KIMBERLY CLARK CORP - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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
![kmb-20200930_g1.jpg](https://www.sec.gov/Archives/edgar/data/0000055785/000005578520000074/kmb-20200930_g1.jpg)
KIMBERLY CLARK CORPORATON
(Exact name of registrant as specified in its charter)
Delaware | 39-0394230 | |||||||
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
P.O. Box 619100
Dallas, TX
75261-9100
(Address of principal executive offices)
(Zip code)
(972) 281-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock | KMB | New York Stock Exchange | ||||||
0.625% Notes due 2024 | KMB24 | New York Stock Exchange |
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 o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 15, 2020, there were 340,136,715 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 STATEMENTS
(Unaudited)
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
(Millions of dollars, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
Net Sales | $ | 4,683 | $ | 4,640 | $ | 14,304 | $ | 13,867 | ||||||||||||||||||
Cost of products sold | 3,093 | 3,085 | 9,146 | 9,398 | ||||||||||||||||||||||
Gross Profit | 1,590 | 1,555 | 5,158 | 4,469 | ||||||||||||||||||||||
Marketing, research and general expenses | 919 | 815 | 2,636 | 2,395 | ||||||||||||||||||||||
Other (income) and expense, net | 5 | (175) | 27 | (166) | ||||||||||||||||||||||
Operating Profit | 666 | 915 | 2,495 | 2,240 | ||||||||||||||||||||||
Nonoperating expense | (40) | (11) | (57) | (33) | ||||||||||||||||||||||
Interest income | 2 | 3 | 6 | 8 | ||||||||||||||||||||||
Interest expense | (62) | (66) | (188) | (198) | ||||||||||||||||||||||
Income Before Income Taxes and Equity Interests | 566 | 841 | 2,256 | 2,017 | ||||||||||||||||||||||
Provision for income taxes | (114) | (192) | (510) | (467) | ||||||||||||||||||||||
Income Before Equity Interests | 452 | 649 | 1,746 | 1,550 | ||||||||||||||||||||||
Share of net income of equity companies | 31 | 31 | 104 | 91 | ||||||||||||||||||||||
Net Income | 483 | 680 | 1,850 | 1,641 | ||||||||||||||||||||||
Net income attributable to noncontrolling interests | (11) | (9) | (37) | (31) | ||||||||||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | $ | 472 | $ | 671 | $ | 1,813 | $ | 1,610 | ||||||||||||||||||
Per Share Basis | ||||||||||||||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | ||||||||||||||||||||||||||
Basic | $ | 1.38 | $ | 1.95 | $ | 5.32 | $ | 4.68 | ||||||||||||||||||
Diluted | $ | 1.38 | $ | 1.94 | $ | 5.30 | $ | 4.65 | ||||||||||||||||||
See notes to the unaudited interim consolidated financial statements.
1
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
(Millions of dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
Net Income | $ | 483 | $ | 680 | $ | 1,850 | $ | 1,641 | ||||||||||||||||||
Other Comprehensive Income (Loss), Net of Tax | ||||||||||||||||||||||||||
Unrealized currency translation adjustments | 38 | (170) | (236) | (148) | ||||||||||||||||||||||
Employee postretirement benefits | — | 16 | 39 | 38 | ||||||||||||||||||||||
Other | (3) | 2 | 5 | (18) | ||||||||||||||||||||||
Total Other Comprehensive Income (Loss), Net of Tax | 35 | (152) | (192) | (128) | ||||||||||||||||||||||
Comprehensive Income | 518 | 528 | 1,658 | 1,513 | ||||||||||||||||||||||
Comprehensive (income) loss attributable to noncontrolling interests | (16) | 1 | (34) | (15) | ||||||||||||||||||||||
Comprehensive Income Attributable to Kimberly-Clark Corporation | $ | 502 | $ | 529 | $ | 1,624 | $ | 1,498 |
See notes to the unaudited interim consolidated financial statements.
2
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(2020 Data is Unaudited)
(Millions of dollars) | September 30, 2020 | December 31, 2019 | ||||||||||||
ASSETS | ||||||||||||||
Current Assets | ||||||||||||||
Cash and cash equivalents | $ | 1,518 | $ | 442 | ||||||||||
Accounts receivable, net | 2,125 | 2,263 | ||||||||||||
Inventories | 1,787 | 1,790 | ||||||||||||
Other current assets | 645 | 562 | ||||||||||||
Total Current Assets | 6,075 | 5,057 | ||||||||||||
Property, Plant and Equipment, Net | 7,497 | 7,450 | ||||||||||||
Investments in Equity Companies | 333 | 268 | ||||||||||||
Goodwill | 1,418 | 1,467 | ||||||||||||
Other Assets | 1,208 | 1,041 | ||||||||||||
TOTAL ASSETS | $ | 16,531 | $ | 15,283 | ||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
Current Liabilities | ||||||||||||||
Debt payable within one year | $ | 517 | $ | 1,534 | ||||||||||
Trade accounts payable | 2,995 | 3,055 | ||||||||||||
Accrued expenses and other current liabilities | 2,230 | 1,978 | ||||||||||||
Dividends payable | 360 | 352 | ||||||||||||
Total Current Liabilities | 6,102 | 6,919 | ||||||||||||
Long-Term Debt | 7,851 | 6,213 | ||||||||||||
Noncurrent Employee Benefits | 873 | 897 | ||||||||||||
Deferred Income Taxes | 500 | 511 | ||||||||||||
Other Liabilities | 599 | 520 | ||||||||||||
Redeemable Preferred Securities of Subsidiaries | 29 | 29 | ||||||||||||
Stockholders' Equity | ||||||||||||||
Kimberly-Clark Corporation | ||||||||||||||
Preferred stock - no par value - authorized 20.0 million shares, none issued | — | — | ||||||||||||
Common stock - $1.25 par value - authorized 1.2 billion shares; issued 378.6 million shares at September 30, 2020 and December 31, 2019 | 473 | 473 | ||||||||||||
Additional paid-in capital | 610 | 556 | ||||||||||||
Common stock held in treasury, at cost - 38.2 and 37.1 million shares at September 30, 2020 and December 31, 2019, respectively | (4,661) | (4,454) | ||||||||||||
Retained earnings | 7,395 | 6,686 | ||||||||||||
Accumulated other comprehensive income (loss) | (3,482) | (3,294) | ||||||||||||
Total Kimberly-Clark Corporation Stockholders' Equity | 335 | (33) | ||||||||||||
Noncontrolling Interests | 242 | 227 | ||||||||||||
Total Stockholders' Equity | 577 | 194 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 16,531 | $ | 15,283 |
See notes to the unaudited interim consolidated financial statements.
3
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Millions of dollars, shares in thousands, except per share amounts) | Common Stock Issued | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 378,597 | $ | 473 | $ | 554 | 37,574 | $ | (4,545) | $ | 7,299 | $ | (3,513) | $ | 227 | $ | 495 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income in stockholders' equity, excludes redeemable interests' share | — | — | — | — | — | 472 | — | 10 | 482 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax, excludes redeemable interests' share | — | — | — | — | — | — | 30 | 6 | 36 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based awards exercised or vested | — | — | (2) | (672) | 79 | — | — | — | 77 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | — | 1,280 | (195) | — | — | — | (195) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of stock-based compensation | — | — | 45 | — | — | — | — | — | 45 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($1.07 per share) | — | — | — | — | — | (365) | — | — | (365) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | 13 | — | — | (11) | 1 | (1) | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 378,597 | $ | 473 | $ | 610 | 38,182 | $ | (4,661) | $ | 7,395 | $ | (3,482) | $ | 242 | $ | 577 |
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Millions of dollars, shares in thousands, except per share amounts) | Common Stock Issued | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 378,597 | $ | 473 | $ | 556 | 37,149 | $ | (4,454) | $ | 6,686 | $ | (3,294) | $ | 227 | $ | 194 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income in stockholders' equity, excludes redeemable interests' share | — | — | — | — | — | 1,813 | — | 34 | 1,847 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax, excludes redeemable interests' share | — | — | — | — | — | — | (189) | (2) | (191) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based awards exercised or vested | — | — | (54) | (2,294) | 266 | — | — | — | 212 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | — | 3,327 | (473) | — | — | — | (473) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of stock-based compensation | — | — | 98 | — | — | — | — | — | 98 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($3.21 per share) | — | — | — | — | — | (1,095) | — | (17) | (1,112) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | 10 | — | — | (9) | 1 | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 378,597 | $ | 473 | $ | 610 | 38,182 | $ | (4,661) | $ | 7,395 | $ | (3,482) | $ | 242 | $ | 577 |
See notes to the unaudited interim consolidated financial statements.
4
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Millions of dollars, shares in thousands, except per share amounts) | Common Stock Issued | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 378,597 | $ | 473 | $ | 510 | 34,381 | $ | (4,062) | $ | 6,170 | $ | (3,269) | $ | 228 | $ | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income in stockholders' equity, excludes redeemable interests' share | — | — | — | — | — | 671 | — | 8 | 679 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax, excludes redeemable interests' share | — | — | — | — | — | — | (142) | (10) | (152) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based awards exercised or vested | — | — | (3) | (483) | 55 | — | — | — | 52 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | — | 1,562 | (215) | — | — | — | (215) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of stock-based compensation | — | — | 24 | — | — | — | — | — | 24 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($1.03 per share) | — | — | — | — | — | (354) | — | — | (354) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | 4 | — | — | (2) | (1) | 3 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 378,597 | $ | 473 | $ | 535 | 35,460 | $ | (4,222) | $ | 6,485 | $ | (3,412) | $ | 229 | $ | 88 |
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Millions of dollars, shares in thousands, except per share amounts) | Common Stock Issued | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 378,597 | $ | 473 | $ | 548 | 33,635 | $ | (3,956) | $ | 5,947 | $ | (3,299) | $ | 241 | $ | (46) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income in stockholders' equity, excludes redeemable interests' share | — | — | — | — | — | 1,610 | — | 28 | 1,638 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax, excludes redeemable interests' share | — | — | — | — | — | — | (112) | (17) | (129) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based awards exercised or vested | — | — | (90) | (2,642) | 302 | — | — | — | 212 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | — | 4,467 | (568) | — | — | — | (568) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of stock-based compensation | — | — | 72 | — | — | — | — | — | 72 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($3.09 per share) | — | — | — | — | — | (1,063) | — | (24) | (1,087) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | 5 | — | — | (9) | (1) | 1 | (4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 378,597 | $ | 473 | $ | 535 | 35,460 | $ | (4,222) | $ | 6,485 | $ | (3,412) | $ | 229 | $ | 88 |
See notes to the unaudited interim consolidated financial statements.
5
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
Nine Months Ended September 30 | ||||||||||||||
(Millions of dollars) | 2020 | 2019 | ||||||||||||
Operating Activities | ||||||||||||||
Net income | $ | 1,850 | $ | 1,641 | ||||||||||
Depreciation and amortization | 606 | 700 | ||||||||||||
Stock-based compensation | 101 | 74 | ||||||||||||
Deferred income taxes | (30) | 8 | ||||||||||||
Net (gains) losses on asset dispositions | 67 | (155) | ||||||||||||
Equity companies' earnings (in excess of) less than dividends paid | (53) | (31) | ||||||||||||
Operating working capital | 292 | (399) | ||||||||||||
Postretirement benefits | 7 | (16) | ||||||||||||
Other | 2 | (10) | ||||||||||||
Cash Provided by Operations | 2,842 | 1,812 | ||||||||||||
Investing Activities | ||||||||||||||
Capital spending | (894) | (867) | ||||||||||||
Proceeds from dispositions of property | 5 | 206 | ||||||||||||
Investments in time deposits | (509) | (353) | ||||||||||||
Maturities of time deposits | 404 | 287 | ||||||||||||
Other | 17 | (40) | ||||||||||||
Cash Used for Investing | (977) | (767) | ||||||||||||
Financing Activities | ||||||||||||||
Cash dividends paid | (1,087) | (1,054) | ||||||||||||
Change in short-term debt | (497) | 324 | ||||||||||||
Debt proceeds | 1,842 | 700 | ||||||||||||
Debt repayments | (753) | (705) | ||||||||||||
Proceeds from exercise of stock options | 212 | 211 | ||||||||||||
Acquisitions of common stock for the treasury | (449) | (544) | ||||||||||||
Other | (40) | (92) | ||||||||||||
Cash Used for Financing | (772) | (1,160) | ||||||||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (17) | (8) | ||||||||||||
Change in Cash and Cash Equivalents | 1,076 | (123) | ||||||||||||
Cash and Cash Equivalents - Beginning of Period | 442 | 539 | ||||||||||||
Cash and Cash Equivalents - End of Period | $ | 1,518 | $ | 416 |
See notes to the unaudited interim consolidated financial statements.
6
KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
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, 2019. The terms "Corporation," "Kimberly-Clark," "K-C," "we," "our" and "us" refer to Kimberly-Clark Corporation and its consolidated subsidiaries.
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, 2020, 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, 2020 and 2019.
Recently Adopted Accounting Standards
The Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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). We adopted this standard as of January 1, 2020 on a prospective basis. The effects of this standard on our financial position, results of operations and cash flows were not material.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The effects of this standard on our financial position, results of operations and cash flows are not expected to be material.
Accounting Standards Issued - Not Yet Adopted
The FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, the calculation of the income tax impact of hybrid taxes, tax basis of goodwill after a business combination and recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.
7
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 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 in 2021, with total costs anticipated to be toward the high end of the range of $1.7 billion to $1.9 billion pre-tax ($1.3 billion to $1.4 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.
The following net charges were incurred in connection with the 2018 Global Restructuring Program:
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Cost of products sold: | |||||||||||||||||||||||
Charges for workforce reductions | $ | 15 | $ | 1 | $ | 16 | $ | 33 | |||||||||||||||
Asset write-offs | 50 | 18 | 59 | 45 | |||||||||||||||||||
Incremental depreciation | 18 | 57 | 86 | 189 | |||||||||||||||||||
Other exit costs | 24 | 28 | 76 | 64 | |||||||||||||||||||
Total | 107 | 104 | 237 | 331 | |||||||||||||||||||
Marketing, research and general expenses: | |||||||||||||||||||||||
Charges (adjustments) for workforce reductions | 1 | (4) | (1) | (12) | |||||||||||||||||||
Other exit costs | 24 | 25 | 76 | 78 | |||||||||||||||||||
Total | 25 | 21 | 75 | 66 | |||||||||||||||||||
Other (income) and expense, net | (1) | (181) | (1) | (182) | |||||||||||||||||||
Nonoperating expense | 26 | — | 26 | — | |||||||||||||||||||
Total charges | 157 | (56) | 337 | 215 | |||||||||||||||||||
Provision for income taxes | (50) | 23 | (83) | (35) | |||||||||||||||||||
Net charges | 107 | (33) | 254 | 180 | |||||||||||||||||||
Net impact related to equity companies and noncontrolling interests | — | — | (1) | 1 | |||||||||||||||||||
Net charges attributable to Kimberly-Clark Corporation | $ | 107 | $ | (33) | $ | 253 | $ | 181 |
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:
2020 | 2019 | |||||||||||||
Restructuring liabilities at January 1 | $ | 132 | $ | 210 | ||||||||||
Charges for workforce reductions and other cash exit costs | 162 | 159 | ||||||||||||
Cash payments | (177) | (230) | ||||||||||||
Currency and other | (3) | 3 | ||||||||||||
Restructuring liabilities at September 30 | $ | 114 | $ | 142 |
Restructuring liabilities of $80 and $84 are recorded in Accrued expenses and other current liabilities and $34 and $58 are recorded in Other Liabilities as of September 30, 2020 and 2019, 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.
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Through September 30, 2020, cumulative pre-tax charges for the 2018 Global Restructuring Program were $1.7 billion ($1.3 billion after tax).
Note 3. Income Taxes
The U.S. Internal Revenue Service ("IRS") is currently auditing our federal tax return for the taxable year ended December 31, 2017. As part of this tax audit, the IRS is reviewing our one-time transition tax on certain undistributed earnings of foreign subsidiaries under the Tax Cuts and Jobs Act of 2017. The IRS has proposed an adjustment that would increase the amount of the transition tax owed by us. We believe we have adequate reserves and meritorious defenses and intend to vigorously defend against the proposed adjustment; 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, 2020 and for the full year 2019, 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, 2020 and December 31, 2019, derivative assets were $70 and $34, respectively, and derivative liabilities were $32 and $44, 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 7.
Redeemable preferred securities of subsidiaries are measured on a recurring basis at fair value and were $29 as of September 30, 2020 and December 31, 2019. They are not traded in active markets. 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 $71 and $76 at September 30, 2020 and December 31, 2019, 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.
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The following table includes the fair value of our financial instruments for which disclosure of fair value is required:
Fair Value Hierarchy Level | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||
Cash and cash equivalents(a) | 1 | $ | 1,518 | $ | 1,518 | $ | 442 | $ | 442 | ||||||||||||||||||||
Time deposits(b) | 1 | 380 | 380 | 275 | 275 | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||
Short-term debt(c) | 2 | 260 | 260 | 775 | 775 | ||||||||||||||||||||||||
Long-term debt(d) | 2 | 8,108 | 9,590 | 6,972 | 7,877 |
(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. Cash of approximately $600 from debt issued to partially fund the acquisition of Softex Indonesia represented restricted cash as of September 30, 2020 as the debt was subject to a special mandatory redemption provision. This provision lapsed upon the close of the acquisition. See Note 11 for details.
(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) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
Basic | 341.0 | 343.8 | 341.1 | 344.1 | ||||||||||||||||||||||
Dilutive effect of stock options and restricted share unit awards | 1.3 | 2.1 | 1.2 | 1.9 | ||||||||||||||||||||||
Diluted | 342.3 | 345.9 | 342.3 | 346.0 |
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, 2020 and 2019 was 340.4 million and 343.1 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, 2020 was primarily due to weakening of foreign currencies versus the U.S. dollar, particularly the Brazilian real.
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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, 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) | ||||||||||||||||||
Balance as of December 31, 2019 | $ | (2,271) | $ | (979) | $ | (13) | $ | (31) | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications | (233) | (19) | 3 | 15 | ||||||||||||||||||||||
(Income) loss reclassified from AOCI | — | 57 | (a) | (1) | (a) | (10) | ||||||||||||||||||||
Net current period other comprehensive income (loss) | (233) | 38 | 2 | 5 | ||||||||||||||||||||||
Balance as of September 30, 2020 | $ | (2,504) | $ | (941) | $ | (11) | $ | (26) |
(a) Included in computation of net periodic benefit costs.
Note 7. 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, 2020 and December 31, 2019, derivative assets were $70 and $34, respectively, and derivative liabilities were $32 and $44, 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. In addition, we utilize negotiated short-term contract structures, including fixed price contracts, to manage volatility for a portion of our commodity costs.
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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, 2020, the aggregate notional values and carrying values of outstanding interest rate contracts designated as fair value hedges were $300 and $323, respectively. For the nine months ended September 30, 2020 and 2019, 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, 2020, 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 2020 and future periods. As of September 30, 2020, the aggregate notional value of outstanding foreign exchange derivative contracts designated as cash flow hedges was $692. For the nine months ended September 30, 2020 and 2019, 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, 2020, 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, 2020 is September 2022.
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, 2020. 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, 2020, unrealized gains of $13 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, 2020.
Undesignated Hedging Instruments
Gains or losses on undesignated foreign exchange hedging instruments are immediately recognized in Other (income) and expense, net. A gain of $23 and loss of $14 were recorded in the three months ended September 30, 2020 and 2019, respectively. A gain of $31 and loss of $27 were recorded in the nine months ended September 30, 2020 and 2019, 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, 2020, the notional value of these undesignated derivative instruments was approximately $1.7 billion.
Note 8. Legal Matters
We are party to certain legal proceedings relating to our former health care business, Avanos Medical, Inc. ("Avanos", previously Halyard Health, Inc.), as described in our Form 10-K for the year ended December 31, 2019, including consumer class actions, qui tam matters, a shareholder derivative suit, a securities class action and certain subpoena and document requests from the federal government. During the third quarter of 2020, in the California consumer class action Bahamas Surgery Center v. Kimberly-Clark Corporation, et al., the Ninth Circuit Court of Appeals vacated the award against us for compensatory and punitive damages and decertified the class. The court denied the plaintiff’s subsequent appeal requesting a rehearing. The shareholder derivative suit and the securities class action have also been dismissed.
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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 and acquisition-related costs associated with the acquisition of Softex Indonesia as described in Note 11.
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 | |||||||||||||||||||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||
NET SALES | ||||||||||||||||||||||||||||||||||||||
Personal Care | $ | 2,339 | $ | 2,305 | +1 | % | $ | 6,990 | $ | 6,866 | +2 | % | ||||||||||||||||||||||||||
Consumer Tissue | 1,623 | 1,484 | +9 | % | 4,991 | 4,482 | +11 | % | ||||||||||||||||||||||||||||||
K-C Professional | 705 | 839 | -16 | % | 2,277 | 2,477 | -8 | % | ||||||||||||||||||||||||||||||
Corporate & Other | 16 | 12 | N.M. | 46 | 42 | N.M. | ||||||||||||||||||||||||||||||||
TOTAL NET SALES | $ | 4,683 | $ | 4,640 | +1 | % | $ | 14,304 | $ | 13,867 | +3 | % | ||||||||||||||||||||||||||
OPERATING PROFIT | ||||||||||||||||||||||||||||||||||||||
Personal Care | $ | 486 | $ | 490 | -1 | % | $ | 1,532 | $ | 1,459 | +5 | % | ||||||||||||||||||||||||||
Consumer Tissue | 318 | 264 | +20 | % | 1,111 | 726 | +53 | % | ||||||||||||||||||||||||||||||
K-C Professional | 87 | 176 | -51 | % | 423 | 488 | -13 | % | ||||||||||||||||||||||||||||||
Corporate & Other(a) | (220) | (190) | N.M. | (544) | (599) | N.M. | ||||||||||||||||||||||||||||||||
Other (income) and expense, net(a) | 5 | (175) | N.M. | 27 | (166) | N.M. | ||||||||||||||||||||||||||||||||
TOTAL OPERATING PROFIT | $ | 666 | $ | 915 | -27 | % | $ | 2,495 | $ | 2,240 | +11 | % |
(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 and Softex Indonesia acquisition-related costs. Restructuring charges related to the Personal Care, Consumer Tissue and K-C Professional business segments were $57, $59 and $15, respectively, for the three months ended September 30, 2020, $53, $49 and $21, respectively, for the three months ended September 30, 2019, $131, $135 and $41, respectively, for the nine months ended September 30, 2020 and $208, $131 and $52, respectively for the nine months ended September 30, 2019.
N.M. - Not Meaningful
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Sales of Principal Products
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
(Billions of dollars) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
Baby and child care products | 1.6 | 1.6 | 4.8 | 4.7 | ||||||||||||||||||||||
Consumer tissue products | 1.6 | 1.5 | 5.0 | 4.5 | ||||||||||||||||||||||
Away-from-home professional products | 0.7 | 0.8 | 2.3 | 2.5 | ||||||||||||||||||||||
All other | 0.8 | 0.7 | 2.2 | 2.2 | ||||||||||||||||||||||
Consolidated | $ | 4.7 | $ | 4.6 | $ | 14.3 | $ | 13.9 |
Note 10. Supplemental Balance Sheet Data
The following schedule presents a summary of inventories by major class:
September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
LIFO | Non-LIFO | Total | LIFO | Non-LIFO | Total | |||||||||||||||||||||||||||||||||
Raw materials | $ | 124 | $ | 251 | $ | 375 | $ | 85 | $ | 236 | $ | 321 | ||||||||||||||||||||||||||
Work in process | 110 | 89 | 199 | 113 | 93 | 206 | ||||||||||||||||||||||||||||||||
Finished goods | 433 | 683 | 1,116 | 451 | 696 | 1,147 | ||||||||||||||||||||||||||||||||
Supplies and other | — | 242 | 242 | — | 271 | 271 | ||||||||||||||||||||||||||||||||
667 | 1,265 | 1,932 | 649 | 1,296 | 1,945 | |||||||||||||||||||||||||||||||||
Excess of FIFO or weighted-average cost over LIFO cost | (145) | — | (145) | (155) | — | (155) | ||||||||||||||||||||||||||||||||
Total | $ | 522 | $ | 1,265 | $ | 1,787 | $ | 494 | $ | 1,296 | $ | 1,790 |
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, 2020 | December 31, 2019 | ||||||||||
Land | $ | 164 | $ | 165 | |||||||
Buildings | 2,914 | 2,877 | |||||||||
Machinery and equipment | 14,094 | 13,946 | |||||||||
Construction in progress | 801 | 851 | |||||||||
17,973 | 17,839 | ||||||||||
Less accumulated depreciation | (10,476) | (10,389) | |||||||||
Total | $ | 7,497 | $ | 7,450 |
Note 11. Subsequent Event - Acquisition
On October 1, 2020, we acquired Softex Indonesia, a leader in the fast-growing Indonesian personal care market, in an all-cash transaction for approximately $1.2 billion. This transaction significantly expands our presence in an important developing and emerging market and is a strong strategic fit with our core business. Softex Indonesia generated net sales of approximately $420 in 2019. We financed the transaction through a combination of short-term commercial paper, cash on hand and the issuance of a $600 bond. During the quarter ended September 30, 2020, we recorded acquisition-related costs of $9 in Marketing, research and general expenses. We will consolidate Softex into our financial statements beginning in the fourth quarter of 2020 after completing a purchase price allocation. The consolidated results for Softex Indonesia will be reported as part of our Personal Care business segment on a one-month lag.
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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 ("MD&A") of financial condition and results of operations is intended to provide investors with an understanding of our recent performance, financial condition and prospects. Dollar amounts are reported in millions, except per share dollar amounts, unless otherwise noted. The following will be discussed and analyzed:
•Overview of Third Quarter 2020 Results
•Impact of COVID-19
•Results of Operations and Related Information
•Liquidity and Capital Resources
•Information Concerning Forward-Looking Statements
We describe our business outside North America in two groups – Developing and Emerging Markets ("D&E") and Developed Markets. D&E markets comprise Eastern Europe, the Middle East and Africa, Latin America and Asia-Pacific, excluding Australia and South Korea. Developed Markets consist of Western and Central Europe, Australia and South Korea. We have three reportable business segments: Personal Care, Consumer Tissue and K-C Professional. These business segments are described in greater detail in Note 9 to the unaudited interim consolidated financial statements.
This section presents a discussion and analysis of our third quarter 2020 net sales, operating profit and other information relevant to an understanding of the results of operations. In addition, we provide commentary regarding organic sales growth, which describes the impact of changes in volume, net selling prices and product mix on net sales. Change in foreign currency exchange rates and exited businesses also impact the year-over-year change in net sales. Our analysis compares the three and nine months ended September 30, 2020 results to the same periods in 2019.
Throughout this MD&A, we refer to financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures. These measures include adjusted gross and operating profit, adjusted net income, adjusted earnings per share, adjusted other (income) and expense, net and adjusted effective tax rate. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight into some of the financial measures used to evaluate management.
Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measures, and they should be read only in conjunction with our unaudited interim consolidated financial statements prepared in accordance with GAAP. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation and items being excluded. We compensate for these limitations by using these non-GAAP financial measures as a supplement to the GAAP measures and by providing reconciliations of the non-GAAP and comparable GAAP financial measures.
The non-GAAP financial measures exclude the following items for the relevant time periods as indicated in the reconciliations included later in this MD&A:
•2018 Global Restructuring Program - In 2018, we initiated this restructuring program to reduce our structural cost base by streamlining and simplifying our manufacturing supply chain and overhead organization. See Item 1, Note 2 to the unaudited interim consolidated financial statements for details.
•Acquisition-Related Costs – One-time transaction and integration costs associated with the acquisition of Softex Indonesia. See Item 1, Note 11 to the unaudited interim consolidated financial statements for details.
Overview of Third Quarter 2020 Results
•Net sales of $4.7 billion increased 1 percent compared to the year-ago period. Organic sales increased 3 percent, while changes in foreign currency exchange rates reduced sales by 2 percent.
•Operating profit was $666 in 2020 and $915 in 2019. Net Income Attributable to Kimberly-Clark Corporation was $472 in 2020 compared to $671 in 2019, and diluted earnings per share were $1.38 in 2020 compared to $1.94 in 2019. Results in both periods include charges related to the 2018 Global Restructuring Program. Results in 2020 include acquisition-related costs associated with the acquisition of Softex Indonesia, and results in 2019 also include a gain on the sale of a manufacturing facility as part of the restructuring.
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Impact of COVID-19
We continue to actively address the COVID-19 situation and its impact globally. We believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business and results.
We have experienced increased volatility in demand for some of our products as consumers adapt to the evolving environment. Beginning in the first quarter, particularly in March, demand across all business segments and major geographies increased as consumers increased home inventory levels in response to COVID-19. We expect the increase to be followed by periods of potential demand softness and volatility as consumers use existing home inventories and demand potentially returns to more normal levels. Demand for our consumer tissue products has been elevated this year as more people spend more time at home. Our K-C Professional business experienced accelerated volume declines in the third quarter reflecting the reduction in away from home demand.
During 2020, we have experienced temporary closures of certain facilities, though we have not experienced a material impact from a plant closure to date and our facilities have largely been exempt or partially exempt from government closure orders. At many of our facilities, we have been experiencing increased employee absences, which may continue in the current situation.
During 2020, we also experienced increased volatility in foreign currency exchange rates and commodity prices, as certain countries experienced increased macro-economic volatility from the COVID-19 situation.
Results of Operations and Related Information
This section presents a discussion and analysis of our third quarter 2020 net sales, operating profit and other information relevant to an understanding of the results of operations.
Consolidated
Selected Financial Results | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||
2020 | 2019 | Percent Change | 2020 | 2019 | Percent Change | ||||||||||||||||||||||||||||||
Net Sales: | |||||||||||||||||||||||||||||||||||
North America | $ | 2,562 | $ | 2,476 | +3 | % | $ | 7,786 | $ | 7,296 | +7 | % | |||||||||||||||||||||||
Outside North America | 2,188 | 2,227 | -2 | % | 6,724 | 6,777 | -1 | % | |||||||||||||||||||||||||||
Intergeographic sales | (67) | (63) | N.M. | (206) | (206) | N.M. | |||||||||||||||||||||||||||||
Total Net Sales | 4,683 | 4,640 | +1 | % | 14,304 | 13,867 | +3 | % | |||||||||||||||||||||||||||
Operating Profit: | |||||||||||||||||||||||||||||||||||
North America | 626 | 638 | -2 | % | 2,054 | 1,818 | +13 | % | |||||||||||||||||||||||||||
Outside North America | 265 | 292 | -9 | % | 1,012 | 855 | +18 | % | |||||||||||||||||||||||||||
Corporate & Other(a) | (220) | (190) | N.M. | (544) | (599) | N.M. | |||||||||||||||||||||||||||||
Other (income) and expense, net(a) | 5 | (175) | N.M. | 27 | (166) | N.M. | |||||||||||||||||||||||||||||
Total Operating Profit | 666 | 915 | -27 | % | 2,495 | 2,240 | +11 | % | |||||||||||||||||||||||||||
Share of net income of equity companies | 31 | 31 | — | 104 | 91 | +14 | % | ||||||||||||||||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | 472 | 671 | -30 | % | 1,813 | 1,610 | +13 | % | |||||||||||||||||||||||||||
Diluted Earnings per Share | 1.38 | 1.94 | -29 | % | 5.30 | 4.65 | +14 | % |
(a) Corporate & Other and Other (income) and expense, net include income and expense not associated with the business segments, including adjustments as indicated in the Non-GAAP Reconciliations.
N.M. - Not Meaningful
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GAAP to Non-GAAP Reconciliations of Selected Financial Results
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||
As Reported | 2018 Global Restructuring Program | Softex Indonesia Acquisition-Related Costs | As Adjusted Non-GAAP | |||||||||||||||||||||||
Cost of products sold | $ | 3,093 | $ | 107 | $ | — | $ | 2,986 | ||||||||||||||||||
Gross Profit | 1,590 | (107) | — | 1,697 | ||||||||||||||||||||||
Marketing, research and general expenses | 919 | 25 | 9 | 885 | ||||||||||||||||||||||
Other (income) and expense, net | 5 | (1) | — | 6 | ||||||||||||||||||||||
Operating Profit | 666 | (131) | (9) | 806 | ||||||||||||||||||||||
Nonoperating expense | (40) | (26) | — | (14) | ||||||||||||||||||||||
Provision for income taxes | (114) | 50 | — | (164) | ||||||||||||||||||||||
Effective tax rate | 20.1 | % | — | — | 22.4 | % | ||||||||||||||||||||
Share of net income of equity companies | 31 | — | — | 31 | ||||||||||||||||||||||
Net income attributable to noncontrolling interests | (11) | — | — | (11) | ||||||||||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | 472 | (107) | (9) | 588 | ||||||||||||||||||||||
Diluted Earnings per Share(a) | 1.38 | (0.31) | (0.03) | 1.72 |
Three Months Ended September 30, 2019 | ||||||||||||||||||||
As Reported | 2018 Global Restructuring Program | As Adjusted Non-GAAP | ||||||||||||||||||
Cost of products sold | $ | 3,085 | $ | 104 | $ | 2,981 | ||||||||||||||
Gross Profit | 1,555 | (104) | 1,659 | |||||||||||||||||
Marketing, research and general expenses | 815 | 21 | 794 | |||||||||||||||||
Other (income) and expense, net | (175) | (181) | 6 | |||||||||||||||||
Operating Profit | 915 | 56 | 859 | |||||||||||||||||
Provision for income taxes | (192) | (23) | (169) | |||||||||||||||||
Effective tax rate | 22.8 | % | — | 21.5 | % | |||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | 671 | 33 | 638 | |||||||||||||||||
Diluted Earnings per Share(a) | 1.94 | 0.10 | 1.84 |
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||
As Reported | 2018 Global Restructuring Program | Softex Indonesia Acquisition-Related Costs | As Adjusted Non-GAAP | |||||||||||||||||||||||
Cost of products sold | $ | 9,146 | $ | 237 | $ | — | $ | 8,909 | ||||||||||||||||||
Gross Profit | 5,158 | (237) | — | 5,395 | ||||||||||||||||||||||
Marketing, research and general expenses | 2,636 | 75 | 9 | 2,552 | ||||||||||||||||||||||
Other (income) and expense, net | 27 | (1) | — | 28 | ||||||||||||||||||||||
Operating Profit | 2,495 | (311) | (9) | 2,815 | ||||||||||||||||||||||
Nonoperating expense | (57) | (26) | — | (31) | ||||||||||||||||||||||
Provision for income taxes | (510) | 83 | — | (593) | ||||||||||||||||||||||
Effective tax rate | 22.6 | % | — | — | 22.8 | % | ||||||||||||||||||||
Share of net income of equity companies | 104 | (1) | — | 105 | ||||||||||||||||||||||
Net income attributable to noncontrolling interests | (37) | 2 | — | (39) | ||||||||||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | 1,813 | (253) | (9) | 2,075 | ||||||||||||||||||||||
Diluted Earnings per Share(a) | 5.30 | (0.74) | (0.03) | 6.06 |
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Nine Months Ended September 30, 2019 | ||||||||||||||||||||
As Reported | 2018 Global Restructuring Program | As Adjusted Non-GAAP | ||||||||||||||||||
Cost of products sold | $ | 9,398 | $ | 331 | $ | 9,067 | ||||||||||||||
Gross Profit | 4,469 | (331) | 4,800 | |||||||||||||||||
Marketing, research and general expenses | 2,395 | 66 | 2,329 | |||||||||||||||||
Other (income) and expense, net | (166) | (182) | 16 | |||||||||||||||||
Operating Profit | 2,240 | (215) | 2,455 | |||||||||||||||||
Provision for income taxes | (467) | 35 | (502) | |||||||||||||||||
Effective tax rate | 23.2 | % | — | 22.5 | % | |||||||||||||||
Share of net income of equity companies | 91 | (2) | 93 | |||||||||||||||||
Net income attributable to noncontrolling interests | (31) | 1 | (32) | |||||||||||||||||
Net Income Attributable to Kimberly-Clark Corporation | 1,610 | (181) | 1,791 | |||||||||||||||||
Diluted Earnings per Share(a) | 4.65 | (0.52) | 5.18 |
(a) "As Adjusted Non-GAAP" may not equal "As Reported" plus "Adjustments" as a result of rounding.
Analysis of Consolidated Results
Net Sales | Percent Change | Adjusted Operating Profit | Percent Change | |||||||||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||
Volume | 2 | 4 | Volume | 3 | 10 | |||||||||||||||||||||||||||
Net Price | 1 | 1 | Net Price | 3 | 5 | |||||||||||||||||||||||||||
Mix/Other | 1 | 1 | Input Costs | 3 | 9 | |||||||||||||||||||||||||||
Currency | (2) | (3) | Cost Savings(c) | 16 | 18 | |||||||||||||||||||||||||||
Total(a) | 1 | 3 | Currency Translation | (1) | (2) | |||||||||||||||||||||||||||
Other(d) | (30) | (25) | ||||||||||||||||||||||||||||||
Organic(b) | 3 | 6 | Total | (6) | 15 |
(a) Total may not equal the sum of volume, net price, mix/other and currency due to rounding.
(b) Combined impact of changes in volume, net price and mix/other.
(c) Combined benefits of the FORCE (Focused On Reducing Costs Everywhere) program and 2018 Global Restructuring Program.
(d) Includes impact of changes in product mix, marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs.
Net sales in the third quarter of $4.7 billion increased 1 percent compared to the year-ago period. Organic sales increased 3 percent, while changes in foreign currency exchange rates reduced sales by 2 percent. Volumes increased 2 percent and the combined impact of changes in net selling prices and product mix increased sales by 1 percent. In North America, organic sales increased 8 percent in consumer products but fell 15 percent in K-C Professional. Outside North America, organic sales rose 2 percent in D&E markets and 3 percent in developed markets.
Operating profit in the third quarter was $666 in 2020 and $915 in 2019. Results in both periods include charges related to the 2018 Global Restructuring Program. Results in 2020 include acquisition-related costs associated with the acquisition of Softex Indonesia, and results in 2019 also include a gain on the sale of a manufacturing facility as part of the restructuring. Third quarter adjusted operating profit was $806 in 2020 and $859 in 2019. Results benefited from organic sales growth, $125 of cost savings from our FORCE program and $15 of cost savings from the 2018 Global Restructuring Program. Input costs decreased $25, driven by pulp and other raw materials. Other manufacturing costs increased year-on-year, including costs related to COVID-19. Advertising spending increased significantly and general and administrative costs were also higher, including capability-building investments and increased incentive compensation expense. Foreign currency translation effects reduced operating profit by $10 and transaction effects also negatively impacted the comparison.
The third quarter effective tax rate was 20.1 percent in 2020 and 22.8 percent in 2019. The third quarter adjusted effective tax rate was 22.4 percent in 2020 and 21.5 percent in 2019.
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Our share of net income of equity companies in the third quarter was $31 in both 2020 and 2019.
Diluted net income per share for the third quarter of 2020 was $1.38 in 2020 and $1.94 in 2019. Third quarter adjusted earnings per share were $1.72 in 2020, a decrease of 7 percent compared to $1.84 in 2019.
Year-to-date net sales of $14.3 billion increased 3 percent compared to the year ago period. Organic sales increased 6 percent, as volumes rose 4 percent and changes in net selling prices and product mix each increased sales by 1 percent. Changes in foreign currency exchange rates reduced sales by 3 percent and business exits in conjunction with the 2018 Global Restructuring Program reduced sales slightly. Year-to-date operating profit was $2,495 in 2020 and $2,240 in 2019. Results in both periods include charges related to the 2018 Global Restructuring Program. Results in 2020 include acquisition-related costs associated with the acquisition of Softex Indonesia, and results in 2019 also include a gain on the sale of a manufacturing facility as part of the restructuring. Year-to-date adjusted operating profit was $2,815 in 2020 and $2,455 in 2019. Results benefited from organic sales growth, $345 of FORCE cost savings and $95 of cost savings from the 2018 Global Restructuring Program. Input costs decreased $215, driven by pulp. The comparison was impacted by other manufacturing cost increases, unfavorable foreign currency effects, higher general and administrative costs and increased advertising spending. Through nine months, diluted net income per share was $5.30 in 2020 and $4.65 in 2019. Year-to-date adjusted earnings per share were $6.06 in 2020 and $5.18 in 2019.
Results by Business Segments
Personal Care
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | $ | 2,339 | $ | 2,305 | $ | 6,990 | $ | 6,866 | Operating Profit | $ | 486 | $ | 490 | $ | 1,532 | $ | 1,459 | |||||||||||||||||||||||||||||||||||||||
Net Sales | Percent Change | Percent Change | Operating Profit | Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
Volume | 4 | 4 | Volume | 7 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net Price | — | — | Net Price | (1) | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Mix/Other | 1 | 2 | Input Costs | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Currency | (4) | (4) | Cost Savings(c) | 14 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total(a) | 1 | 2 | Currency Translation | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other(d) | (22) | (20) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Organic(b) | 5 | 6 | Total | (1) | 5 |
(a) Total may not equal the sum of volume, net price, mix/other and currency due to rounding.
(b) Combined impact of changes in volume, net price and mix/other.
(c) Combined benefits of the FORCE program and 2018 Global Restructuring Program.
(d) Includes impact of changes in product mix, marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs.
Third quarter net sales in North America increased 6 percent. Volumes increased 5 percent, driven by baby and child care, and the combined impact of changes in net selling prices and product mix increased sales by 1 percent.
Net sales in D&E markets decreased 4 percent. Changes in foreign currency exchange rates reduced sales by 11 percent. Volumes rose 5 percent, including increases in China, Eastern Europe, India and Latin America, and changes in product mix increased sales by more than 1 percent.
Net sales in developed markets outside North America increased 1 percent. Changes in foreign currency exchange rates increased sales by 2 percent. Changes in net selling prices decreased sales by 3 percent while changes in product mix increased sales by 2 percent.
Operating profit of $486 decreased 1 percent. Results were impacted by unfavorable foreign currency effects, higher advertising spending, other manufacturing cost increases and higher general and administrative costs. The comparison benefited from organic sales growth, cost savings and lower input costs.
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Consumer Tissue
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | $ | 1,623 | $ | 1,484 | $ | 4,991 | $ | 4,482 | Operating Profit | $ | 318 | $ | 264 | $ | 1,111 | $ | 726 | |||||||||||||||||||||||||||||||||||||||
Net Sales | Percent Change | Percent Change | Operating Profit | Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
Volume | 10 | 13 | Volume | 24 | 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net Price | — | 1 | Net Price | 3 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Mix/Other | (1) | (1) | Input Costs | 5 | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Currency | — | (2) | Cost Savings(c) | 18 | 23 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total(a) | 9 | 11 | Currency Translation | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other(d) | (30) | (26) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Organic(b) | 10 | 13 | Total | 20 | 53 | |||||||||||||||||||||||||||||||||||||||||||||||||||
(a) Total may not equal the sum of volume, net price, mix/other and currency due to rounding.
(b) Combined impact of changes in volume, net price and mix/other.
(c) Combined benefits of the FORCE program and 2018 Global Restructuring Program.
(d) Includes impact of changes in marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs.
Third quarter net sales in North America increased 11 percent. Volumes rose 11 percent and changes in net selling prices increased sales by 2 percent, while changes in product mix decreased sales by 2 percent. Volumes increased high-single digits to low-double digits in all major product categories. The volume increase was driven by increased shipments to support higher consumer and customer demand related to the global outbreak of COVID-19.
Net sales in D&E markets decreased 4 percent including a 7 percent negative impact from changes in foreign currency exchange rates. Volumes increased 3 percent and changes in product mix increased sales by 2 percent, while changes in net selling prices decreased sales by 2 percent.
Net sales in developed markets outside North America increased 17 percent. Volumes rose 14 percent, driven by South Korea and Western/Central Europe. The volume increase was driven by increased shipments to support higher consumer and customer demand related to the global outbreak of COVID-19. Changes in foreign currency exchange rates increased sales by 4 percent, while changes in net selling prices decreased sales by 1 percent.
Operating profit of $318 increased 20 percent. Results benefited from organic sales growth, cost savings and lower input costs. The comparison was impacted by increased advertising spending, other manufacturing cost increases, higher general and administrative costs and unfavorable foreign currency effects.
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K-C Professional
Three Months Ended September 30 | Nine Months Ended September 30 | Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | $ | 705 | $ | 839 | $ | 2,277 | $ | 2,477 | Operating Profit | $ | 87 | $ | 176 | $ | 423 | $ | 488 | |||||||||||||||||||||||||||||||||||||||
Net Sales | Percent Change | Percent Change | Operating Profit | Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
Volume | (21) | (11) | Volume | (41) | (20) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net Price | 3 | 3 | Net Price | 13 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Mix/Other | 3 | 2 | Input Costs | (4) | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Currency | — | (1) | Cost Savings(c) | 11 | 13 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total(a) | (16) | (8) | Currency Translation | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other(d) | (30) | (22) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Organic(b) | (15) | (6) | Total | (51) | (13) |
(a) Total may not equal the sum of volume, net price, mix/other, exited businesses and currency due to rounding.
(b) Combined impact of changes in volume, net price and mix/other.
(c) Combined benefits of the FORCE program and 2018 Global Restructuring Program.
(d) Includes impact of changes in product mix, marketing, research and general expenses, foreign currency transaction effects and other manufacturing costs.
Third quarter net sales in North America decreased 15 percent. Volumes decreased 21 percent, reflecting the reduction in demand for away from home products related to the global outbreak of COVID-19, with sales down significantly in washroom products but up double-digits in wipers, safety and other products. Changes in net selling prices and product mix each increased sales by 3 percent.
Net sales in D&E markets decreased 28 percent including a 5 percent negative impact from changes in foreign currency exchange rates. Volumes fell 24 percent, reflecting the reduction in demand for away from home products related to the global outbreak of COVID-19, with significant declines in all major geographies. Changes in product mix decreased sales by 2 percent., while changes in net selling prices increased sales by 3 percent.
Net sales in developed markets outside North America decreased 8 percent. Volumes decreased 18 percent, reflecting the reduction in demand for away from home products related to the global outbreak of COVID-19, while changes in product mix and net selling prices increased sales by 4 percent and 3 percent, respectively. Changes in foreign currency exchange rates increased sales by 3 percent.
Operating profit of $87 decreased 51 percent. The comparison was impacted by lower organic sales, other manufacturing cost increases including inefficiencies from lower production volumes and higher input costs. Results benefited from cost savings.
2018 Global Restructuring Program
As a result of the outbreak of COVID-19 and the related uncertainty and complexity of the environment, consistent with our Form 10-Q filed on April 22, 2020, we expect that some restructuring activity and the related charges will extend into 2021 rather than being completed at the end of 2020 as previously planned. Total restructuring charges to implement the program are expected to be toward the high end of the range of $1.7 billion to $1.9 billion pre-tax ($1.3 billion to $1.4 billion after tax). We continue to expect the program will generate annual pre-tax cost savings of $500 to $550. We target to achieve those savings by the end of 2021, although it is possible the full realization could occur in 2022 because of the uncertainties related to COVID-19. Savings for the first nine months of 2020 were $95, bringing cumulative savings to $395. See Item 1, Note 2 to the unaudited interim consolidated financial statements for additional information.
Subsequent Event - Acquisition
On October 1 2020, we acquired Softex Indonesia, a leader in the fast-growing Indonesian personal care market, in an all-cash transaction for approximately $1.2 billion. This transaction significantly expands our presence in an important developing and emerging market and is a strong strategic fit with our core business. Softex Indonesia generated net sales of approximately $420 in 2019. We financed the transaction through a combination of short-term commercial paper, cash on hand, and the issuance of a $600 bond. See Item 1, Note 11 to the unaudited interim consolidated financial statements for additional information.
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Liquidity and Capital Resources
Cash Provided by Operations
Cash provided by operations was $2.8 billion for the first nine months of 2020 compared to $1.8 billion in the prior year. The increase was driven by improved working capital and higher earnings.
Investing
During the nine months ended September 30, 2020, our capital spending was $894 compared to $867 in the prior year. We anticipate that full year capital spending will be $1.2 billion to $1.3 billion. Proceeds from disposition of property in 2019 include approximately $200 from the previously mentioned sale of a manufacturing facility in the third quarter as part of the 2018 Global Restructuring Program.
Financing
Our short-term debt, which consists of U.S. commercial paper with original maturities up to 90 days and/or other similar short-term debt issued by non-U.S. subsidiaries, was $260 as of September 30, 2020 (included in Debt payable within one year on the consolidated balance sheet). The average month-end balance of short-term debt for the third quarter of 2020 was $156. These short-term borrowings provide supplemental funding for supporting our operations. The level of short-term debt generally fluctuates depending upon the amount of operating cash flows and the timing of customer receipts and payments for items such as dividends and income taxes.
At September 30, 2020 and December 31, 2019, total debt was $8.4 billion and $7.7 billion, respectively.
In September 2020, we issued $600 aggregate principal amount of 1.05% notes due September 15, 2027. Proceeds from the offering together with cash on hand and borrowings under our commercial paper program were used to fund the acquisition of Softex Indonesia.
In March 2020, we issued $750 aggregate principal amount of 3.10% notes due March 26, 2030. Proceeds from the offering were used for general corporate purposes including the repayment of a portion of our commercial paper indebtedness.
In February 2020, we issued $500 aggregate principal amount of 2.875% notes due February 7, 2050. Proceeds from the offering were used for general corporate purposes including the repayment of a portion of our commercial paper indebtedness.
We maintain a $2.0 billion revolving credit facility which expires in June 2023 and a $750 revolving credit facility which expires in June 2021. These facilities, currently unused, support our commercial paper program, and would provide liquidity in the event our access to the commercial paper markets is unavailable for any reason.
In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced that it intends to phase out LIBOR by the end of 2021. We are currently evaluating the potential effect of the eventual replacement of the LIBOR, but we do not expect the effect to be material. Accounting guidance has been recently issued to ease the transition to alternative reference rates from a financial reporting perspective. See Item 1, Note 1 to the unaudited interim consolidated financial statements for details.
We repurchase shares of Kimberly-Clark common stock from time to time pursuant to publicly announced share repurchase programs. During the first nine months of 2020, we repurchased 3.2 million shares of our common stock at a cost of $457 through a broker in the open market. We expect our full-year repurchases will be $700.
K-C Argentina began accounting for their operations as highly inflationary effective July 1, 2018, as required by GAAP. 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, 2020, 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 three and nine months ended September 30, 2020.
We believe that our ability to generate cash from operations and our capacity to issue short-term and long-term debt are adequate to fund working capital, payments for our 2018 Global Restructuring Program, capital spending, pension contributions, dividends and other needs for the foreseeable future. Further, we do not expect restrictions or taxes on repatriation of cash held outside of the U.S. to have a material effect on our overall business, liquidity, financial condition or results of operations for the foreseeable future.
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Information Concerning Forward-Looking Statements
Certain matters contained in this report concerning the business outlook, including the anticipated cost savings from our FORCE program, costs and savings from the 2018 Global Restructuring Program, cash flow and uses of cash, growth initiatives, innovations, marketing and other spending, net sales, anticipated currency rates and exchange risks, including the impact in Argentina, raw material, energy and other input costs, effective tax rate, contingencies and anticipated transactions of Kimberly-Clark, including dividends, share repurchases and pension contributions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are based upon management's expectations and beliefs concerning future events impacting Kimberly-Clark. There can be no assurance that these future events will occur as anticipated or that our results will be as estimated. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
The assumptions used as a basis for the forward-looking statements include many estimates that, among other things, depend on the achievement of future cost savings and projected volume increases. In addition, many factors outside our control, including pandemics (including the ongoing COVID-19 outbreak), epidemics, failure to realize the expected benefits or synergies from the Softex Indonesia acquisition, fluctuations in foreign currency exchange rates, the prices and availability of our raw materials, potential competitive pressures on selling prices for our products, energy costs, our ability to maintain key customer relationships and retail trade customer actions, as well as general economic and political conditions globally and in the markets in which we do business, could affect the realization of these estimates.
For a description of certain factors that could cause our future results to differ from those expressed in these forward-looking statements, see Item 1A entitled "Risk Factors" in each of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019. Other factors not presently known to us or that we presently consider immaterial could also affect our business operations and financial results.
Item 4. Controls and Procedures
As of September 30, 2020, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2020. There were no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, Note 8 to the unaudited interim consolidated financial statements, which is incorporated in this Item 1 by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We repurchase shares of Kimberly-Clark common stock from time to time pursuant to publicly announced share repurchase programs. All our share repurchases during the third quarter of 2020 were made through a broker in the open market.
The following table contains information for shares repurchased during the third quarter of 2020. None of the shares in this table were repurchased directly from any of our officers or directors.
Period (2020) | Total Number of Shares Purchased(a) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
July 1 to July 31 | 162,100 | $ | 149.85 | 32,461,828 | 7,538,172 | |||||||||||||||||||||
August 1 to August 31 | 541,200 | 156.80 | 33,003,028 | 6,996,972 | ||||||||||||||||||||||
September 1 to September 30 | 570,700 | 148.83 | 33,573,728 | 6,426,272 | ||||||||||||||||||||||
Total | 1,274,000 |
(a)Share repurchases were made pursuant to a share repurchase program authorized by our Board of Directors on November 13, 2014. This program allows for the repurchase of 40 million shares in an amount not to exceed $5 billion.
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Item 6. Exhibits
(a)Exhibits
Exhibit No. (4). Copies of instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission on request.
Exhibit No. (10)b. Form of Executive Severance Agreement, incorporated by reference to Exhibit No. (10)b of the Corporation's Current Report on Form 8-K filed September 16, 2020.
Exhibit No. (101).INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Exhibit No. (101).SCH XBRL Taxonomy Extension Schema Document
Exhibit No. (101).CAL XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit No. (101).DEF XBRL Taxonomy Extension Definition Linkbase Document
Exhibit No. (101).LAB XBRL Taxonomy Extension Label Linkbase Document
Exhibit No. (101).PRE XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit No. 104 The cover page from this Current Report on Form 10-Q formated as Inline XBRL
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KIMBERLY-CLARK CORPORATION | ||||||||
(Registrant) | ||||||||
By: | /s/ Andrew S. Drexler | |||||||
Andrew S. Drexler | ||||||||
Vice President and Controller | ||||||||
(principal accounting officer) |
October 22, 2020
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