges | $ | 66 |
| | $ | 24 |
| | $ | 5 |
| | $ | 95 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2011 |
| North America | | Australia | | Other | | Total |
| (Millions of dollars) |
Incremental depreciation | $ | 123 |
| | $ | 59 |
| | $ | 10 |
| | $ | 192 |
|
Charges for workforce reductions | 10 |
| | 46 |
| | 3 |
| | 59 |
|
Asset write-offs | 8 |
| | 5 |
| | — |
| | 13 |
|
Other exit costs | 1 |
| | 2 |
| | — |
| | 3 |
|
Total charges | $ | 142 |
| | $ | 112 |
| | $ | 13 |
| | $ | 267 |
|
The following summarizes the cash charges recorded and reconciles these charges to accrued expenses:
|
| | | |
| |
| Millions of dollars |
Accrued expenses - January 1, 2011 | $ | — |
|
Charges for workforce reductions and other exit costs | 62 |
|
Cash payments | (34 | ) |
Currency and other | 15 |
|
Accrued expenses - September 30, 2011 | $ | 43 |
|
Note 4. Highly Inflationary Accounting for Venezuelan Operations
The cumulative inflation in Venezuela for the three years ended December 31, 2009 was more than 100 percent, based on the Consumer Price Index/National Consumer Price Index. As a result, effective January 1, 2010, our Venezuelan subsidiary (“K-C Venezuela”) began accounting for its operations as highly inflationary, as required by GAAP. Under highly inflationary accounting, K-C Venezuela’s functional currency became the U.S. dollar, and its income statement and balance sheet are measured into U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on bolivar-denominated monetary assets and liabilities is reflected in earnings in other (income) and expense, net.
As a result of the adoption of highly inflationary accounting, we recorded an after-tax charge of $96 million in first quarter 2010 to remeasure K-C Venezuela’s bolivar-denominated net monetary asset position into U.S. dollars at an exchange rate of approximately 6 bolivars per U.S. dollar. In the Condensed Consolidated Cash Flow Statement, this non-cash charge was included in Other in Cash Provided by Operations. This charge was recorded in the following Consolidated Income Statement line items:
|
| | | |
| Millions of dollars |
Cost of products sold | $ | 19 |
|
Other (income) and expense, net | 79 |
|
Provision for income taxes | (2 | ) |
Net charge | $ | 96 |
|
For the first quarter 2010, we determined that, under highly inflationary accounting, the unregulated parallel market exchange rate was the appropriate exchange rate to measure K-C Venezuela’s bolivar-denominated transactions into U.S. dollars as this was the rate at which K-C Venezuela had substantially converted the bolivars it generated from its operations into U.S. dollars to pay for its significant imports of U.S. dollar-denominated finished goods, raw materials and services to support its operations.
On May 18, 2010, the Venezuelan government enacted reforms to its currency exchange regulations to close the parallel market. On June 9, 2010, the Central Bank of Venezuela began a regulated currency exchange system (the “central bank system”) that replaced the previous unregulated parallel market. As a result of the currency exchange regulations imposed on May 18, 2010, we determined that the central bank system rate of 5.4 bolivars per U.S. dollar was the appropriate exchange rate to measure K‑C Venezuela’s bolivar-denominated transactions into U.S. dollars during the period May 18, 2010 through September 30, 2011.
In July 2011, K-C Venezuela paid a dividend related to its 2008 dividend remittance request that was approved in June 2011 by the Venezuelan government at an exchange rate of 4.3 bolivars per U.S. dollar. This dividend represented less than 5 percent of K-C Venezuela’s bolivar-denominated net assets, which totaled approximately $130 million at September 30, 2011. We believe that these bolivar-denominated net assets, primarily cash, should continue to be measured at the central bank system rate of 5.4 bolivars per U.S. dollar given the uncertainty of accessing more significant future dividend remittances or other mechanisms of repatriating the cash at the rate of 4.3 bolivars per U.S. dollar.
For the full year 2010 and for the nine months ended September 30, 2011, K-C Venezuela represented 1 percent of Consolidated Net Sales. At September 30, 2011, our net investment in K-C Venezuela was approximately $220 million, valued at 5.4 bolivars per U.S. dollar.
Note 5. Inventories
The following schedule presents a summary of inventories by major class:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2011 | | December 31, 2010 |
(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 | | $ | 175 |
| | $ | 335 |
| | $ | 510 |
| | $ | 154 |
| | $ | 350 |
| | $ | 504 |
|
Work in process | | 242 |
| | 142 |
| | 384 |
| | 195 |
| | 144 |
| | 339 |
|
Finished goods | | 769 |
| | 769 |
| | 1,538 |
| | 715 |
| | 763 |
| | 1,478 |
|
Supplies and other | | — |
| | 302 |
| | 302 |
| | — |
| | 298 |
| | 298 |
|
| | 1,186 |
| | 1,548 |
| | 2,734 |
| | 1,064 |
| | 1,555 |
| | 2,619 |
|
Excess of FIFO or weighted-average cost over LIFO cost | | (313 | ) | | — |
| | (313 | ) | | (246 | ) | | — |
| | (246 | ) |
Total | | $ | 873 |
| | $ | 1,548 |
| | $ | 2,421 |
| | $ | 818 |
| | $ | 1,555 |
| | $ | 2,373 |
|
We use 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 6. Employee Postretirement Benefits
The table below presents benefit cost information for defined benefit plans and other postretirement benefit plans:
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | Other Postretirement Benefit Plans |
| | Three Months Ended September 30 |
(Millions of dollars) | | 2011 | | 2010 | | 2011 | | 2010 |
| | | | | | | | |
Service cost | | $ | 14 |
| | $ | 14 |
| | $ | 3 |
| | $ | 3 |
|
Interest cost | | 77 |
| | 77 |
| | 10 |
| | 11 |
|
Expected return on plan assets | | (87 | ) | | (84 | ) | | — |
| | — |
|
Recognized net actuarial loss | | 23 |
| | 25 |
| | — |
| | — |
|
Other | | 4 |
| | 1 |
| | — |
| | 1 |
|
Net periodic benefit cost | | $ | 31 |
| | $ | 33 |
| | $ | 13 |
| | $ | 15 |
|
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | Other Postretirement Benefit Plans |
| | Nine Months Ended September 30 |
(Millions of dollars) | | 2011 | | 2010 | | 2011 | | 2010 |
| | | | | | | | |
Service cost | | $ | 42 |
| | $ | 41 |
| | $ | 10 |
| | $ | 10 |
|
Interest cost | | 231 |
| | 231 |
| | 32 |
| | 32 |
|
Expected return on plan assets | | (260 | ) | | (251 | ) | | — |
| | — |
|
Recognized net actuarial loss | | 70 |
| | 74 |
| | — |
| | — |
|
Other | | 6 |
| | 5 |
| | 2 |
| | 3 |
|
Net periodic benefit cost | | $ | 89 |
| | $ | 100 |
| | $ | 44 |
| | $ | 45 |
|
We made cash contributions to our pension trusts as follows:
|
| | | | | | | | |
| | Nine Months Ended September 30 |
| | 2011 | | 2010 |
| | (Millions of dollars) |
First Quarter | | $ | 265 |
| | $ | 176 |
|
Second Quarter | | 150 |
| | 52 |
|
Third Quarter | | 1 |
| | 2 |
|
Total | | $ | 416 |
| | $ | 230 |
|
We plan to accelerate additional pension contributions into 2011. As a result, we plan to contribute an aggregate of $680 to $760 million in 2011 (increased from our prior estimate of $420 to $500 million).
Various derivative instruments are utilized in the management of K-C’s defined benefit plan assets. These derivative instruments are used to manage risk or achieve a target asset allocation. For the U.S. pension plan, equity volatility is managed by entering into exchange-traded puts and over-the-counter calls to create equity collars with a zero net premium at initiation. The equity collar strategy is designed to reduce potential equity losses and limit gains, resulting in lower equity volatility for the plan. As of September 30, 2011, equity collars are in place on approximately 45 percent of the plan’s $1.3 billion equity allocation. In addition to the equity collars, as of September 30, 2011, long-dated Treasury futures contracts to maintain a target asset allocation are in place with a notional value of about $580 million.
Note 7. 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 Ended September 30 | | Nine Months Ended September 30 |
(Millions of shares) | | 2011 | | 2010 | | 2011 | | 2010 |
| | | | | | | | |
Average shares outstanding | | 392.1 |
| | 409.0 |
| | 395.7 |
| | 412.6 |
|
Participating securities | | .1 |
| | .9 |
| | .4 |
| | 1.1 |
|
Basic | | 392.2 |
| | 409.9 |
| | 396.1 |
| | 413.7 |
|
Dilutive effect of stock options | | 1.6 |
| | 1.5 |
| | 1.5 |
| | 1.1 |
|
Dilutive effect of restricted share and restricted share unit awards | | 1.4 |
| | 1.2 |
| | 1.2 |
| | 1.1 |
|
Diluted | | 395.2 |
| | 412.6 |
| | 398.8 |
| | 415.9 |
|
Options outstanding during the three and nine month periods ended September 30, 2011 to purchase 3.2 million and 4.8 million shares of common stock, respectively, were not included in the computation of diluted EPS mainly because the exercise prices of the options were greater than the average market price of the common shares during the periods.
Options outstanding during the three and nine month periods ended September 30, 2010 to purchase 6.1 million and 13.7 million shares of common stock, respectively, were not included in the computation of diluted EPS mainly because the exercise prices of the options were greater than the average market price of the common shares during the periods.
The number of common shares outstanding as of September 30, 2011 and 2010 was 393.3 million and 408.0 million, respectively.
Note 8. Stockholders’ Equity
Set forth below are reconciliations for the nine months ended September 30, 2011 and 2010 of the carrying amount of total stockholders’ equity from the beginning of the period to the end of the period. In addition, each of the reconciliations displays the amount of net income allocable to redeemable preferred securities of subsidiaries.
|
| | | | | | | | | | | | | | | | |
| | | | Stockholders’ Equity Attributable to | | |
(Millions of dollars) | | Comprehensive Income | | The Corporation | | Noncontrolling Interests | | Redeemable Securities of Subsidiaries |
| | | | | | | | |
Balance at December 31, 2010 | | | | $ | 5,917 |
| | $ | 285 |
| | $ | 1,047 |
|
Comprehensive Income: | | | | | | | | |
Net income | | $ | 1,262 |
| | 1,190 |
| | 30 |
| | 42 |
|
Other comprehensive income, net of tax: | | | | | | | | |
Unrealized translation | | (224 | ) | | (209 | ) | | (15 | ) | | — |
|
Employee postretirement benefits | | 45 |
| | 44 |
| | 1 |
| | — |
|
Other | | (36 | ) | | (36 | ) | | — |
| | — |
|
Total Comprehensive Income | | $ | 1,047 |
| | | | | | |
Stock-based awards exercised or vested | | | | 306 |
| | — |
| | — |
|
Income tax benefits on stock-based compensation | | | | 7 |
| | — |
| | — |
|
Shares repurchased | | | | (1,246 | ) | | — |
| | — |
|
Recognition of stock-based compensation | | | | 37 |
| | — |
| | — |
|
Dividends declared | | | | (830 | ) | | (17 | ) | | (1 | ) |
Other | | | | (1 | ) | | 1 |
| | (1 | ) |
Return on redeemable preferred securities and noncontrolling interests | | | | — |
| | (1 | ) | | (40 | ) |
Balance at September 30, 2011 | | | | $ | 5,179 |
| | $ | 284 |
| | $ | 1,047 |
|
The net unrealized currency translation adjustments for the nine months ended September 30, 2011 are primarily due to a strengthening of the U.S. dollar against most foreign currencies, partially offset by a weakening of the U.S. dollar against the Euro.
In the nine months ended September 30, 2011, we repurchased 19 million shares for a total cost of $1.24 billion. We do not expect to repurchase any additional shares in the fourth quarter of 2011.
|
| | | | | | | | | | | | | | | | |
| | | | Stockholders’ Equity Attributable to | | |
(Millions of dollars) | | Comprehensive Income | | The Corporation | | Noncontrolling Interests | | Redeemable Securities of Subsidiaries |
| | | | | | | | |
Balance at December 31, 2009 | | | | $ | 5,406 |
| | $ | 284 |
| | $ | 1,052 |
|
Comprehensive Income: | | | | | | | | |
Net income | | $ | 1,423 |
| | 1,351 |
| | 30 |
| | 42 |
|
Other comprehensive income, net of tax: | | | | | | | | |
Unrealized translation | | 264 |
| | 257 |
| | 6 |
| | 1 |
|
Employee postretirement benefits | | 47 |
| | 47 |
| | — |
| | — |
|
Other | | (37 | ) | | (37 | ) | | — |
| | — |
|
Total Comprehensive Income | | $ | 1,697 |
| | | | | | |
Stock-based awards exercised or vested | | | | 115 |
| | — |
| | — |
|
Income tax benefits on stock-based compensation | | | | 1 |
| | — |
| | — |
|
Shares repurchased | | | | (706 | ) | | — |
| | — |
|
Recognition of stock-based compensation | | | | 41 |
| | — |
| | — |
|
Dividends declared | | | | (816 | ) | | (47 | ) | | (1 | ) |
Other | | | | 1 |
| | 1 |
| | (2 | ) |
Return on redeemable preferred securities and noncontrolling interests | | | | — |
| | — |
| | (40 | ) |
Balance at September 30, 2010 | | | | $ | 5,660 |
| | $ | 274 |
| | $ | 1,052 |
|
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 the 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 in stockholders’ equity 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.
Note 9. Objectives and Strategies for Using Derivatives
As a multinational enterprise, we are exposed to financial risks, such as changes in foreign currency exchange rates, interest rates, commodity prices and the value of investments of our defined benefit pension plans. We employ a number of practices to manage these risks, including operating and financing activities and, where deemed appropriate, the use of derivative instruments. Our policies allow the use of derivatives for risk management purposes and prohibit their use for speculation. Our policies also prohibit the use of any leveraged derivative instrument. Consistent with our policies, foreign currency derivative instruments, interest rate swaps and locks, equity collars and the majority of commodity hedging contracts are entered into with major financial institutions.
On the date a derivative contract is entered into, we formally designate certain derivatives as cash flow, fair value or net investment hedges and establish 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 in earnings as they occur.
Set forth below is a summary of the fair values of our derivative instruments classified by the risks they are used to manage:
|
| | | | | | | | | | | | | | | | |
| | September 30 2011 | | December 31 2010 |
(Millions of dollars) | | Assets | | Liabilities | | Assets | | Liabilities |
| | | | | | | | |
Interest rate risk | | $ | 13 |
| | $ | 63 |
| | $ | 24 |
| | $ | 2 |
|
Foreign currency exchange risk | | 55 |
| | 93 |
| | 46 |
| | 39 |
|
Commodity price risk | | — |
| | 7 |
| | — |
| | 7 |
|
Total | | $ | 68 |
| | $ | 163 |
| | $ | 70 |
| | $ | 48 |
|
Foreign Currency Exchange Risk Management
We have a centralized U.S. dollar functional currency international treasury operation (“In-House Bank”) that manages foreign currency exchange risks by netting, on a daily basis, our exposures to recorded non-U.S. dollar assets and liabilities and entering into derivative instruments with third parties whenever our 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 remeasurement of its non-U.S. dollar-denominated monetary assets and liabilities in earnings. Consequently, the net effect on earnings from the use of these non-designated derivatives is substantially neutralized by transactional gains and losses recorded on the underlying liabilities. The In-House Bank’s daily notional derivative positions with third parties averaged $1.4 billion in the first nine months of 2011 and its average net exposure for the period was $1.2 billion. The In-House Bank used nine counterparties for its foreign exchange derivative contracts.
We enter into derivative instruments to hedge a portion of the net foreign currency exposures of our non-U.S. operations, principally for their forecasted purchases of pulp, which are priced in U.S. dollars, and imports of intercompany finished goods and work-in-process priced predominately in U.S. dollars and euros. The derivative instruments used to manage these exposures are designated and qualify as cash flow hedges. As of September 30, 2011, outstanding derivative contracts of $865 million notional value were designated as cash flow hedges for the forecasted purchases of pulp and intercompany finished goods and work-in-process.
The foreign currency exposure on non-functional currency denominated monetary assets and liabilities managed outside the In-House Bank, primarily intercompany loans, is hedged with derivative instruments with third parties. At September 30, 2011, the notional amount of these predominantly undesignated derivative instruments was $550 million.
Foreign Currency Translation Risk Management
Translation adjustments result from translating foreign entities’ financial statements to U.S. dollars from their functional currencies. Translation exposure, which results from changes in translation rates between functional currencies and the U.S. dollar, generally is not hedged. However, consistent with other years, a portion of our net investment in our Mexican affiliate has been hedged. At September 30, 2011, we had in place net investment hedges of $67 million for a portion of our investment in our Mexican affiliate. Changes in the fair value of net investment hedges are recognized in other comprehensive income to offset the change in value of the net investment being hedged. There was no significant ineffectiveness related to net investment hedges as of September 30, 2011 and 2010.
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. From time to time, interest rate swap contracts, which are derivative instruments, are entered into 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 or, to a lesser extent, cash flow hedges.
From time to time, we hedge the anticipated issuance of fixed-rate debt, using 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 a future date). These contracts are designated as cash flow hedges.
At September 30, 2011, the aggregate notional values of outstanding interest rate contracts designated as fair value hedges and cash flow hedges were $700 million and $580 million, respectively.
Commodity Price Risk Management
We use derivative instruments to hedge a portion of our 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 September 30, 2011, outstanding commodity forward contracts were in place to hedge forecasted purchases of about 25 percent of our estimated natural gas requirements for the next twelve months and a lesser percentage for future periods.
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 predominantly used to manage interest rate risk and foreign currency exchange risk. 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 related hedged items also is recorded in current earnings. Any realized gain or loss on the derivatives that hedge interest rate risk is amortized to interest expense over the life of the related debt.
Fair value hedges resulted in no significant ineffectiveness in the nine months ended September 30, 2011 and 2010. For the nine months ended September 30, 2011 and 2010, 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, the effective portion of the gain or loss on the derivative instrument is initially recorded in AOCI, net of related income taxes, and recognized in earnings in the same period that the hedged exposure affects earnings.
Cash flow hedges resulted in no significant ineffectiveness in the nine months ended September 30, 2011 and 2010. For the nine months ended September 30, 2011 and 2010, 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. At September 30, 2011, $2 million of after-tax gains are expected to be reclassified from AOCI 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 September 30, 2011 is October 2013.
Quantitative Information about Our Use of Derivative Instruments
The following tables display the classification and amount of pretax gains and losses reported in the Consolidated Income Statement and Consolidated Statement of Other Comprehensive Income (“OCI”) and the classification and fair values of derivative instruments presented in the Condensed Consolidated Balance Sheet.
For the three months ended September 30 (Millions of dollars):
|
| | | | | | | | | |
| Income Statement Classifications | | (Gain) or Loss Recognized in Income |
| | | 2011 | | 2010 |
Undesignated foreign exchange hedging instruments | Other (income) and expense, net(a) | | $ | 92 |
| | $ | (115 | ) |
| | | | | |
Fair Value Hedges | | | | | |
Interest rate swap contracts | Interest expense | | $ | 8 |
| | $ | (2 | ) |
Hedged debt instruments | Interest expense | | $ | (8 | ) | | $ | 2 |
|
|
| | | | | | | | | | | | | | | | | |
| Amount of (Gain) or Loss Recognized In AOCI | | Income Statement Classification of Gain or Loss Reclassified from AOCI | | (Gain) or Loss Reclassified from AOCI into Income |
| 2011 | | 2010 | | | | 2011 | | 2010 |
Cash Flow Hedges | | | | | | | | | |
Interest rate contracts | $ | 61 |
| | $ | 12 |
| | Interest expense | | $ | — |
| | $ | (1 | ) |
Foreign exchange contracts | (34 | ) | | 40 |
| | Cost of products sold | | 15 |
| | (6 | ) |
Foreign exchange contracts | (8 | ) | | — |
| | Other (income) and expense, net | | (8 | ) | | — |
|
Commodity contracts | 5 |
| | 8 |
| | Cost of products sold | | 1 |
| | 2 |
|
Total | $ | 24 |
| | $ | 60 |
| | | | $ | 8 |
| | $ | (5 | ) |
Net Investment Hedges | | | | | | | | | |
Foreign exchange contracts | $ | (7 | ) | | $ | 2 |
| | | | $ | — |
| | $ | — |
|
For the nine months ended September 30 (Millions of dollars):
|
| | | | | | | | | |
| Income Statement Classifications | | (Gain) or Loss Recognized in Income |
| | | 2011 | | 2010 |
Undesignated foreign exchange hedging instruments | Other (income) and expense, net(a) | | $ | (7 | ) | | $ | (34 | ) |
| | | | | |
Fair Value Hedges | | | | | |
Interest rate swap contracts | Interest expense | | $ | 3 |
| | $ | (16 | ) |
Hedged debt instruments | Interest expense | | $ | (3 | ) | | $ | 16 |
|
Foreign exchange contracts | Other (income) and expense, net | | $ | — |
| | $ | (1 | ) |
|
| | | | | | | | | | | | | | | | | |
| Amount of (Gain) or Loss Recognized In AOCI | | Income Statement Classification of Gain or Loss Reclassified from AOCI | | (Gain) or Loss Reclassified from AOCI into Income |
| 2011 | | 2010 | | | | 2011 | | 2010 |
Cash Flow Hedges | | | | | | | | | |
Interest rate contracts | $ | 69 |
| | $ | 42 |
| | Interest expense | | $ | (2 | ) | | $ | (2 | ) |
Foreign exchange contracts | 11 |
| | 7 |
| | Cost of products sold | | 36 |
| | 2 |
|
Foreign exchange contracts | (3 | ) | | — |
| | Other (income) and expense, net | | (3 | ) | | — |
|
Commodity contracts | 6 |
| | 15 |
| | Cost of products sold | | 6 |
| | 8 |
|
Total | $ | 83 |
| | $ | 64 |
| | | | $ | 37 |
| | $ | 8 |
|
Net Investment Hedges | | | | | | | | | |
Foreign exchange contracts | $ | (4 | ) | | $ | 4 |
| | | | $ | — |
| | $ | — |
|
| |
(a) | (Gains) and losses on these instruments primarily relate to derivatives entered into with third parties to manage foreign currency exchange exposure on the remeasurement of non-functional currency denominated monetary assets and liabilities. Consequently, the effect on earnings from the use of these undesignated derivatives is substantially neutralized by transactional gains and losses recorded on the underlying assets and liabilities. |
Fair Values of Derivative Instruments
|
| | | | | | | | | |
| Balance Sheet Location | | September 30 2011 | | December 31 2010 |
| | | (Millions of dollars) |
Assets | | | |
Derivatives designated as hedging instruments: | | | | | |
Interest rate contracts | Other current assets | | $ | 2 |
| | $ | — |
|
Interest rate contracts | Other assets | | 11 |
| | 24 |
|
Foreign exchange contracts | Other current assets | | 19 |
| | 4 |
|
Foreign exchange contracts | Other assets | | 4 |
| | 1 |
|
Total | | | 36 |
| | 29 |
|
Undesignated derivatives: | | | | | |
Foreign exchange contracts | Other current assets | | 32 |
| | 41 |
|
Total asset derivatives | | | $ | 68 |
| | $ | 70 |
|
| | | | | |
Liabilities | | | | | |
Derivatives designated as hedging instruments: | | | | | |
Interest rate contracts | Accrued expenses | | $ | 37 |
| | $ | — |
|
Interest rate contracts | Other liabilities | | 26 |
| | 2 |
|
Foreign exchange contracts | Accrued expenses | | 5 |
| | 16 |
|
Foreign exchange contracts | Other liabilities | | — |
| | 3 |
|
Commodity contracts | Accrued expenses | | 6 |
| | 7 |
|
Commodity contracts | Other liabilities | | 1 |
| | — |
|
Total | | | 75 |
| | 28 |
|
Undesignated derivatives: | | | | | |
Foreign exchange contracts and other | Accrued expenses | | 88 |
| | 20 |
|
Total liability derivatives | | | $ | 163 |
| | $ | 48 |
|
Note 10. Description of Business Segments
We are 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 our executive managers develop and execute global strategies to drive growth and profitability. 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 and income and expense not associated with the business segments, including the charges related to the pulp and tissue restructuring described in Note 3.
The principal sources of revenue in each global business segment are described below:
| |
• | The Personal Care segment manufactures and markets disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and related products. Products in this segment are primarily for household use and are sold under a variety of brand names, including Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names. |
| |
• | The Consumer Tissue segment manufactures and markets facial and bathroom tissue, paper towels, napkins and related products for household use. Products in this segment are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page and other brand names. |
| |
• | The K-C Professional & Other segment manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers |
and a range of safety products for the away-from-home marketplace. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, WypAll, Kimtech, KleenGuard, Kimcare and Jackson brand names.
| |
• | The Health Care segment manufactures and markets health care products such as surgical drapes and gowns, infection control products, face masks, exam gloves, respiratory products, pain management products primarily sold through I-Flow, and other disposable medical products. Products in this segment are sold under the Kimberly-Clark, Ballard, ON-Q and other brand names. |
The following schedules present information concerning consolidated operations by business segment:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Millions of dollars) | | 2011 | | 2010 | | 2011 | | 2010 |
| | | | | | | | |
NET SALES: | | | | | | | | |
Personal Care | | $ | 2,390 |
| | $ | 2,183 |
| | $ | 6,918 |
| | $ | 6,501 |
|
Consumer Tissue | | 1,711 |
| | 1,643 |
| | 5,054 |
| | 4,778 |
|
K-C Professional & Other | | 863 |
| | 781 |
| | 2,477 |
| | 2,312 |
|
Health Care | | 407 |
| | 367 |
| | 1,186 |
| | 1,078 |
|
Corporate & Other | | 11 |
| | 5 |
| | 35 |
| | 2 |
|
Consolidated | | $ | 5,382 |
| | $ | 4,979 |
| | $ | 15,670 |
| | $ | 14,671 |
|
| | | | | | | | |
OPERATING PROFIT (reconciled to income before income taxes): | | | | | | | | |
Personal Care | | $ | 396 |
| | $ | 428 |
| | $ | 1,185 |
| | $ | 1,343 |
|
Consumer Tissue | | 206 |
| | 156 |
| | 529 |
| | 488 |
|
K-C Professional & Other | | 127 |
| | 116 |
| | 360 |
| | 356 |
|
Health Care | | 56 |
| | 49 |
| | 159 |
| | 148 |
|
Other (income) and expense, net(a) | | (17 | ) | | 7 |
| | (27 | ) | | 112 |
|
Corporate & Other(b) | | (140 | ) | | (44 | ) | | (429 | ) | | (149 | ) |
Total Operating Profit | | 662 |
| | 698 |
| | 1,831 |
| | 2,074 |
|
Interest income | | 5 |
| | 5 |
| | 13 |
| | 16 |
|
Interest expense | | (70 | ) | | (59 | ) | | (205 | ) | | (180 | ) |
Income Before Income Taxes and Equity Interests | | $ | 597 |
| | $ | 644 |
| | $ | 1,639 |
| | $ | 1,910 |
|
| |
(a) | For the nine months ended September 30, 2010, Other (income) and expense, net included a $79 million charge for the adoption of highly inflationary accounting in Venezuela effective January 1, 2010. See additional information in Note 4. |
| |
(b) | For the three months ended September 30, 2011, pulp and tissue restructuring charges of $95 million are included in Corporate & Other. See additional information in Note 3. For the nine months ended September 30, 2011, pulp and tissue restructuring charges of $267 million and a non-deductible business tax charge of $32 million related to a law change in Colombia are included in Corporate & Other. The restructuring charges related to the business segments are as follows: |
|
| | | | | | | |
| Three Months Ended September 30, 2011 | | Nine Months Ended September 30, 2011 |
Consumer Tissue | $ | 81 |
| | $ | 233 |
|
K-C Professional & Other | 14 |
| | 34 |
|
Total | $ | 95 |
| | $ | 267 |
|
Also included in Corporate & Other for the nine months ended September 30, 2010, is a $19 million charge related to the adoption of highly inflationary accounting in Venezuela. The charges related to the business segments are as follows:
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| | | |
| |
| Millions of dollars |
Personal Care | $ | 11 |
|
Consumer Tissue | 6 |
|
K-C Professional & Other | 2 |
|
Total | $ | 19 |
|
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Introduction
This management’s discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of our recent performance, financial condition and prospects. The following will be discussed and analyzed:
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• | Overview of Third Quarter 2011 Results |
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• | Results of Operations and Related Information |
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• | Liquidity and Capital Resources |
Overview of Third Quarter 2011 Results
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• | Net sales increased 8.1 percent primarily due to the positive impact of foreign currency rates and increases in net selling prices. |
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• | Operating profit and net income attributable to Kimberly-Clark Corporation decreased 5.2 percent and 7.9 percent, respectively. |
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• | Results were negatively impacted by $95 million in pre-tax charges, $66 million after tax, for the pulp and tissue restructuring. |
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• | Cash provided by operations was $750 million, an increase of 1 percent compared to last year. |
Results of Operations and Related Information
This section presents a discussion and analysis of our third quarter and first nine months of 2011 net sales, operating profit and other information relevant to an understanding of the results of operations.
Third Quarter of 2011 Compared With Third Quarter of 2010
Analysis of Net Sales
By Business Segment
(Millions of dollars)
|
| | | | | | | | |
Net Sales | | 2011 | | 2010 |
| | | | |
Personal Care | | $ | 2,390 |
| | $ | 2,183 |
|
Consumer Tissue | | 1,711 |
| | 1,643 |
|
K-C Professional & Other | | 863 |
| | 781 |
|
Health Care | | 407 |
| | 367 |
|
Corporate & Other | | 11 |
| | 5 |
|
| | | | |
Consolidated | | $ | 5,382 |
| | $ | 4,979 |
|
Commentary:
|
| | | | | | | | | | | | |
| Percent Change in Net Sales Versus Prior Year |
| Total Change | | Changes Due To |
| Volume Growth | | Net Price | | Mix/ Other | | Currency |
|
| | | | | | | | | |
Consolidated | 8.1 | | — |
| | 3 |
| | 1 |
| | 4 |
Personal Care | 9.5 | | 3 |
| | 3 |
| | (1 | ) | | 4 |
Consumer Tissue | 4.1 | | (6 | ) | | 4 |
| | 1 |
| | 5 |
K-C Professional & Other | 10.5 | | 3 |
| | 2 |
| | — |
| | 5 |
Health Care | 10.9 | | 9 |
| | (1 | ) | | — |
| | 3 |
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• | Personal care net sales in North America decreased 1 percent. Changes in net selling prices and product mix each reduced sales by 1 percent, while favorable currency rates added 1 percent to sales. Overall sales volumes were even with the year-ago period. Volumes increased double-digits in adult care and baby wipes, with market share gains in both categories. New Poise Hourglass Shape pads were introduced in the third quarter and contributed to the volume growth in adult care. Feminine care volumes increased high-single digits, with continued momentum in the U by Kotex brand. Although new Huggies Little Movers Slip-On diapers had solid initial sales, infant care volumes declined low-single digits, and child care volumes fell at a double-digit rate. Category declines, competitive promotional activity, reductions in customer inventory levels in diapers and some consumer trade-down in child care accounted for the volume decline. |
In Europe, personal care net sales increased 8 percent, including an 11 percent benefit from changes in currency rates. Sales volumes fell 1 percent, as lower diaper volumes were mostly offset by growth in other product areas, including baby wipes and child care. In addition, changes in net selling prices and product mix each reduced sales 1 percent.
In our international operations in Asia, Latin America, the Middle East, Eastern Europe and Africa (“K-C International”), personal care net sales increased 21 percent, including a 7 percent benefit from changes in currency rates. Sales volumes were up 6 percent, including double-digit growth in China, South Korea and Vietnam. In addition, volumes rose high-single digits in Latin America, with broad-based improvements throughout the region. Overall net selling prices rose 9 percent compared to the year-ago period, driven by increases in Latin America.
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• | In North America, net sales of consumer tissue products decreased 1 percent compared to the year-ago period. Net selling prices rose 6 percent, while sales volumes fell 7 percent due to lower sales of bathroom tissue and facial tissue. The declines reflect the near-term impact of sheet count reductions, along with the company's focus on revenue realization and strong year-ago promotion support. By product category, bathroom tissue volumes fell double-digits and Kleenex facial tissue volumes were off high single-digits. In other product areas, paper towel volumes rose at a double-digit rate and benefited from improved distribution levels and promotion activity. |
In Europe, consumer tissue net sales increased 8 percent, including a favorable currency benefit of 11 percent. Sales volumes and net selling prices each declined 2 percent as market conditions worsened somewhat over the last three months.
In K-C International, consumer tissue net sales increased 11 percent, including an 8 percent benefit from changes in currency rates. Net selling prices increased 6 percent, driven by improvements in Latin America, and changes in product mix benefited sales by 3 percent. Sales volumes declined 7 percent, including a 2 percent negative impact from exiting certain non-strategic products in conjunction with the pulp and tissue restructuring.
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• | Net sales of K-C Professional (“KCP”) & other products in North America increased 4 percent. Net selling prices rose 2 percent, while changes in product mix and currency rates each benefited sales by 1 percent. Sales volumes were even with year-ago levels. Although safety product volumes advanced mid-single digits, washroom product volumes were even with year-ago levels, as high unemployment and office vacancy levels continued to impact demand, and wiper volumes declined low-single digits. Net sales in Europe increased 20 percent, driven by stronger currency rates that benefited sales by 13 percent. In addition, sales volumes advanced 6 percent compared to a relatively soft year-ago performance. Net sales increased 19 percent in K-C International, including a 9 percent benefit from favorable currency rates. Sales volumes were up 7 percent, with particular strength in Latin America and South Asia, and net selling prices rose 3 percent. |
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• | Net sales of health care products increased 11 percent in the third quarter. Sales volumes rose 9 percent and changes in currency rates increased sales 3 percent, while net selling prices were off 1 percent. Medical supply volumes rose double-digits, led by growth in exam gloves and surgical products, reflecting improved North American market demand. In other areas of the business, global medical device volumes increased high-single digits, including strong growth in Europe and Asia. |
By Geography
(Millions of dollars)
|
| | | | | | | | |
Net Sales | | 2011 | | 2010 |
| | | | |
North America | | $ | 2,740 |
| | $ | 2,741 |
|
Outside North America | | 2,838 |
| | 2,429 |
|
Intergeographic sales | | (196 | ) | | (191 | ) |
| | | | |
Consolidated | | $ | 5,382 |
| | $ | 4,979 |
|
Commentary:
| |
• | Net sales in North America were essentially even with the prior year, primarily due to higher net selling prices and favorable currency effects, offset by lower sales volumes, primarily in infant care and child care. |
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• | Net sales outside North America increased 16.8 percent due to favorable currency effects, higher net selling prices, higher sales volumes, primarily in personal care, in a number of markets including most of Latin America, South Korea, China, and Vietnam, and improvement in product mix. |
Analysis of Operating Profit
By Business Segment
(Millions of dollars)
|
| | | | | | | | |
Operating Profit | | 2011 | | 2010 |
| | | | |
Personal Care | | $ | 396 |
| | $ | 428 |
|
Consumer Tissue | | 206 |
| | 156 |
|
K-C Professional & Other | | 127 |
| | 116 |
|
Health Care | | 56 |
| | 49 |
|
Corporate & Other(a) | | (140 | ) | < |