NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
The accompanying unaudited interim 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 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 material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in millions, except per share dollar amounts, unless otherwise noted.
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, 2018. The terms "Corporation," "Kimberly-Clark," "K-C," "we," "our" and "us" refer to Kimberly-Clark Corporation and its consolidated subsidiaries.
Annual Goodwill Impairment Assessment
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized, but rather is assessed for impairment annually and whenever events and circumstances indicate that impairment may have occurred. Impairment testing compares the reporting unit carrying amount, including goodwill, with its fair value. Fair value is estimated based on discounted cash flows. If the reporting unit carrying amount, including goodwill, exceeds its fair value, a goodwill impairment charge for the excess amount above fair value would be recorded. For 2019, we completed the required annual testing of goodwill for impairment for all of our reporting units using the first day of the third quarter as the measurement date, and determined through quantitative impairment testing that goodwill is not impaired.
Highly Inflationary Accounting in Argentina
GAAP guidance requires the use of highly inflationary accounting for countries whose cumulative three-year inflation exceeds 100 percent. In the second quarter of 2018, published inflation indices indicated that the three-year cumulative inflation in Argentina exceeded 100 percent, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiaries in Argentina (“K-C Argentina”). Under highly inflationary accounting, K-C Argentina’s functional currency became the U.S. dollar, and its income statement and balance sheet have been measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other (income) and expense, net and was not material. As of September 30, 2019, K-C Argentina had a small net peso monetary position. Net sales of K-C Argentina were approximately 1 percent of our consolidated net sales for the nine months ended September 30, 2019 and 2018.
Leases
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
Variable lease payments are generally expensed as incurred and include certain index-based changes in rent, certain nonlease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
Certain lease agreements with lease and nonlease components are combined as a single lease component. The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Recently Adopted Accounting Standards
The Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements. The new guidance requires a lessee to recognize assets and liabilities for all leases with lease terms of more than 12 months and provide additional disclosures. The
ASU requires adoption using a modified retrospective transition approach with either 1) periods prior to the adoption date being recast or 2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast. We adopted this standard on January 1, 2019 using the cumulative-effect adjustment approach. We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019 whereby these contracts were not reassessed or reclassified from their previous assessment as of December 31, 2018. We also elected certain other practical expedients in transition including not reassessing existing land easements as lease contracts. For all new and modified leases after adoption of the ASU, we have taken the component election allowing us to generally account for lease components together with nonlease components in the calculation of the lease asset and corresponding liability. We implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess our contracts and enable proper accounting and reporting of financial information upon adoption. No cumulative-effect adjustment was recognized as the amount was not material, and the impact on our results of operations and cash flows was also not material. See Note 7 for the financial position impact and additional disclosures.
The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends presentation and disclosure requirements and changes how companies assess hedge effectiveness. This ASU requires adoption using a modified retrospective transition approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast. We adopted this standard on January 1, 2019 with no cumulative-effect adjustment as the amount was not material. The effects of this standard on our financial position, results of operations and cash flows were not material.
The FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. We early adopted this standard as of July 1, 2019 on a prospective basis. The impact on our disclosures was not material.
Accounting Standards Issued - Not Yet Adopted
The FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.
Note 2. 2018 Global Restructuring Program
In January 2018, we announced the 2018 Global Restructuring Program to reduce our structural cost base by streamlining and simplifying our manufacturing supply chain and overhead organization. We expect to close or sell approximately 10 manufacturing facilities and expand production capacity at several others. We expect to exit or divest some lower-margin businesses that generate approximately 1 percent of our net sales. The sales are concentrated in our consumer tissue business segment. The restructuring is expected to impact our organizations in all major geographies. Workforce reductions are expected to be in the range of 5,000 to 5,500. Certain capital appropriations under the 2018 Global Restructuring Program are being finalized. Accounting for actions related to each appropriation will commence when the appropriation is authorized for execution.
The restructuring is expected to be completed by the end of 2020, with total costs anticipated to be $1.7 billion to $1.9 billion pre-tax ($1.35 billion to $1.5 billion after tax). Cash costs are expected to be $900 to $1.0 billion, primarily related to workforce reductions. Non-cash charges are expected to be $800 to $900 pre-tax and will primarily consist of incremental depreciation, asset write-offs and pension settlement and curtailment charges. Restructuring charges in 2019 are expected to be $375 to $425 pre-tax ($300 to $345 after tax).
The following net charges were incurred in connection with the 2018 Global Restructuring Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cost of products sold:
|
|
|
|
|
|
|
|
|
Charges for workforce reductions
|
$
|
1
|
|
|
$
|
31
|
|
|
$
|
33
|
|
|
$
|
156
|
|
|
Asset impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
74
|
|
|
Asset write-offs
|
18
|
|
|
16
|
|
|
45
|
|
|
102
|
|
|
Incremental depreciation
|
57
|
|
|
47
|
|
|
189
|
|
|
115
|
|
|
Other exit costs
|
28
|
|
|
9
|
|
|
64
|
|
|
18
|
|
|
Total
|
104
|
|
|
103
|
|
|
331
|
|
|
465
|
|
|
Marketing, research and general expenses:
|
|
|
|
|
|
|
|
|
Charges (adjustments) for workforce reductions
|
(4
|
)
|
|
(13
|
)
|
|
(12
|
)
|
|
257
|
|
|
Other exit costs
|
25
|
|
|
39
|
|
|
78
|
|
|
84
|
|
|
Total
|
21
|
|
|
26
|
|
|
66
|
|
|
341
|
|
|
Other (income) and expense, net
|
(181
|
)
|
|
—
|
|
|
(182
|
)
|
|
—
|
|
|
Nonoperating expense(a)
|
—
|
|
|
20
|
|
|
—
|
|
|
50
|
|
|
Total charges
|
(56
|
)
|
|
149
|
|
|
215
|
|
|
856
|
|
|
Provision for income taxes
|
23
|
|
|
(30
|
)
|
|
(35
|
)
|
|
(197
|
)
|
|
Net charges
|
(33
|
)
|
|
119
|
|
|
180
|
|
|
659
|
|
|
Net impact related to equity companies and noncontrolling interests
|
—
|
|
|
—
|
|
|
1
|
|
|
(10
|
)
|
|
Net charges attributable to Kimberly-Clark Corporation
|
$
|
(33
|
)
|
|
$
|
119
|
|
|
$
|
181
|
|
|
$
|
649
|
|
|
|
|
|
(a)
|
Represents non-cash pension settlement charges resulting from restructuring actions.
|
The asset impairment charges were measured based on the excess of the carrying value of the impacted asset groups over their fair values. These fair values were measured by using discounted cash flows expected over the limited time the assets would remain in use and as a result, the assets were essentially written off. The use of discounted cash flows represents a level 3 measure under the fair value hierarchy.
Other (income) and expense, net in 2019 includes a pre-tax gain of approximately $182 on the sale of a manufacturing facility and associated real estate which were disposed of as part of the restructuring.
The following summarizes the restructuring liabilities activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Restructuring liabilities at January 1
|
|
$
|
210
|
|
|
$
|
—
|
|
|
Charges for workforce reductions and other cash exit costs
|
|
159
|
|
|
512
|
|
|
Cash payments
|
|
(230
|
)
|
|
(229
|
)
|
|
Currency and other
|
|
3
|
|
|
(20
|
)
|
|
Restructuring liabilities at September 30
|
|
$
|
142
|
|
|
$
|
263
|
|
Restructuring liabilities of $84 and $138 are recorded in Accrued expenses and other current liabilities and $58 and $125 are recorded in Other Liabilities as of September 30, 2019 and 2018, respectively. The impact related to restructuring charges is recorded in Operating working capital and Other Operating Activities, as appropriate, in our consolidated cash flow statements.
Through September 30, 2019, cumulative pre-tax charges for the 2018 Global Restructuring Program were $1.3 billion ($1.0 billion after tax).
Note 3. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). In the period ended December 31, 2017, we recorded a provisional discrete net tax benefit related to the transition tax, remeasurement of deferred taxes, our reassessment of permanently reinvested earnings, uncertain tax positions
and valuation allowances, and actions taken in anticipation of the Tax Act. The provisional amounts recorded in 2017 were finalized in 2018. During 2018, we recorded discrete net tax expense related to new guidance issued during 2018 affecting tax benefits we recorded in the period ended December 31, 2017 for the transition tax and certain tax planning actions taken in anticipation of the Tax Act. At December 31, 2018, we finalized our policy and elected to use the period cost method for global intangible low-taxed income (“GILTI”) provisions and therefore have not recorded deferred taxes for basis differences expected to reverse in future periods.
In the first quarter of 2018, we recorded discrete net tax expense of $82 primarily related to guidance issued affecting tax benefits we recorded in the fourth quarter of 2017 for certain tax planning actions taken in anticipation of the Tax Act. In the third quarter of 2018, we recorded discrete net tax expense of $26 as a result of finalizing estimates related to the transition tax and remeasurement of deferred taxes.
The Brazilian tax authority, Secretaria da Receita Federal do Brasil ("RFB"), concluded an audit for the taxable periods from 2008-2013. This audit included a review of our determinations of amortization of certain goodwill arising from prior acquisitions in Brazil, and the RFB has proposed adjustments that effectively eliminate the goodwill amortization benefits related to these transactions. Administrative appeals have been exhausted, and the dispute is moving into the judicial phase. The amount of the proposed tax adjustments and penalties is approximately $90 as of September 30, 2019 (translated at the September 30, 2019 currency exchange rate). The amount ultimately in dispute will be significantly greater because of interest. We believe we have meritorious defenses and intend to vigorously defend these proposed adjustments; however, it is expected to take a number of years to reach resolution of this matter.
Note 4. Fair Value Information
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.
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.
During the nine months ended September 30, 2019 and for the full year 2018, there were no significant transfers to or from level 3 fair value determinations.
Derivative assets and liabilities are measured on a recurring basis at fair value. At September 30, 2019 and December 31, 2018, derivative assets were $61 and $30, respectively, and derivative liabilities were $27 and $18, respectively. 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 values of hedging instruments used to manage foreign currency risk are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. Measurement of our derivative assets and liabilities is considered a level 2 measurement. Additional information on our classification and use of derivative instruments is contained in Note 8.
Redeemable preferred securities of subsidiaries are measured on a recurring basis at fair value and were $38 and $64 at September 30, 2019 and December 31, 2018, respectively. They are not traded in active markets. As of September 30, 2019, the fair values of the redeemable securities were based on a discounted cash flow valuation model. Measurement of the redeemable preferred securities is considered a level 3 measurement.
Company-owned life insurance ("COLI") assets are measured on a recurring basis at fair value. COLI assets were $72 and $64 at September 30, 2019 and December 31, 2018, respectively. The COLI policies are a source of funding primarily for our nonqualified employee benefits and are included in Other Assets. The COLI policies are measured at fair value using the net asset value per share practical expedient, and therefore, are not classified in the fair value hierarchy.
The following table includes the fair value of our financial instruments for which disclosure of fair value is required:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(a)
|
1
|
|
$
|
416
|
|
|
$
|
416
|
|
|
$
|
539
|
|
|
$
|
539
|
|
|
Time deposits(b)
|
1
|
|
302
|
|
|
302
|
|
|
256
|
|
|
256
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Short-term debt(c)
|
2
|
|
796
|
|
|
796
|
|
|
495
|
|
|
495
|
|
|
Long-term debt(d)
|
2
|
|
6,957
|
|
|
7,885
|
|
|
6,960
|
|
|
7,192
|
|
|
|
|
|
(a)
|
Cash equivalents are composed of certificates of deposit, time deposits and other interest-bearing investments with original maturity dates of 90 days or less. Cash equivalents are recorded at cost, which approximates fair value.
|
|
|
|
|
(b)
|
Time deposits are composed of deposits with original maturities of more than 90 days but less than one year and instruments with original maturities of greater than one year, included in Other current assets or Other Assets in the consolidated balance sheet, as appropriate. Time deposits are recorded at cost, which approximates fair value.
|
|
|
|
|
(c)
|
Short-term debt is composed of U.S. commercial paper and/or other similar short-term debt issued by non-U.S. subsidiaries, all of which are recorded at cost, which approximates fair value.
|
|
|
|
|
(d)
|
Long-term debt includes the current portion of these debt instruments. Fair values were estimated based on quoted prices for financial instruments for which all significant inputs were observable, either directly or indirectly.
|
Note 5. Earnings Per Share ("EPS")
There are no adjustments required to be made to net income for purposes of computing EPS. The average number of common shares outstanding is reconciled to those used in the basic and diluted EPS computations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
(Millions of shares)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Basic
|
|
343.8
|
|
|
347.2
|
|
|
344.1
|
|
|
348.8
|
|
|
Dilutive effect of stock options and restricted share unit awards
|
|
2.1
|
|
|
1.6
|
|
|
1.9
|
|
|
1.6
|
|
|
Diluted
|
|
345.9
|
|
|
348.8
|
|
|
346.0
|
|
|
350.4
|
|
The impact of options outstanding that were not included in the computation of diluted EPS because their exercise price was greater than the average market price of the common shares was insignificant. The number of common shares outstanding as of September 30, 2019 and 2018 was 343.1 million and 346.6 million, respectively.
Note 6. Stockholders' Equity
Net unrealized currency gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries, except those in highly inflationary economies, are recorded in Accumulated Other Comprehensive Income ("AOCI"). For these operations, changes in exchange rates generally do not affect cash flows; therefore, unrealized translation adjustments are recorded in AOCI rather than net income. Upon sale or substantially complete liquidation of any of these subsidiaries, the applicable unrealized translation would be removed from AOCI and reported as part of the gain or loss on the sale or liquidation.
Also included in unrealized translation amounts 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 change in net unrealized currency translation for the nine months ended September 30, 2019 was primarily due to weakening of foreign currencies versus the U.S. dollar, including the South Korean won, British pound sterling, and Brazilian real.
The changes in the components of AOCI attributable to Kimberly-Clark, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Translation
|
|
Defined Benefit Pension Plans
|
|
Other Postretirement Benefit Plans
|
|
Cash Flow Hedges and Other
|
|
Balance as of December 31, 2017
|
|
$
|
(1,864
|
)
|
|
$
|
(976
|
)
|
|
$
|
(39
|
)
|
|
$
|
(40
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
(333
|
)
|
|
25
|
|
|
14
|
|
|
17
|
|
|
(Income) loss reclassified from AOCI
|
|
1
|
|
|
63
|
|
(a)
|
(1
|
)
|
(a)
|
14
|
|
|
Net current period other comprehensive income (loss)
|
|
(332
|
)
|
|
88
|
|
|
13
|
|
|
31
|
|
|
Tax effects reclassified from AOCI
|
|
(18
|
)
|
|
(125
|
)
|
|
(5
|
)
|
|
(8
|
)
|
|
Balance as of September 30, 2018
|
|
$
|
(2,214
|
)
|
|
$
|
(1,013
|
)
|
|
$
|
(31
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
(2,297
|
)
|
|
$
|
(1,017
|
)
|
|
$
|
12
|
|
|
$
|
3
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(132
|
)
|
|
1
|
|
|
16
|
|
|
(6
|
)
|
|
(Income) loss reclassified from AOCI
|
|
—
|
|
|
22
|
|
(a)
|
(1
|
)
|
(a)
|
(13
|
)
|
|
Net current period other comprehensive income (loss)
|
|
(132
|
)
|
|
23
|
|
|
15
|
|
|
(19
|
)
|
|
Balance as of September 30, 2019
|
|
$
|
(2,429
|
)
|
|
$
|
(994
|
)
|
|
$
|
27
|
|
|
$
|
(16
|
)
|
|
|
|
|
(a)
|
Included in computation of net periodic benefit costs.
|
Note 7. Leases
We have entered into leases for certain facilities, vehicles, material handling and other equipment. Our operating leases have remaining contractual terms up to 13 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases within 1 year. Our operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. Our operating lease costs are primarily related to facility leases for inventory warehousing and administration offices, and our finance leases are immaterial.
Operating Lease Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
Income Statement Classification
|
|
Lease cost
|
|
$
|
41
|
|
|
$
|
120
|
|
|
Cost of products sold, Marketing, research and general expenses
|
|
Variable lease cost(a)
|
|
30
|
|
|
102
|
|
|
Cost of products sold, Marketing, research and general expenses
|
|
Total lease cost
|
|
$
|
71
|
|
|
$
|
222
|
|
|
|
(a) Includes short-term leases, which are immaterial.
Operating Lease Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Balance Sheet Classification
|
|
Lease assets
|
|
$
|
399
|
|
|
Other Assets
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
$
|
133
|
|
|
Accrued expenses and other current liabilities
|
|
Noncurrent lease liabilities
|
|
275
|
|
|
Other Liabilities
|
|
Total lease liabilities
|
|
$
|
408
|
|
|
|
Maturity of Operating Lease Liabilities
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
2019
|
|
$
|
40
|
|
|
2020
|
|
138
|
|
|
2021
|
|
95
|
|
|
2022
|
|
66
|
|
|
2023
|
|
45
|
|
|
Thereafter
|
|
75
|
|
|
Total lease payments
|
|
459
|
|
|
Less imputed interest
|
|
51
|
|
|
Present value of lease liabilities
|
|
$
|
408
|
|
As of September 30, 2019, our operating leases have a weighted-average remaining lease term of 4.3 years and a weighted-average discount rate of 5.0 percent. Cash paid for amounts included in the measurement of operating lease liabilities was $121 for the nine months ended September 30, 2019.
As of September 30, 2019, we have additional operating leases, primarily for facilities, that have not yet commenced of $105. These operating leases will commence during 2020 with lease terms of up to 10 years.
The future minimum obligations under operating leases in effect as of December 31, 2018 having a noncancelable term in excess of one year as determined prior to the adoption of ASU 842 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
2019
|
|
$
|
160
|
|
|
2020
|
|
123
|
|
|
2021
|
|
85
|
|
|
2022
|
|
57
|
|
|
2023
|
|
41
|
|
|
Thereafter
|
|
72
|
|
|
Future minimum obligations
|
|
$
|
538
|
|
Note 8. 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, and commodity prices. We employ a number of practices to manage these risks, including operating and financing activities and, where appropriate, the use of derivative instruments.
At September 30, 2019 and December 31, 2018, derivative assets were $61 and $30, respectively, and derivative liabilities were $27 and $18, respectively, primarily comprised of foreign currency exchange contracts. Derivative assets are recorded in Other current assets or Other Assets, as appropriate, and derivative liabilities are recorded in Accrued expenses and other current liabilities or Other Liabilities, as appropriate.
Foreign Currency Exchange Rate Risk
Translation adjustments result from translating foreign entities' financial statements into U.S. dollars from their functional currencies. The risk to any particular entity's net assets is reduced to the extent that the entity is financed with local currency borrowings. A portion of our balance sheet translation exposure for certain affiliates, which results from changes in translation rates between the affiliates’ functional currencies and the U.S. dollar, is hedged with cross-currency swap contracts and certain foreign denominated debt which are designated as net investment hedges. The foreign currency exposure on certain non-functional currency denominated monetary assets and liabilities, primarily intercompany loans and accounts payable, is hedged with primarily undesignated derivative instruments.
Derivative instruments are entered into to hedge a portion of forecasted cash flows denominated in foreign currencies for non-U.S. operations' purchases of raw materials, which are priced in U.S. dollars, and imports of intercompany finished goods and work-in-process priced predominantly in U.S. dollars and euros. The derivative instruments used to manage these exposures are designated as cash flow hedges.
Interest Rate Risk
Interest rate risk is managed using a portfolio of variable and fixed-rate debt composed of short and long-term instruments. Interest rate swap contracts may be used to facilitate the maintenance of the desired ratio of variable and fixed-rate debt and are designated as fair value hedges. From time to time, we also hedge the anticipated issuance of fixed-rate debt, and these contracts are designated as cash flow hedges.
Commodity Price Risk
We use derivative instruments, such as forward contracts, to hedge a limited portion of our exposure to market risk arising from changes in prices of certain commodities. These derivatives are designated as cash flow hedges of specific quantities of the underlying commodity expected to be purchased in future months.
Fair Value Hedges
Derivative instruments that are designated and qualify as fair value hedges are predominantly used to manage interest rate risk. The fair values of these interest rate derivative instruments are recorded as an asset or liability, as appropriate, with the offset recorded in Interest expense. The offset to the change in fair values of the related debt is also recorded in Interest expense. 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. As of September 30, 2019, the aggregate notional values and carrying values of outstanding interest rate contracts designated as fair value hedges were $300 and $310, respectively. For the nine months ended September 30, 2019 and 2018, gains or losses recognized in Interest expense for interest rate swaps were not significant.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, 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 income statement line and period that the hedged exposure affects earnings. As of September 30, 2019, outstanding commodity forward contracts were in place to hedge a limited portion of our estimated requirements of the related underlying commodities in the remainder of 2019 and future periods. As of September 30, 2019, the aggregate notional value of outstanding foreign exchange derivative contracts designated as cash flow hedges was $640. For the nine months ended September 30, 2019 and 2018, no significant gains or losses were reclassified into Interest expense, Cost of products sold or Other (income) and expense, net 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, 2019, amounts to be reclassified from AOCI into Interest expense, Cost of products sold or Other (income) and expense, net during the next twelve months are not expected to be material. The maximum maturity of cash flow hedges in place at September 30, 2019 is September 2021.
Net Investment Hedges
For derivative instruments that are designated and qualify as net investment hedges, the aggregate notional value was $1.5 billion at September 30, 2019. We exclude the interest accruals on cross-currency swap contracts and the forward points on foreign exchange forward contracts from the assessment and measurement of hedge effectiveness. We recognize the interest accruals on cross-currency swap contracts in earnings within Interest expense. We amortize the forward points on foreign exchange contracts into earnings within Interest expense over the life of the hedging relationship. Changes in fair value of net investment hedges are recorded in AOCI and offset the change in the value of the net investment being hedged. For the nine months ended September 30, 2019, unrealized gains of $49 related to net investment hedge fair value changes were recorded in AOCI and no significant amounts were reclassified from AOCI to Interest expense.
No significant amounts were excluded from the assessment of net investment, fair value or cash flow hedge effectiveness as of September 30, 2019.
Undesignated Hedging Instruments
Gains or losses on undesignated foreign exchange hedging instruments are immediately recognized in Other (income) and expense, net. Losses of $14 and $9 were recorded in the three months ended September 30, 2019 and 2018, respectively. Losses of $27 and $46 were recorded in the nine months ended September 30, 2019 and 2018, respectively. The effect on earnings from the use of these non-designated derivatives is substantially neutralized by the transactional gains and losses recorded on the underlying assets and liabilities. At September 30, 2019, the notional value of these undesignated derivative instruments was approximately $1.7 billion.
Note 9. Business Segment Information
We are organized into operating segments based on product groupings. These operating segments have been aggregated into three reportable global business segments: Personal Care, Consumer Tissue and K-C Professional. The reportable segments were determined in accordance with how our chief operating decision maker and 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 ongoing operations of the business segments, including the costs of corporate decisions related to the 2018 Global Restructuring Program described in Note 2.
The principal sources of revenue in each global business segment are described below:
|
|
|
|
•
|
Personal Care brands offer our consumers a trusted partner in caring for themselves and their families by delivering confidence, protection and discretion through a wide variety of innovative solutions and products such as disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products. Products in this segment are sold under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Kotex, U by Kotex, Intimus, Depend, Plenitud, Poise and other brand names.
|
|
|
|
|
•
|
Consumer Tissue offers a wide variety of innovative solutions and trusted brands that responsibly improve everyday living for families around the world. Products in this segment include facial and bathroom tissue, paper towels, napkins and related products, and are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Neve and other brand names.
|
|
|
|
|
•
|
K-C Professional partners with businesses to create Exceptional Workplaces, helping to make them healthier, safer and more productive through a range of solutions and supporting products such as wipers, tissue, towels, apparel, soaps and sanitizers. Our brands, including Kleenex, Scott, WypAll, Kimtech and KleenGuard are well known for quality and trusted to help people around the world work better.
|
Information concerning consolidated operations by business segment is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
|
|
Nine Months Ended September 30
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
|
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Care
|
|
$
|
2,305
|
|
|
$
|
2,252
|
|
|
+2
|
%
|
|
$
|
6,866
|
|
|
$
|
6,816
|
|
|
+1
|
%
|
|
Consumer Tissue
|
|
1,484
|
|
|
1,469
|
|
|
+1
|
%
|
|
4,482
|
|
|
4,520
|
|
|
-1
|
%
|
|
K-C Professional
|
|
839
|
|
|
848
|
|
|
-1
|
%
|
|
2,477
|
|
|
2,541
|
|
|
-3
|
%
|
|
Corporate & Other
|
|
12
|
|
|
13
|
|
|
N.M.
|
|
|
42
|
|
|
40
|
|
|
N.M.
|
|
|
TOTAL NET SALES
|
|
$
|
4,640
|
|
|
$
|
4,582
|
|
|
+1
|
%
|
|
$
|
13,867
|
|
|
$
|
13,917
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Care
|
|
$
|
490
|
|
|
$
|
466
|
|
|
+5
|
%
|
|
$
|
1,459
|
|
|
$
|
1,397
|
|
|
+4
|
%
|
|
Consumer Tissue
|
|
264
|
|
|
212
|
|
|
+25
|
%
|
|
726
|
|
|
668
|
|
|
+9
|
%
|
|
K-C Professional
|
|
176
|
|
|
160
|
|
|
+10
|
%
|
|
488
|
|
|
483
|
|
|
+1
|
%
|
|
Corporate & Other(a)
|
|
(190
|
)
|
|
(171
|
)
|
|
N.M.
|
|
|
(599
|
)
|
|
(952
|
)
|
|
N.M.
|
|
|
Other (income) and expense, net(a)
|
|
(175
|
)
|
|
(2
|
)
|
|
N.M.
|
|
|
(166
|
)
|
|
6
|
|
|
N.M.
|
|
|
TOTAL OPERATING PROFIT
|
|
$
|
915
|
|
|
$
|
669
|
|
|
+37
|
%
|
|
$
|
2,240
|
|
|
$
|
1,590
|
|
|
+41
|
%
|
|
|
|
|
(a)
|
Corporate & Other and Other (income) and expense, net include income and expense not associated with the business segments, including charges related to the 2018 Global Restructuring Program. Restructuring charges related to the personal care, consumer tissue and K-C Professional business segments were $53, $49 and $21, respectively, for the three months ended September 30, 2019, $75, $35 and $11, respectively, for the three months ended September 30, 2018, $208, $131 and $52, respectively, for the nine months ended September 30, 2019 and $476, $194 and $112, respectively, for the nine months ended September 30, 2018.
|
N.M. - Not Meaningful
Sales of Principal Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
(Billions of dollars)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Consumer tissue products
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
4.5
|
|
|
$
|
4.5
|
|
|
Baby and child care products
|
|
1.6
|
|
|
1.6
|
|
|
4.7
|
|
|
4.7
|
|
|
Away-from-home professional products
|
|
0.8
|
|
|
0.8
|
|
|
2.5
|
|
|
2.5
|
|
|
All other
|
|
0.7
|
|
|
0.7
|
|
|
2.2
|
|
|
2.2
|
|
|
Consolidated
|
|
$
|
4.6
|
|
|
$
|
4.6
|
|
|
$
|
13.9
|
|
|
$
|
13.9
|
|
Note 10. Supplemental Balance Sheet Data
The following schedule presents a summary of inventories by major class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
LIFO
|
|
Non-LIFO
|
|
Total
|
|
LIFO
|
|
Non-LIFO
|
|
Total
|
|
Raw materials
|
|
$
|
81
|
|
|
$
|
233
|
|
|
$
|
314
|
|
|
$
|
99
|
|
|
$
|
263
|
|
|
$
|
362
|
|
|
Work in process
|
|
130
|
|
|
91
|
|
|
221
|
|
|
120
|
|
|
94
|
|
|
214
|
|
|
Finished goods
|
|
462
|
|
|
687
|
|
|
1,149
|
|
|
461
|
|
|
692
|
|
|
1,153
|
|
|
Supplies and other
|
|
—
|
|
|
263
|
|
|
263
|
|
|
—
|
|
|
275
|
|
|
275
|
|
|
|
|
673
|
|
|
1,274
|
|
|
1,947
|
|
|
680
|
|
|
1,324
|
|
|
2,004
|
|
|
Excess of FIFO or weighted-average cost over LIFO cost
|
|
(168
|
)
|
|
—
|
|
|
(168
|
)
|
|
(191
|
)
|
|
—
|
|
|
(191
|
)
|
|
Total
|
|
$
|
505
|
|
|
$
|
1,274
|
|
|
$
|
1,779
|
|
|
$
|
489
|
|
|
$
|
1,324
|
|
|
$
|
1,813
|
|
Inventories are valued at the lower of cost or net realizable value, determined on the FIFO or weighted-average cost methods, and at the lower of cost or market, determined on the LIFO cost method.
The following schedule presents a summary of property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Land
|
$
|
164
|
|
|
$
|
169
|
|
|
Buildings
|
2,788
|
|
|
2,787
|
|
|
Machinery and equipment
|
13,888
|
|
|
14,059
|
|
|
Construction in progress
|
780
|
|
|
699
|
|
|
|
17,620
|
|
|
17,714
|
|
|
Less accumulated depreciation
|
(10,462
|
)
|
|
(10,555
|
)
|
|
Total
|
$
|
7,158
|
|
|
$
|
7,159
|
|